Victorian Auditor-General’s report
23 November 2011

Portfolio Departments and Associated Entities: Results of the 2010–11 Audits
Audit summary
Background
The Victorian public sector includes 11 portfolio departments and 201 associated entities through which the government delivers its policy objectives, services and public infrastructure. This report covers the outcomes and observations from the external financial audit of these 212 entities. 
Each portfolio department and associated entity is required to prepare a financial report to inform Parliament and the community about the level of public resources and assets it holds and manages.
Financial reports should be a reliable and timely source of information for assessing the financial management and health of entities at a point in time. Financial reports should also be underpinned by systems, processes and internal controls that assure an entity of the completeness, accuracy and appropriateness of its transactions and balances. 
The external audit of portfolio departments and their associated entities provides an opportunity to compare and analyse the quality of preparation of their financial reports. Our financial audits also include cyclical reviews over areas of internal controls. The common findings from these reviews are included in this report.
Conclusion
At the date of preparation of this report, audit opinions had been issued for all 11 portfolio departments and 183 of the 201 associated entities. All opinions issued were clear. 
For the 46 self-funded entities, the most significant challenge facing their financial sustainability is self‑financing. Twenty-three generated insufficient cash from operations to fund new assets and asset renewals, and a further 13 were at risk. 
Most of the self-funded entities are governed by a board or trustees accountable for managing and operating significant public sector assets. However, the community nature of these assets can restrict the ability of the entities’ boards and trustees to increase revenue, limiting their oversight to controlling expenditure. Notwithstanding this, the accountability of the boards and trustees is not limited. 
Findings
Quality of financial reporting
Clear audit opinions were issued for the 11 portfolio departments and 183 associated entities that had finalised their financial reports. A clear opinion means the financial report is credible and reliable.
Portfolio departments improved preparation of their financial reports in 2010–11. Fifty per cent of them achieved the earlier reporting time lines and minimal material adjustments were required to drafts provided to audit. 
Financial sustainability
The financial sustainability of the 46 self-funded entities was assessed using four short- and long-term sustainability indicators. Twelve entities were rated as high financial sustainability risks, meaning short-term or immediate financial concerns exist and need to be addressed. A further 20 were rated as medium risk, indicating a long-term financial sustainability concern. 
Three entities were rated high risk solely due to poor liquidity positions when averaged over the past five financial years. Nine were rated as high risk because of large underlying deficits when averaged across the past five financial years. 
Most of these nine entities have boards or trusts who control and have responsibility for managing significant public sector assets. However, they do not generate sufficient revenue from operations to maintain and renew those assets. This creates an accountability issue for members of their boards and trusts who are unable to meet their statutory obligations, which includes maintenance of assets, because of financial constraints.
Management of employee leave
Leave management in portfolio departments was adequate. All portfolio departments had leave management policies. However, these could be strengthened by specifying accountabilities and requiring reporting to management on excess leave balances and strategies in place to reduce them.
On average, 5 per cent of staff in portfolio departments had excess recreation leave entitlements at 30 June 2011, consistent with the average of 4.9 per cent reported in 2007–08. Staff in portfolio departments took an average of 7.89 sick leave days during the year. However, staff within the Departments of Justice and Transport took 1.5 days and 2.4 days respectively more than the average.
Grants management
Grants administration policies and practices of the 11 portfolio departments were adequate. Nevertheless improvements can be made to:
·	require conflicts of interests declarations to be made by all grant assessors
·	consolidate grant management systems at the Departments of Justice, Primary Industries, and Sustainability and Environment, to provide timely access to grants information for decision-making, monitoring and reporting purposes.
Information technology controls
Weaknesses were identified in information technology (IT) change management at the portfolio departments. Written IT change management policies did not exist or were not up to date at five portfolio departments, and were in draft at CenITex. Despite this, we found that CenITex, Shared Business Systems and the portfolio departments had sound management practices in place to process changes to their IT systems. 
Management, governance and oversight of IT security was adequate at most portfolio departments, but IT security policies could be strengthened by tailoring them for the risks unique to each portfolio department.
Recommendations
Number	Recommendation 	Page	
1.	That the Department of Treasury and Finance work with agencies to address accountability obligations when statutory responsibilities for governance and the funding models are not aligned.  	18	
2.	That portfolio departments prepare and approve leave management plans for all staff with excess annual leave, and actively manage compliance with those plans.	26	
3.	That portfolio departments report to senior management periodically on sick leave data, including patterns and trends against internal and public sector benchmarks to enable the timely identification of problems, and development of action plans to mitigate risks to staff wellbeing, or underlying issues in the workplace escalating.	26	
4.	That portfolio departments reinforce the importance of conflicts of interests declarations by all staff undertaking grants assessments.	31	
5.	That the Departments of Justice, Primary Industries, and Sustainability and Environment leverage the experience and expertise of other portfolio departments to examine the costs and benefits of a consolidated grants management system.	31	
6. 	That CenITex have its change management policy, and process and procedures guide approved and adopted by senior management.	45	
7.	That portfolio departments develop, approve and implement change management policies and procedures for all financial applications.	45	
8.	That portfolio departments develop comprehensive policies and procedures over information technology system security which are approved by the secretary and subject to regular review.	45	
9.	That portfolio departments develop an information security classification policy that outlines criteria for assigning security classifications to information and the required security controls for each classification.	45	
10.	That portfolio departments develop, approve and implement disaster recovery policies and procedures for all financial applications.	45	
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 portfolio departments and named agencies with a request for submissions or comments.
The 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) submissions and comments, however, are included in Appendix E.