Victorian Auditor-General’s report
2 May 2012

Personal Expense Reimbursement, Travel Expenses and Corporate Credit Cards 
Audit summary
Background
Public sector agencies meet the business costs they incur by reimbursing out‑of‑pocket expenses, settling corporate purchasing card statements and paying invoices generated through their activities. These costs are significant, for example, during 2010–11, agencies charged $61.6 million to government purchasing cards and spent a total of $14.4 million through the whole-of-government contract for air travel. 
The government's 2010 Better Financial Management Plan, which requires departments to reduce non-payroll costs by $722 million over four years, has added impetus to finding savings while properly controlling expenses and improving services to the community. 
In Victoria, legislation describes a framework of rules for effective and efficient financial management. Public sector agencies are responsible for developing specific systems, procedures and reports to meet these rules and assure government that they have achieved this. 
The Department of Treasury and Finance (DTF) communicates the legislated rules to public sector agencies and monitors their compliance on behalf of the Minister for Finance. DTF has translated the rules into the Financial Management Compliance Framework (FMCF), which agencies are required to follow. 
Agencies report annually on their compliance with the FMCF through a checklist and DTF uses this information to assure the Minister for Finance and Parliament that the state's finances are well managed. 
The audit examined the management of travel-related, hospitality, credit card, and reimbursed expenses for the following six agencies: the departments of Business and Innovation, Human Services (DHS), Justice (DOJ) and Premier and Cabinet, the Country Fire Authority and Tourism Victoria (TV). 
The audit also included DTF because of its whole-of-government oversight role. It assessed how well agencies had applied, and DTF had overseen, the FMCF for: 
·	controlling expenditure so that funds are used for legitimate business expenses in accordance with the rules 
·	taking account of the costs, benefits and risks when deciding how to purchase and pay for goods and services
·	realising the potential savings of using mandated State Purchase Contracts (SPCs)—whole-of-government, discounted contracts for goods and services.
Conclusions
The agencies examined in this audit are effectively controlling expenses so that they are used for legitimate business purposes. Cases where public money is used:
·	for purely personal benefit are extremely rare
·	for legitimate business purposes, but without complying with all the rules, make up a small proportion of purchases—less than 10 per cent of the total number.
However, there is no cause for complacency because:
·	agencies have not done enough to improve cost-effectiveness by understanding and reducing the costs of small transactions and addressing spending that leaks outside of mandatory, heavily discounted, SPCs
·	the mechanisms for assuring government about performance are not working—except for DOJ, agencies did not accurately report rule breaches to the Minister for Finance, and DTF did not adequately review this information.
The government's goal of reducing departments' non-payroll costs by $722 million over four years means public sector agencies should realise savings that can be made by using more cost-effective purchasing arrangements, including SPCs. 
Realising greater efficiency
Departments should identify further efficiencies by:
·	understanding where they do not use mandatory SPCs, reporting this information to DTF and securing further savings by addressing contract leakage
·	analysing how they purchase and pay for goods and services and identifying improvements based on the costs, benefits and risks.
The public sector is expected to spend more than $750 million each year on SPCs. Only one agency in this audit, DOJ, had purposefully managed contract leakage. Its experience showed the significance and benefits of doing this, reducing average leakage from 47 per cent to 14 per cent of spending on the goods and services available through these arrangements. This generated significant savings. 
The agencies in this audit understood the costs of processing invoices and five of them had upgraded their systems to secure efficiency gains. They did not have the same knowledge of expenses involving purchasing cards or reimbursements. Documenting the costs, benefits and risks will help them verify or improve their efficiency. 
Managing expenditure risk
Agencies have consistently applied core controls requiring evidence of an expense and the documented approval by a person other than the purchaser. This reduces the risk that non-business expenses will go unchallenged.
However, a small proportion of transactions—7 per cent of the sample of 460 we tested—did not fully comply with legislated rules. These breaches happen when:
·	the rules are not adequately documented and communicated to staff
·	staff work around the rules to make a legitimate business purchase.
The reporting mechanisms intended to alert DTF and the Minister for Finance to transactions that broke the rules failed. Only DOJ accurately reported purchasing card rule breaches and DTF did not detect the reporting failures of the other agencies. 
Addressing these issues requires the continued and improved scrutiny of transactions, comprehensive documentation of the rules and their clear communication to staff. DTF needs to improve how it communicates updated purchasing rules because the existing mechanisms have not been effective. Only DHS and TV incorporate the latest purchasing card rules in cardholder agreements.
Public sector agencies should meet government's reporting requirements and DTF should apply a greater level of scrutiny in assessing the validity of these reports.
Recommendations
Number	Recommendation	Page	
	Public sector agencies should:		
1.	review and increase the level of scrutiny and control applied to transactions by:
·	making greater use of in-built card limits
·	running regular, automated tests to detect control breaches and better target detailed reviews
·	including reviews of personal expenses in their forward internal audit programs 	22	
2.	review and, where required, strengthen how they document and communicate rules so that staff have a comprehensive understanding of their obligations	22	
3.	meet the mandatory requirements for reporting unauthorised purchasing card use and thefts and losses.	22	
	The Department of Treasury and Finance should:		
4.	improve its communication of changes to the legislated purchasing rules so that agencies have a comprehensive and current understanding of what is required	22	
5.	significantly improve its scrutiny of agencies’ reporting on breaches of the purchasing card rules and reports on thefts and losses.	22	
6.	The Department of Premier and Cabinet should evaluate the effectiveness of the 2012 hospitality guidelines within two years of their issue, by:
·	confirming that agencies have adequately reflected the revised framework in their individual policies
·	assessing the impact on hospitality expenditure and controls, and the community’s satisfaction with the way agencies control this type of expenditure. 	22	
	Public sector agencies should:		
7.	comprehensively analyse how they purchase and pay for goods and services, and identify improvements based on the costs, benefits and risks	27	
8.	report and address expenditure occurring outside of mandated State Purchase Contracts.	38	
9.	The Department of Treasury and Finance should request an acquittal of the scale of contract leakage and the reasons why this happens from agencies participating in a mandatory State Purchase Contract.	38	
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 was provided to the departments of Business and Innovation, Human Services, Justice, Premier and Cabinet, and Treasury and Finance, the Country Fire Authority and Tourism Victoria, 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. Their full section 16(3) submissions and comments however, are included in Appendix A.