Results of 2019–20 Audits: State–controlled Entities

The coronavirus (COVID-19) pandemic significantly affected state government entities' ability to meet their annual reporting requirements and our ability to meet audit timelines.  The government granted 286 entities a two-month extension to table their annual reports in Parliament. The new deadline was 31 December 2020 or the first sitting day after it. This meant financial reporting requirements were also changed. Financial reports were required to be prepared and audited within 18 weeks of the financial year's end, compared to 12 weeks in a normal year. Most entities were able to meet the revised financial reporting deadline. The four modified opinions we issued relate to subsidiaries of VicTrack, whose statements were also qualified. We reported on VicTrack's qualification in the November 2020 Auditor-General’s Report on the Annual Financial Report of the State of Victoria: 2019–20.

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Victorians spent a significant part of 2020 under lockdown due to the COVID-19 pandemic. All aspects of how we live and work were affected. Restrictions on movement and access to workplaces, and remote working and learning meant there was no such thing as business as usual.

In response to these challenges, VAGO joined a working group that included representatives from Department of Treasury and Finance (DTF) and the Department of Premier and Cabinet (DPC) to address issues relating to the preparation of public sector entities' financial reports. The result was a staged approach to financial reporting and audit timelines, with the Assistant Treasurer providing non-material government entities with reporting relief.

This report details the audit outcomes of the 286 state-controlled entities that were granted that relief. It brings together the results of the financial audits of the entities and provides Parliament assurance regarding their overall financial management and accountability.

1.1 The Victorian public sector

The Victorian public sector includes the state's public service, special bodies and public entities. Figure 1A illustrates this division within the public service.

The Victorian public sector plays a key role in supporting the government of the day to serve the people of the state. It does this by providing public services; supporting ministers in developing and implementing policies and legislation; building and maintaining physical and social infrastructure; managing resources; and administering state finances. It operates across a range of functions. Figure 1B illustrates the functions of government and expenditure incurred by each in 2019–20.

1.2 Reporting requirements

Financial reports

Victorian public sector entities are required by the Financial Management Act 1994 (or other Acts) to prepare an annual report at the end of each financial year for tabling in Parliament by the relevant minister. Each annual report completed under the Financial Management Act 1994 (FMA) must include financial reports that have been audited by the Auditor-General.

Entities in scope of this report

The Annual Financial Report of the State of Victoria: 2019–20 consolidates the financial information of 312 entities controlled by the State of Victoria. 

In November 2020, we tabled the Auditor-General's Report on the Annual Financial Report of the State of Victoria: 2019–20. It focused on the outcome of the financial audits of 26 entities that made up the majority of the state's assets and liabilities at 30 June 2020, and revenue and expenditure for the year then ended. These significant agencies are known as material entities. This report details the outcome of the financial audits of the remaining 286 non-material, state-controlled entities with a 30 June 2020 reporting date, that were not covered in our November report. These entities were given reporting relief in acknowledgement of the challenges posed by the COVID-19 pandemic.

We also report on the timeliness of financial reporting, providing commentary on the impact that the COVID-19 pandemic had on entities' ability to meet their reporting obligations. 

Entities not included in the scope of this report 

Other entities that supply public services, which we also audit, are not included in the Victorian public sector because they fall outside the definition of a public sector body within the Public Administration Act 2004 (see Figure 1C).

FIGURE 1C: Sectors and entities not included in the Victorian public sector

Source: VAGO.

We table separate sector-based reports on the financial audit outcomes for local government and university sectors. We also table a separate report (in May) on the financial audit outcomes of the technical and further education sector, which forms part of the Victorian public sector.

1.3 Our audit approaches

Our focus

Each year, we audit and provide opinions on the financial reports of Victorian public sector entities. Legislation enables us to conduct audits by arrangement, such as audits of the Parliament of Victoria and Senior Master of the Supreme Court of Victoria, both of which are part of this report.

The purpose of an audit is to increase the level of confidence a user has in an entity's financial report. Auditors achieve this by gaining reasonable assurance and issuing an opinion that financial reports are free from material misstatements.

Our method

We conduct our financial audits in accordance with the Audit Act 1994 and the Australian Auditing Standards.

As part of auditing financial reports, we:

• identify and assess the risks of material misstatement of the financial report whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for an opinion
• obtain an understanding of internal controls relevant to the audit to design audit procedures that are appropriate in the circumstances
• evaluate the appropriateness of accounting policies used, and the reasonableness of accounting estimates and related disclosures
• conclude on the appropriateness of using the going-concern basis of accounting 
• evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation.

Our independence

The Auditor-General is:

• an independent officer of the Parliament of Victoria
• appointed under legislation to examine, on behalf of Parliament and taxpayers, the management of resources within the public sector
• not subject to the control or direction of either Parliament or the government.

The Auditor-General and staff of VAGO are required to meet the ethical requirements of:

• the Australian Auditing Standards and the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants
• the Code of Conduct for Victorian Public Sector Employees of Special Bodies and the Public Administration Act 2004
• the Standing Directions Under the Financial Management Act 1994, which provide policies on the acceptance and provision of gifts, benefits and hospitality.

The cost of preparing this report was $60 000, which is funded by parliamentary appropriation.

1.4 Submissions and comments received

We consulted with DTF and the entities named in this report and considered their views when reaching conclusions. As required by the Audit Act 1994, we gave a draft copy of this report to those agencies and asked for their submissions or comments. We also provided a copy of the report to DTF and DPC.

VicTrack was the only agency that responded and its full response appears in Appendix A. 

In summary, VicTrack's Chief Executive Officer noted that the agency is working through the issues associated with accounting for Victoria's transport assets. He noted that although the agency disagrees with the adverse audit qualification, it will continue to work through these technical issues with VAGO.

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Conclusion

The financial audits of four controlled entities—Rolling Stock (Victoria-VL) Pty Limited, Rolling Stock (VL-2) Pty Limited, Rolling Stock (VL-3) Pty Limited and Rolling Stock Holdings (Victoria) Pty Limited—received modified opinions.

As at 28 February, the financial audits of Central Highlands Rural Health and the Yorta Yorta Traditional Owner Land Management Board were in progress.

2.1 Financial report audit opinions

Figure 2A summarises the financial report audit opinions we issued to Victoria public sector entities.

We issued clear audit opinions on 280 Victorian public sector entities controlled by the state in 2019–20. A clear audit opinion adds credibility to financial reports by providing reasonable assurance that reported information is reliable, accurate, and complies with the requirements of relevant Australian accounting standards and applicable legislation.

The financial reports of four of the five Victorian Rail Track (VicTrack) subsidiary entities were assessed as not reliable and we provided adverse opinions on them.

Appendix C lists the entities included in this report. It details the date their financial reports were certified by those charged with governance and the type of audit opinion we issued for 30 June 2020. It also notes the date we issued our opinion to each entity.

Adverse audit opinions issued to VicTrack and four subsidiaries

In our Auditor-General's Report on the Annual Financial Report of the State of Victoria: 2019–20, we detail the reasons why we issued an adverse audit opinion on VicTrack's 2019–20 financial report.

We reassessed the lease arrangement between VicTrack and the Department of Transport (DoT) and concluded it is a finance lease, based on the respective roles and responsibilities of all parties in the transport network. In substance, DoT is responsible for the operation of the transport network as a whole and its assets.

This means that VicTrack should not have reported leased assets and all associated transactions and balances. Instead, VicTrack should have reported a nominal finance lease receivable.

The effects of this noncompliance were so material and pervasive to VicTrack’s financial statements that we issued an adverse opinion.

We also issued the following VicTrack subsidiaries, covered in this report, adverse opinions on their 2019–20 financial reports:

• Rolling Stock (Victoria-VL) Pty Limited
• Rolling Stock (VL-2) Pty Limited
• Rolling Stock (VL-3) Pty Limited
• Rolling Stock Holdings (Victoria) Pty Limited.

The adverse audit opinions were issued to these entities because the assets they report form part of those leased to DoT by VicTrack. Like VicTrack, their financial reports do not present fairly in all material respects in accordance with the relevant Australian Accounting Standards. 

2.2 Timeliness of financial reporting

The sooner after year-end that audited financial reports are published, the more relevant and useful they are for users to make informed decisions based on report contents. Timeliness is also measured against statutory reporting deadlines. 

The FMA requires annual reports to be submitted to the relevant minister and tabled in Parliament within four months of the end of the financial year. These reports include the financial report for the entity and any entities they control. Financial reports have to be prepared and audited within 12 weeks of the financial year's end.

Entities reporting under the Corporations Act 2001 (CA) are required to present an annual report to their members within four months of the end of the financial year. A summary of the FMA and CA reporting timeframes, including the reporting relief provided due to the COVID-19 pandemic, is provided in Figure 2B.

For 2019–20, the COVID-19 pandemic affected the preparation and production of financial reports in the public sector. While we were able to conduct our financial audits remotely, the need for agencies to divert resources to respond to the pandemic—combined with the challenges posed by restrictions on movement and access to workplaces, and flexible and remote learning arrangements—affected everyone's capacity to achieve annual financial reporting and audit timelines. 

In response to these challenges, we joined a working group with representatives from DTF and DPC to consider alternative timelines. Outcomes of this working group allowed a staged approach to financial reporting and audit timelines, focusing first on the 26 material entities listed in Appendix C, whose financial results were significant to the Annual Financial Report of the State of Victoria: 2019–20.

In acknowledgement of the COVID-19 pandemic challenges, the Assistant Treasurer issued temporary instructions under section 47 of the FMA, to agencies that had the annual reporting period 1 July 2019 to 30 June 2020. Material entities were required to table their annual report by 31 October 2020—effectively no change—while all non-material entities were given leeway to table their annual reports by 31 December 2020, an extension of two months. This meant financial reporting requirements were also extended—financial reports were required to be prepared and audited within 18 weeks of the financial year's end as opposed to 12 weeks from the financial year's end. The financial reporting extension relief can be seen in Figure 2B.

The extension of the reporting timelines was provided as relief; it was not a direct shift in requirements for non-material entities. In other words, relief was recommended only where the entity or audit capacity to deliver—or both—were challenged.

Figure 2C shows the financial reporting timeliness for non-material entities in 2019–20.

Most financial reports were finalised after 12 weeks, in line with the financial report tabling relief provided by the Assistant Treasurer. In 2019–20, only 100 of 286 entities (35 per cent) met the original 12-week financial reporting timelines. The comparable figure for 2018–19 was 228 of 285 (80 per cent). 

It is pleasing that 226 of the 286 entities (79 per cent) were able to prepare their financial reports and have them audited within the financial reporting relief timelines provided by the Assistant Treasurer in 2019–20.

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We have consulted with DTF and VicTrack and we considered their views when reaching our audit conclusions. As required by the Audit Act 1994, we gave a draft copy of this report, or relevant extracts, to those agencies and asked for their submissions and comments. 

Responsibility for the accuracy, fairness and balance of those comments rests solely with the agency head.

Response provided by the Chief Executive, VicTrack

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Figure C1 lists the entities included in this report and the material entities reported in our earlier report Auditor-General's Report on the Annual Financial Report of the State of Victoria: 2019–20. It details the date financial statements were certified by those charged with the entities' governance, the type of audit opinion we issued for 30 June 2020 and the date it was issued to each entity.

FIGURE C1: Audit opinions issued for the Victorian public sector for the year ended 30 June 2020

^(a)The technical and further education sector is excluded from the table above. The results of this sector were reported in Results of 2019 Audits: Technical and Further Education Institutes (June 2020).
*Audit by arrangement
Note: Australian Charities and Not-for-profits Commission Act 2012 (ACNC); Associations Incorporation Reform Act 2012 (AIRA); Special Purpose Financial Report (SPFR).
Source: VAGO.

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