Victorian Auditor-General’s report
9 February 2011

Acquittal Report Annex A:
Portfolio Departments and Associated Entities
Audit summary
This annex sets out the results of the audit of 209 state entities, comprising 11 portfolio departments and 198 associated entities with 30 June 2010 balance dates. An assessment is also made of the financial sustainability of the 46 self-funded entities that primarily generate their own revenue. 
Results of audits
Independent audit opinions add credibility to financial reports by providing assurance that the information is reliable. 
Parliament can have confidence in the financial reporting by portfolio departments and associated entities because all entities have finalised their 30 June 2010 financial reports with only one qualified audit opinion issued.
The financial statements of the Public Transport Ticketing Authority were qualified because significant control weaknesses identified in the myki system meant it was not possible to form an opinion on the completeness and accuracy of myki revenue collections for the 2009–10 financial year. 
Clear audit opinions that warranted an emphasis of matter paragraph were provided for 23 entities drawing attention to the uncertainty around the going concern assumption recognising proposed legislative changes and other reforms that would:
·	amalgamate the existing 12 regional waste management groups into seven
·	amalgamate the Port Phillip and Westernport Catchment Management Authority with Melbourne Water, and establish four natural resource and catchment management authorities to replace the remaining nine catchment management authorities
·	replace the Judicial College of Victoria with a new Judicial Commission of Victoria.   
Quality of financial reporting 
The quality of financial reporting can be measured by the accuracy and timeliness of the preparation and finalisation of the financial report.
The financial reporting processes at portfolio departments were generally adequate. However, further improvement could be achieved by preparing shell financial statements, conducting materiality assessments, adopting rigorous quality control and assurance processes, and improving supporting documentation and data security. 
In regards to accuracy, the number of material adjustments made to draft financial reports was minimal, a commendable achievement by portfolio departments.
With respect to timeliness, the average time taken by portfolio departments to finalise their financial statements reduced from 8.6 weeks in 2008–09 to 7.6 weeks in 
2009–10. 
Given the improved time frames achieved in 2009–10, portfolio departments and associated entities should maintain this momentum of earlier reporting.
Financial sustainability
Financial sustainability analysis has been provided for the 46 self-funded entities that primarily generate their own revenue.
The eleven portfolio departments are not included in this analysis as they are fully funded by government.
To be financially sustainable, public sector 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 self-funded public sector entities is obtained from analysis of four core financial sustainability indicators over a five-year period from 2005–06 to 2009–10. The four core indicators used are underlying result, liquidity, self‑financing and capital replacement. These indicators reflect each entity’s funding and expenditure policies, and indicate whether these policies are sustainable.
A summary of the five-year average financial sustainability results for each portfolio is provided in Figure A. 
Figure A
2009–10 financial sustainability risk assessment by portfolio
—self-funded entities
Portfolio	High	Medium	Low	
Education and Early Childhood Development	–	–	1	
Health	–	2	2	
Innovation, Industry and Regional Development	3	2	–	
Justice	1	3	3	
Planning and Community Development	2	5	1	
Premier and Cabinet	1	2	–	
Primary Industries	–	8	2	
Sustainability and Environment	–	–	3	
Transport	3	–	1	
Treasury and Finance	–	1	–	
Total	10	23	13	
Source: Victorian Auditor-General’s Office.
Our financial sustainability assessment is that 10 of the 46 self-funded entities have an overall high-risk rating at 30 June 2010. 
The portfolios of Innovation, Industry and Regional Development, and Planning and Community Development have three and two entities respectively, which have an overall high-risk rating due to large underlying deficits. These entities generally operate and maintain large state assets and record large depreciation expenses year on year. The current state funding model allocates capital funding based on strategic priorities therefore entities do not receive funding for annual depreciation expenditure. 
Three entities in the Transport portfolio have an overall high-risk rating due to insufficient liquidity as a result of short-term commitments for finance lease repayments and borrowings. These financial commitments are guaranteed by government.
Our financial sustainability assessment is that 23 of the 46 self-funded entities have an overall medium-risk rating at 30 June 2010.
The entities in the Planning and Community Development, Premier and Cabinet, and Primary Industries portfolios that had an overall medium-risk rating was due to high‑risk self‑financing assessments. The entities in these portfolios generally operate large state assets however the revenue generated from their asset holdings is insufficient to cover expenses and renew assets. 
No sustainability issues were identified in the portfolios of Education and Early Childhood Development, and Sustainability and Environment.
The financial sustainability indicators used in this report highlight trends that need to be monitored. A core consideration is that the current departmental funding model does not provide depreciation funding until capital requirements are determined. This situation blurs accountability for governance and performance as capital grant funding is allocated strategically across the portfolio rather than progressively to each entity. This can impact operational performance.
Recommendation
Number	Recommendation	Page	
1.	Entities should adopt the shortened annual reporting time frames achieved for the 2009–10 reporting cycle as the standard for future reporting cycles.	12	

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 all 11 portfolio departments and named entities with a request for comments or submissions.
Agency views have been considered in reaching our audit conclusions and are represented to the extent relevant and warranted in preparing this report. Their full section 16(3) comments and submissions, however, are included in Appendix C.