Victorian Auditor-General’s report
9 February 2011

Acquittal Report Annex D:
Water Entities
Audit summary
This annex sets out the results of the 2009–10 audits of 20 entities, comprising 19 water entities and one controlled entity. An assessment is also made of the financial sustainability of the 19 water entities.
Results of audits
The 20 entities are required to prepare an annual financial report, with 15 of the 20 also required to prepare a performance report.
Independent audit opinions add credibility to the financial reports and performance reports by providing assurance that the information is reliable. 
A clear audit opinion confirms that the report has been prepared according to the requirements of relevant legislation and accounting standards.
Parliament can have confidence in the financial reporting by the water entities because clear audit opinions were issued on all 20 financial reports and on the 15 performance reports for the year ended 30 June 2010.
Quality of financial and performance reporting
The quality of reporting can be measured by the timeliness and accuracy of the preparation and finalisation of the financial and performance reports.
The reporting processes at water entities were generally adequate. However, further improvement is needed in preparing shell financial and performance reports, materiality assessments, rigorous analytical reviews on the financial report and quality assurance of the performance report.
Where financial reporting plans were prepared, they generally did not include the requirements for preparing the performance report. As a result, performance reports were not subject to the same level of internal quality assurance as financial reports.
With respect to timeliness, the average time taken to finalise the financial reports improved substantially with the water corporations requiring 7.4 weeks in 2009–10 compared to 10.2 weeks in 2008–09. The four companies continue to average eight weeks to finalise their financial report. 
Given the improved time frames achieved in 2009–10, water corporations should maintain this momentum of earlier reporting.

Financial sustainability
Financial sustainability analysis has been provided for the 19 water entities.
To be financially sustainable, water entities should have the capacity to meet current and future expenditure as it falls due. They should also be able to absorb foreseeable changes and risks materialising, without significantly changing their revenue and expenditure policies.
Insight into the financial sustainability of the water entities is obtained from an analysis of six financial sustainability indicators. Four core financial sustainability indicators are assessed being underlying result, liquidity, self-financing and capital replacement. Two additional are included for water entities to assess interest coverage and debt-to-equity ratios. As water entities have a high reliance on debt, these additional indicators assess their ability to meet commitments to interest and repayment of debt. 
The results of the indicators should be considered in the context of the regulatory and commercial environment in which water entities operate. Pricing arrangements are regulated by the Essential Services Commission so that water entities have a sustainable revenue stream, and all borrowings are obtained from the Treasury Corporation of Victoria, which reduces the re-financing and liquidity risks in the short‑term.
A summary of the sustainability assessments by water entity category is in Figure A. 
Figure A
2009–10 financial sustainability risk assessment by category
Category	High	Medium	Low	
Water Entities				
Metropolitan	4	–	–	
Regional urban	5	–	8	
Rural	1	–	1	
Total	10	–	9	
Source: Victorian Auditor-General's Office.
Overall, our financial sustainability assessment is that 53 per cent of water entities have a high-risk rating. This was mainly because of underlying deficits and/or a poor liquidity position. Generally, these entities have approval to refinance their maturing debt and in recent years have refinanced the debt for a new term rather than repay the debt.
The four metropolitan entities have been assessed overall as a high risk due to tight liquidity. However, the four entities have a strong interest cover position, indicating an ability to service their debt as they generate profits and positive cash flows from operating activities.
Five of the 13 regional urban entities have been assessed overall as high risk due to the magnitude of the operating losses and/or liquidity situation.
One rural entity has been assessed overall as a high risk due to the magnitude of its operating losses. 
The liquidity of the sector is deteriorating with 73 per cent of water entities receiving a high-risk assessment for liquidity in 2009–10. The deterioration is due to increased debt taken on to fund large scale infrastructure projects.
Recommendations
Number	Recommendation	Page	
1.	Water entities who prepare a performance report should integrate the preparation and approval of this report into their year-end financial reporting plan and processes.	7	
2.	Water entities should adopt the shortened annual reporting time frames achieved for the 2009–10 reporting cycle as the standard for future reporting cycles.	9	
Submissions and comments received
In addition to progressive engagement during the course of the audit, in accordance with section 16(3) of the Audit Act 1994 a copy of this report, or relevant extracts from the report, was provided to the Department of Sustainability and Environment, the Department of Treasury and Finance and all named agencies with a request for submissions or comments.
Agency views have been considered in reaching our audit conclusions and are represented to the extent relevant and warranted in preparing this report. 
No submissions or comments were received.