Victorian Auditor General’s report 
28 November 2012   
Portfolio Departments and Associated Entities: Results of the 2011–12 Audits 
Audit summary
This report presents the outcomes and observations from the external financial audit of 11 portfolio departments and 193 associated entities. Additionally, it comments on the quality of financial reporting, the financial sustainability of self-funded state entities and the effectiveness of internal controls over the appropriation framework, trust funds and risk management.
Conclusion
Financial reporting by portfolio departments and associated entities is reliable. However, shortcomings were observed in the control frameworks governing appropriations and trust funds, and of disclosures of post-employment remuneration and ex gratia payments.
Quality of financial reporting
The Financial Reporting Direction (FRD) to public sector entities covering the reporting of responsible person and executive officer remuneration has a narrow definition of remuneration.
As a consequence, three public sector bodies, including one portfolio department, were able to limit disclosure of information relating to post‑employment benefits paid to former responsible persons. 
The requirement to report ex gratia payments made by a public sector entity is similarly covered in an FRD. The requirement, however, is minimal and allows public sector agencies to exercise significant discretion over the level of disclosure made on the nature and reasons for the payments.
Financial sustainability
The financial sustainability of 46 self-funded state entities was assessed using four indicators that consider both short-term and long-term sustainability. The assessment flags short-term financial risks for 13 entities and long-term financial risks for a further 16 entities. This result is consistent with prior years and indicates continuing challenges for these entities to generate revenue from operations to fund asset replacement.
The appropriation framework
The principal source of funding for the general government sector is through the annual Appropriation Act, which in 2011–12 allocated $39.2 billion to the 11 portfolio departments. 
The funding for portfolio departments is based on a purchaser-provider model, where appropriations are awarded by the Treasurer for the delivery of services to an agreed output standard. At 30 June 2012, portfolio departments had delivered 71.4 per cent of the agreed output targets for the financial year, but 99.97 per cent of requested appropriations were awarded. It is not evident that there are adverse consequences for underdelivery or non-delivery.
Portfolio departments can generate a surplus by delivering outputs at a cost less than the agreed level. Surpluses can be accumulated and used to deliver additional public services or infrastructure above those funded annually by appropriation. Portfolio departments report the accumulated amount as a receivable in their financial statements; operationally, it is referred to as the state administration unit (SAU).
At 30 June 2012, $1.4 billion was available across the 11 portfolio departments to deliver additional public services and infrastructure. Nevertheless, no portfolio department other than the Department of Health could demonstrate strategies to use these reserves in the current economic climate. 
Where required, portfolio departments can access additional funds to meet urgent expense claims which are unforeseen and therefore not provided for in the Budget. Commonly known as Treasurer’s advances, this emergency funding is permitted under the Appropriation Act, where money is set aside as an ‘advance to Treasurer to enable Treasurer to meet urgent claims that may arise before Parliamentary sanction is obtained, which will afterwards be submitted for Parliamentary authority’. 
During 2011–12, the Treasurer approved 48 Treasurer’s advances with a total value of $776 million. Over the past five years, 56 per cent of the Treasurer’s advances awarded have been to assist portfolio departments in meeting wages, depreciation, administration costs and capital projects. These types of expenses are routine, yet the use of Treasurer’s advances to meet them is inconsistent with the Appropriation Act, which provides for Treasurer’s advances to be used only for urgent expenditure which is unforeseen.
Trust funds
Trust funds are discrete accounts established to record the receipt and disbursement of state funds for specified purposes. They can be set up under their own legislation or by the Minister for Finance under the Financial Management Act 1994. 
At 30 June 2012, 111 trust funds were held across the 11 portfolio departments, with a total value of $2.7 billion. The number and value of trust funds held is growing year on year, however, with one exception, portfolio departments and the Department of Treasury and Finance (DTF) (on behalf of the Minister for Finance) could not demonstrate they had systematically reviewed the nature and purpose of each trust to confirm relevance and alignment with the strategic objectives of government.
There is evidence that treasury trust funds are not being used as intended. Treasury trust funds are established to hold unclaimed and unidentified money, however, there is evidence that revenue and appropriations are being deposited, and expenses raised, out of these trust funds. Further, the Department of Business and Innovation is operating a working trust; however, neither the department nor DTF could provide evidence that the trust had been legally established.
While trust fund balances are reported by portfolio departments in their financial statements at the end of each financial year, there is no public reporting of the amount of money flowing into and out of each trust annually. There is also no disclosure of the nature and purpose of each trust. Consequently, there is a lack of transparency in reporting to Parliament on trust funds.
Risk management
The risk management practices at the 11 portfolio departments are adequate, with general compliance against the Victorian Government Risk Management Framework and the international risk management standard. Further improvements in risk management could be achieved by portfolio departments strengthening risk management policies and training.
An annual attestation on compliance with the international risk management standard has been required since 2007. Three portfolio departments are still developing or improving their risk management controls and framework.
Recommendations
Number	Recommendation	Page	
1.	The Department of Treasury and Finance should:
·	revise Financial Reporting Direction (FRD) 21B to align the disclosure of remuneration of responsible persons and executive officers with Australian Accounting Standards for private sector entities
·	revise FRD 11 to mandate meaningful disclosure of the nature, purpose and amount of ex gratia payments made by public sector entities.	12	
2.	The implications of the financial sustainability challenges for the accountability of boards, councils and trusts should be reviewed, and a strategy to address them developed.	17	
3.	The Department of Treasury and Finance should review the implementation of the appropriation framework to determine whether acquittal and approval procedures are delivering funding outcomes consistent with its aims. 	30	
4.	Portfolio departments should, in consultation with the Department of Treasury and Finance, include in their long‑ and short-term plans a clear link between the use of the accumulated state administration unit balances, and the provision of additional services to the public, and infrastructure, consistent with the model. 
	30	
5.	The Department of Treasury and Finance should adopt a definition of urgent that would mean that Treasurer’s advances are awarded only for purposes consistent with the Appropriation Act.	30	
6. 	The Department of Treasury and Finance should:
·	review every treasury trust fund to determine whether it is being used as intended, and address noncompliance as necessary
·	review its trust fund guidelines for consistency with better practice. 	37	
7.	The Department of Business and Innovation should confirm its legal authority to operate its working trust or close the trust.	37	
8.	The Department of Treasury and Finance and portfolio departments should periodically review the purpose and currency of trusts to assess alignment with changing government objectives.	37	
9.	To better inform users of financial statements and provide greater transparency to the Parliament and the public, reporting requirements should be enhanced to require annual disclosure of the nature and purpose of each trust and the amount of its revenue and expenditure. 	37	
10.	That portfolio departments should:
·	review and approve risk management policies annually
·	conduct regular tailored training for all staff on risk identification and management
·	act decisively to address areas of noncompliance with the risk management standard.	44	

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.
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 are included in Appendix F.