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Last updated: 4 July 2003

The Australian experience of public sector reform

Chapter 6-Financial reforms and accountability

Successive Australian governments have implemented reforms in the financial, public service and workplace relations fields with the aim of achieving a performance culture within the public sector and of improving the responsiveness of the public sector to the needs of government and the community.

The financial management reforms have included:

• new financial management legislation
• implementing an outcomes and outputs framework, building on earlier work on program budgeting
• introducing whole-of-government financial reporting on an accrual basis and budgeting on an accrual basis across the general government sector.

The financial management reforms have been founded on the principles of greater flexibility, devolution and empowerment with clearer accountability for results. They have also been underpinned by a robust performance monitoring and evaluation regime. The major thrust of these public sector reforms has been to remove unnecessary constraints and restrictions on public service managers, in effect to untie their arm.

The purpose of the financial management reforms has been to:

• put the Commonwealth public sector on a more business-like footing
• foster a more competitive environment
• shift the focus from complying with rules to managing for results
• plan, budget and report on an accruals, outcomes and outputs basis.

The reforms, taken together, provide a framework for public sector operations and management. Effective financial management is closely connected to the public sector's ability to meet the expectations of governments regarding the delivery of their objectives.

Ensuring sustainable public finances has been a critical part of sustaining strong economic growth. The primary objective of the federal government's medium-term fiscal strategy is to maintain budget balance on average, over the course of the economic cycle.

Legislating for financial management

Financial management was modernised through three pieces of legislation designed to improve the quality and clarity of understanding of the Commonwealth's financial management framework. These were the Financial Management and Accountability Act 1997, the Commonwealth Authorities and Companies Act 1997 and the Auditor-General Act 1997. The legislation sharpens accountability and emphasises performance and propriety. It also facilitated the subsequent, separate decisions to replace cash accounting with accrual-based budgeting and output and outcomes reporting.

Together with the full adoption of accrual-based budgeting in 1999, the current arrangements have aimed at achieving:

• improved accountability
• improved outcomes and outputs based budgeting and reporting
• better understanding of the true cost of government.

Charter of Budget Honesty Act 1998

The Government's disclosure requirements and principles of sound fiscal management are enshrined in the Charter of Budget Honesty Act 1998.

The Charter Act provides a framework for the conduct of government fiscal policy, requiring fiscal policy to be based on principles of sound fiscal management. By facilitating public scrutiny of fiscal policy and performance, it requires government to adhere to principles of sound fiscal management and to:

• manage financial risks faced by the Commonwealth prudently-requiring the Budget economic and fiscal outlook report to have a statement of risks that includes contingent liabilities, publicly announced government commitments (not already in the estimates)
• release publicly and table half yearly fiscal strategy statements
• use external standards (GFS and AAS standards)
• prepare a 5-yearly inter-generational report which assess sustainability of current government policies over a 40 year period, including taking into account the financialimplications of demographic change
• provide a pre-election economic and fiscal outlook report within 10 days of the issue of a writ for a general election
• define processes for costing election commitments.

Financial Management and Accountability Act 1997

Under the Financial Management and Accountability Act 1997 (FMA Act) agency heads have gained greater flexibility and autonomy in their financial management while still being required to promote the efficient, effective and ethical use of Commonwealth resources.

The purpose of the FMA Act is to provide the framework for the proper use and management of public money, public property and other Commonwealth resources and provide a governance framework for organisations that do not have a separate legal identity. The Act deals with departments of State (such as the Department of Foreign Affairs and Trade, or the Department of the Environment), parliamentary departments (such as the Department of the Senate) and prescribed agencies that deliver a government program under the financial umbrella of the Commonwealth. These organisations range from Centrelink, a key service delivery agency (see Chapter 8), to the Australian Taxation Office.

Compared to its predecessor legislation that assumed a prescriptive and centralised approach to financial management, the new act was based on a more devolved, principles-based approach, with agency Chief Executives being given significant responsibility in defining detailed financial management procedures for their agencies.

The FMA Act sets out the rules for how public money is dealt with and the accountability mechanisms for this process. Under the Act, the agency head (referred to in the legislation as the chief executive) is responsible for the use and management of public money. This usage must be efficient, effective and ethical.

To assist the chief executive, the Financial Management and Accountability Regulations 1997 (FMA Regulations), made under the authority of the FMA Act, provided for more specific matters, such as to give the agency head powers to issue instructions about how the agency’s resources will be used—the Chief Executive’s Instructions (CEIs). These instructions specifically deal with handling, spending and accounting for public money, making commitments to spend public money, and recovering amounts owing to the Commonwealth.

Another major area regulated by the FMA Act is commitments to spend public money. Essentially, any person entering into some form of legally binding arrangement that involves the spending, or likelihood of spending, public money is required to comply with the FMA Regulations. The Act also covers the collection and custody of public money. Essentially, any public money collected by the Commonwealth must be placed into an approved official bank account.

An important limit on spending public money is the need for a drawing right before making a payment of public money. A drawing right is an authority from the Finance Minister to make a payment of public money for a specified purpose. In turn, it must be supported by an appropriation, in accordance with the Constitution.

The FMA Act imposes various accountability requirements on agency heads. They must institute a fraud control plan and convene an audit committee; pursue debts owed to the Commonwealth; and ensure adequate accounts and records are kept in line with the Finance Minister's Orders. Finally, they must provide the Auditor-General with financial statements in the required form.

Commonwealth Authorities and Companies Act 1997

The Commonwealth Authorities and Companies Act 1997 (CAC Act) replaces the former disparate accountability, financial and auditing requirements relating to various Commonwealth authorities and companies with a clearer set of core reporting and auditing requirements for their directors. The Act is loosely modelled on the governance framework incorporated in the corporations law that applies to private sector bodies in Australia, although there are specific clauses supporting ministerial accountability and reporting in the general government sector and whole-of-government sector reporting contexts.

Under the CAC Act these organisations are separate from the Commonwealth both legally and for financial purposes. They are accountable for receipts and uses of their own money.

Commonwealth authorities

High levels of public accountability are achieved through comprehensive financial reporting requirements. Directors of a Commonwealth authority are required to prepare an annual report audited by the Auditor-General, and provide it to the responsible Minister. The full obligations of Commonwealth authorities depend on any requirements specified in their enabling legislation.

The CAC Act imposes on Commonwealth authorities a range of other restrictions and obligations. There are, for instance, restrictions on banking and investment and a range of care, diligence, good faith and conflict of interest obligations. The rules applying to authorities and their directors and officers largely mirror those applying to companies, although specific exceptions may be stated in the authority's enabling legislation, which sets their specific governance regimes.

Commonwealth companies

Companies that are wholly owned, or in which the Commonwealth has a controlling interest, must comply with obligations as companies under both the 2001 and the CAC Act. The additional requirements imposed on Commonwealth companies by the CAC Act include the following:

• the Auditor-General must either be the company's auditor or provide a report on the company's financial statements
• where the company has subsidiaries, the Auditor-General must audit each subsidiary's financial statements
• if the company is wholly owned by the Commonwealth a particular sort of audit committee must be established
• all companies must provide annual reports with the reporting requirements being outlined in the Finance Minister's Orders and budget estimates
• strategic control being exercised by the relevant shareholder Minister.

Commonwealth authorities and companies which are designated government business enterprises (GBEs), such as the Medibank Private Limited, the Australian Postal Corporation, and Telstra, have additional obligations-in particular, they must develop corporate plans. The nature and role of GBEs is dealt with in more detail later in this chapter.

Auditor-General Act 1997

The Auditor-General Act 1997 sets out the main responsibilities and information gathering powers of the Auditor-General, as well as establishing the Australian National Audit Office (ANAO). In contrast to the , which it replaced, the Act focuses on audit goals rather than processes and better defines the status of the Auditor-General and the role of the ANAO.

The Act establishes the Auditor-General as an independent officer of the Parliament, with an auditing mandate extending to all Commonwealth departments, agencies, authorities, companies and subsidiaries. That mandate extends to GBEs to the extent outlined in the previous paragraphs. Additionally, the Auditor-General may undertake performance audits of wholly owned GBEs at the request of the responsible Minister, the Minister of Finance, or Parliament's Joint Committee of Public Accounts and Audit.

Through the ANAO, the Auditor-General provides an independent review of the performance and accountability of the Commonwealth public sector in its use of public resources. That role is discussed in more detail later in this chapter.

Budgetary reforms

Australia has a long-established forward estimates system which projects ministerially agreed estimates of expenditure patterns for three years ahead of the current Budget year, based on existing policy. This provides a sound basis for governments to consider incremental changes to the amount of funding appropriated to agencies in each Budget.

Each agency estimates the funding it needs to carry out the role assigned to it by government and these estimates are drawn together on a portfolio basis. Portfolio Ministers then put forward new proposals and estimates of funding required, provide information on how the proposals will contribute to a planned outcome, and identify any offsets in terms of savings that might be required to make funding available for such initiatives (a common budgetary requirement).

These Portfolio Budget submissions go to an Expenditure Review Committee, the medium through which the Government considers budgetary changes. The Committee, comprising the Prime Minister and senior Cabinet Ministers, also takes into account advice from the Department of Finance and Administration, which consults with the Departments of Prime Minister and Cabinet, and the Treasury. This advice draws on central agency perceptions of value for money and relative priorities.

• Based on the Committee's recommendations, Cabinet makes the final decision on levels of funding that will be appropriated against each outcome, and the funding split that will be made between departmental outputs (goods and services produced by agencies), and outputs related to administered items (for example, unemployment and other benefit payments, program moneys, grants, and transfers to other levels of government). The internal allocation of funds to particular agency outputs is a management issue for agencies.

Reforms of the 1980s and 1990s

Australian budgeting and reporting have undergone significant changes over the past two decades. Prior to the 1980s, funds were appropriated primarily through annual Appropriation Acts with detailed specification of individual items of expenditure. In 1983 a government White Paper, titled , noted the need for a complete overhaul of public sector practice-a shift in management emphasis from 'compliance' to a greater degree of performance control.

Amongst the many changes that followed, key ones included:

• the publication of the forward estimates, approved and endorsed by the Department of Finance and Administration, and the requirement of transparency for any adjustment to the estimates whether through policy decisions or parameter changes (for example, prices or population)
• the introduction of program budgeting, requiring the specification of program objectives and targets, and the certification of all appropriations related to that program objective. This became the basis for the preparation of all portfolio budgets by the government, and for subsequent annual reporting by agencies
• the introduction of the 'running costs' system applying to non-program expenditure, where detailed line items for agency administration costs were replaced by aggregate appropriations allowing agencies the flexibility to move funds between, for example, salaries and administrative purchases
• the introduction of annual efficiency dividends based on annual potential for productivity gains from running costs appropriations
• 'carry-over' arrangements for running costs items, allowing agencies to carry forward unspent moneys, or to borrow from future appropriations, within agreed limits
• common services reforms, involving a sequence of changes in arrangements for common services such as property, cars and publishing, starting with user pays, and then choice of provider, then commercialisation of the government provider (including accrual accounting) and, finally, privatisation in many cases.

In partnership with increased flexibility came additional discipline. Apart from aggregate controls, such as efficiency dividends, planning and reporting reforms were introduced.

These included identifying and reporting against efficiency and effectiveness indicators, and for a period, a formal process of evaluation was introduced to cover all programs.

Outcomes/outputs framework

In 1999 the Commonwealth moved from reporting performance on its programs to an accruals-based outcomes and outputs reporting framework. An integrated framework of accrual budgeting, accounting and reporting, and specifying outcomes and outputs, was first implemented for the 1999-2000 federal Budget. This built on the program budgeting arrangements established in the 1980s. Reporting on programs tended to identify what had been done and what services had been delivered. Reporting on outcomes identifies what results have been achieved by delivering those services.

The essential purpose of the outcomes and outputs framework is to answer three questions: what does government want to achieve (these are the outcomes); how does it want to reach those achievements (these are the outputs); and how does it know if it is succeeding? (these are the indicators).

Outcomes are the key results the government-of-the-day seeks to achieve, and define for each agency the purpose of their business. Typically, they are at a higher (more aggregated) level than programs under the former program budgeting system. Outputs are discrete activities or set of activities, a product or a service, performed by an agency as part of achieving its outcomes.

Agencies are now required to specify and cost their outputs against planned outcomes and identify performance indicators and targets. Importantly, appropriations are now made at the outcomes level. Outcomes, and the supporting administered and departmental outputs, therefore form the basis of an agency's operating budget and external reporting framework.

The framework focuses on the outputs the public sector is producing and their contribution to the outcomes set by government, and is aimed at assisting the tracking of results and progress towards targets. The output component of the framework also facilitates tracking and benchmarking of process, and hence is an important aid to improved efficiency.

By way of example, the outcomes and outputs framework for the Department of the Environment and Heritage includes the following three outcomes:

• Outcome 1: The environment is protected and conserved
• Outcome 2: Australia benefits from meteorological and related science and services
• Outcome 3: Australia's interests in Antarctica are advanced.

Selected outputs contributing to Outcome 1 are illustrated below.

Figure 12 Outcomes and outputs framework of the Department of the Environment and Heritage.

Because Parliament appropriates monies for agency outcomes, the nature and purpose of the outcome must be sufficiently clear in a legal sense to form a valid appropriation under the Australian Constitution. Unlike outcomes, the formal and detailed specification of agency outputs is not part of the legislative requirements for Parliament's Appropriation Bills. However, their inclusion for Commonwealth budgeting purposes enables closer links to be established between portfolio Budget documentation and agency annual reports. This enables Parliament, Ministers and external stakeholders to scrutinise (ex ante) how appropriated monies will be spent, and to judge (ex post) how expenditure was used.

The outcomes/outputs structure also distinguishes between administered expenses and departmental expenses.

Administered expenses

Administered expenses relate to those funds that are managed on behalf of government by some external agency or person. They may be associated with particular legislation, inter-governmental agreements, contractual arrangements or other expressions of government policy.

Using the example of the Department of the Environment and Heritage above, several of the outputs of outcome 1 are administered items, examples being: managing air quality (part of output 1), feral animal control (part of output 2), and all the programs (such as marine biodiversity, species protection and protected areas; Coastcare; wastewater and stormwater management; and coastal and estuarine policy) under output 3.

Examples of administered items in other portfolios include: benefit or welfare payments, various program grants, and transfers to state governments.

Administered expenses comprise about 80 percent of total government spending by the Commonwealth.

Whether they are authorised by special appropriations or annual appropriations, administered expenses are directly linked to the outcomes set out in the Appropriations Acts and Portfolio Budget Statements and other related documentation, and agencies are required to identify and report on their efficiency and effectiveness accordingly.

Departmental expenses and outputs

Departmental expenses are included in global appropriations for each agency, and finance the products and services-the outputs-agencies produce to contribute to outcomes. In effect, they replace the former 'running cost' appropriations, and comprise about 20 percent of the budget. Requiring only approval of the relevant Portfolio Minister, agency heads are given flexibility for the design and mix of outputs that will maximise their contribution to effective outcome delivery.

Where an agency has more than one outcome to support, the Portfolio Budget Statements and annual reports will identify the departmental expenses against each outcome, but this is notional because there is flexibility to reallocate departmental expenses as required. Agencies must subsequently account for such changes in their annual reports for the relevant year.

Departmental expenses are identified against particular outputs, or discrete activities, performed by the agency.

Agencies are encouraged to divide and price their activities so that their final outputs can be compared with outputs of other agencies and potential alternative providers. This facilitates improved costing of outputs and benchmarking across agencies. Generic examples of outputs include policy advice, program design, regulatory activity, or the direct delivery of services. Costings of all proposed new activities are agreed with the Department of Finance and Administration at an early stage of the Budget process, prior to Cabinet consideration.

More than half of the Commonwealth's agencies have structured their outputs within output groups that reflect their major business lines. Output groups are not themselves goods or services, just categories for logically grouping together related outputs.

An example of agency outputs from the Department of Education, Science and Training, illustrates their use of output groups:

Department of Education, Science and Training

• Enhance the quality of teaching and learning (Output Group 1.3)
  - Administration (Output 1.3.1)
  - Policy advising (Output 1.3.2)
  - Ministerial and Parliamentary services (Output 1.3.3)
  - Research, analysis and evaluation (Output 1.3.4)

Experience so far with the implementation of the outcome/output framework suggests that better, lower level program information is necessary for monitoring purposes within government. This is being introduced from 2003-04 onwards. Agencies are also being encouraged to increase the number of, and specificity of, outcomes to address concerns about some agencies having outcomes that were too few and broad in nature.

Financial management reforms

Accrual accounting

Following recommendations from the 1996 National Commission of Audit, accruals-based budgeting was introduced in the 1999-2000 Commonwealth Budget. Prior to this, accrual annual financial reporting had been introduced from 1994-95 onwards with audited statements based on Australian Accounting Standards. Accrual budgeting uses both the AAS standard and the, accrual-based Government Finance Statistics Standard of the International Monetary Fund. The consolidated financial statements for the Commonwealth have also been reported on an accrual basis since 1994-95 (initially on a trial and unaudited basis until 1996-97 when audited statements were introduced).

In accrual accounting, items are brought to account and included in the financial statements as they are earned or incurred, rather than as they are received or paid. Accrual management involves a fundamental change in the way the public service measures business performance financially.

Commercial organisations within government had been reporting on an accrual basis for many years. In the early 1990s the combined impact of measures to introduce commercial disciplines, to allow management flexibility, and to institute new accountability standards, pointed to the need for more comprehensive and timely information about financial performance. Many Commonwealth organisations, particularly those charging for their services, had found that accrual information had enabled managers to better:

• identify the assets controlled by the agency and evaluate decisions concerning resource allocation and management
• reveal the extent of the liabilities of an agency
• make informed judgements about program and agency performance
• account more comprehensively to Parliament for the use of appropriated moneys.

After several departments participated in a pilot program, all departments of State commenced reporting on an accrual basis in 1994-95. Full accrual budgeting at the federal level was adopted in 1999-2000 in the context of the new outputs/outcomes framework discussed earlier.

Accordingly, federal government budgetary deliberations can now be made in the knowledge of the full costs of proposals. While there is no doubt that cash considerations remain prominent, the availability of full accrual information assists decision-making.

The new accrual budgeting framework has changed both how and what governments measure for budgeting, accounting and reporting purposes. The former form of reporting-cash measurement-focused on cash flow over time. It ignored assets and liabilities and could not account for income earned or expenses incurred during the financial year. As a result, governments could not fully assess the financial health of agencies or compare one financial year's performance with the next.

A major benefit of the outcome-output based accrual budgeting framework has been the improvement in the information base underpinning all public sector activity. It provides governments with:

• a clearer picture of the full cost of the goods and services agencies provide, including indirect costs, depreciation and maintenance
• the information necessary to manage the financial health of agencies
• improved communication with stakeholders on priorities and achievements via consistent, streamlined reporting arrangements.

Regular use of accrual information by managers can also result in more effective asset and liability management; better assessments about the true and full cost of outputs; and further opportunities for performance improvement.

The changes associated with the introduction of accrual budgeting required a major investment in retraining financial managers, and the infusion of new staff familiar with accruals.

The move to accruals does not diminish the continuing need for Ministers and for agencies, to be aware of cash management issues. Partly this arises from the importance of cash in fiscal policy, but also to ensure that departments manage their cash reserves prudently.

Financial estimates and reporting systems

The introduction of accrual budgeting in 1999-2000 required Australian agencies to redevelop what had formerly been cash-based financial management and reporting systems. This also applied to the central budget system.

For internal management purposes agencies maintain their own systems. No particular systems were mandated for internal use-agencies developed their own financial management information systems for their individual needs. Whereas budget estimates were previously input by the Department of Finance and Administration, this function was devolved in 1999 to line agencies who entered the data in the central Accrual Information Management System, with the central agency responsible for quality assurance, monitoring and consolidation of this data.

More recently, the federal government has decided that the current central management information system will be replaced with an estimates and actuals management system better able to manage program (largely administered items) and cash information requirements. The interface with agency systems will also be carefully considered. These changes represent a strengthening of central agency information gathering, monthly monitoring, and financial performance analysis. In coming years, the changes are also intended to lead to more timely financial reporting.

A STATE GOVERNMENT PERSPECTIVE

Reforming financial management in New South Wales New South Wales' financial management legislation has been incrementally amended over recent years, clarifying fiscal principles and extending the Auditor-General's powers. A Financial Management Framework for the general government sector was established by the NSW Treasury in December 2000. The Framework advances five principles for improving value for money: clarity of objectives; proper allocation of responsibility; incentive structures; performance management; and integrity of information. The Framework links resources to performance, promoting transparency in budget resource management. It also facilitates adherence to NSW's fiscal strategy, which sets short, medium and long-term targets for the major Budget operating statement and balance sheet measures and provides the basis for preparing the state's annual Budget. Treasury promotes improved resource allocation through performance management by a series of Service and Resource Allocation Agreements which it negotiates with key general government agencies. These Agreements are outcomes focussed agreements that describe agency strategic issues and capture what agencies are trying to achieve; how they are trying to achieve it; how much it will cost; risks, and how the agency will manage them; and efficiency and effectiveness measures. While the main mechanism for performance reporting by each government agency in NSW is its annual report, the Council on the Cost and Quality of Government, a key management advisory body, reports annually from a whole of government perspective. Its Overview of NSW government services provides a summary of expenditure, service efforts and service achievements, together with a description of the community context within which these occur. Budget papers for 2001-02, were published on compact disc for the first time to ensure convenient access to Budget information. Treasury's manual data collection system was replaced with an online electronic collection system, reducing the time and effort needed to collect and verify agency data.

Performance reporting and benchmarking

The financial management framework is centred on underpinning the effectiveness of policies and programs and the quality of service delivery. Accountability to Parliament is also seen as vital, as discussed later in the chapter. The federal Parliament has a welldeveloped scrutiny process with an extensive range of committees, some specialising in the estimates, performance forecasts and achievements of particular portfolios, while others take an overall interest in the maintenance of an appropriate accountability regime. The former type of committee can, where their concern is the Finance or Treasury portfolio, also take an interest in broader budget strategy.

While the Departments of Finance and Administration and the Treasury produce the main Budget papers, a devolved approach applies to agency-based budget-related documents (the Portfolio Budget Statements). In the latter case, the Department of Finance and Administration provides principles-based guidance, with the onus on agencies to produce documentation both meeting their Minister's requirement, and satisfying any particular needs advised by and agreed with parliamentary committees scrutinising the portfolio.

As mentioned earlier, Budget appropriations are made for outcomes, and the Portfolio Budget Statements identify these together with the associated outputs and administered items. At Budget time, performance indicators are also published, often accompanied by targets for planned performance, with the onus on agencies to report publicly (in annual reports) within four months of the end of the relevant financial year on actual performance against these indicators. Any changes made during the year to the suite of indicators must be explained, together with material performance variations between predictions and results. Both at Budget time and following the end of each year, Ministers, agency heads and their agencies are subject to a well-developed process of parliamentary scrutiny.

This consistency in reporting at year-end against the same outcomes, outputs, administered items and associated indicators identified earlier at Budget time, is valuable in clarifying accountability. This performance management regime has been reinforced by other initiatives, such as market testing, outsourcing, purchaser-provider and business partnership arrangements, and privatisation. In situations where agencies deliver services directly to the public, they are also expected to implement and report against service charters.

Oversight of Government business enterprises

Government business enterprises (GBEs) are Commonwealth authorities or companies prescribed as GBEs in Regulations under the CAC Act. The 1997 arrangements for Commonwealth government business enterprises, provide a framework for overseeing these organisations. The Commonwealth's relationship to its GBEs is similar to the relationship between a holding company and its subsidiaries, features of which include:

• a strong interest in its performance and financial returns
• reporting and accountability arrangements that facilitate active oversight by the shareholder
• action by the shareholder in relation to the strategic direction of its GBEs where the GBE prefers a different direction from the one proposed by the shareholder.

The Commonwealth's ownership interest is represented by 'Shareholder Ministers', of which there are typically two, one being the Minister responsible for the portfolio in which the GBE is located, and the other being the Finance Minister. On occasions, the Finance Minister is the sole Shareholder Minister.

The governance arrangements are a transparent and effective mechanism to enable active oversight and enhanced accountability of GBEs. Their guiding principles are:

• Shareholder Ministers exercise strategic control consistent with their accountability to the Parliament and the public, set clear objectives, and must be consulted on matters of significance
  - any community service obligations that a GBE is to undertake are generally specified through contractual arrangements.
• The directors develop the business strategies and handle the day-to-day management policies and ensure that
  - activities are conducted so as to minimise any divergence of interests between the GBE and the shareholders
  - GBEs are managed in the best interests of the shareholders
  - GBE officers maintain the highest standards of integrity, accountability and responsibility.
• Required standards of disclosure must be satisfied, in particular, timely disclosure is to be made by GBEs of information:
  - which may affect the shareholder value of the organisation
  - which may influence government decisions in relation to the GBE or
  - in which the government has a legitimate interest.
• Information is produced for the shareholder and the community according to the highest standards and, where appropriate, should enable ready comparison with other relevant information.

A STATE GOVERNMENT PERSPECTIVE

Government businesses in New South Wales In New South Wales the state government has introduced a commercial policy framework that seeks to replicate, within its government businesses, the disciplines and incentives that lead private sector businesses towards efficient commercial practices. A financial monitoring policy, for example, sets out the framework under which government businesses negotiate an annual agreement on financial performance targets and quarterly monitoring of results against those targets. The government businesses, reports annually on recent microeconomic reforms, and on the efficiency of each GBE, its services and its financial performance.

Improving tendering and procurement processes

Procurement policy is articulated through the Commonwealth procurement guidelines & best practice guidance, which set the framework within which agencies undertake procurement and the agenda for a whole-of-government approach to procurement.

The guidelines were revised in 2002 to support a continuing commitment to reducing red tape for industry, cut the cost of doing business with government agencies, streamline and simplify practices, and increase flexibility in the process. They also provide greater opportunities for business to participate in government markets.

Value for money is the core principle governing Commonwealth procurement. This is strengthened by the supporting principles of:

• efficiency and effectiveness
• accountability and transparency
• ethics
• industry development.

Value for money is evaluated on a whole-of-life basis for the property or service being procured, and is influenced by factors such as the procurement method adopted, market maturity, performance, financial considerations, and the anticipated disposal price.

Within this framework, agencies are encouraged to assess the value of innovative procurement strategies and select the option that represents best value for the Commonwealth. The use of tenders is not mandatory, and sole-sourcing, strategic partnerships, consortia, restricted tenders, expressions of interest and requests for quotation are some examples of other processes that are used.

Making government services contestable has been a central plank of the recent reform agenda. Competitive tendering and contracting, discussed in more detail in the next chapter, encourages public service managers to demonstrate that they are providing best value for the taxpayers' dollar.

Strengthening accountability

The role of the Auditor-General

The Auditor-General and the ANAO play a key role in monitoring and reporting on the performance and accountability of the Commonwealth public sector in its use of public resources. That role extends to providing guidance and leadership in relation to some elements of good government.

As an independent officer of the Parliament, the Auditor-General, appointed for a term of 10 years, is not subject to control or direction by any individual Minister or other Member or Senator of Parliament, and has the ultimate responsibility for setting the scope of his or her activities. Independence is reinforced by the application of parliamentary privilege to performance and financial statement audit reports tabled in the Parliament. This privilege can operate to protect the Auditor-General and ANAO staff from being held liable for statements contained in audit reports. This allows the Auditor-General to report freely, openly and responsibly on matters examined in the course of audits.

Financial statement auditing

The preparation of financial statements by Commonwealth organisations to report on their financial position and financial performance has become a universally established part of normal financial management in the last decade. These annual financial statements are subjected to external audit by the Auditor-General.

The auditor's report provides an independent examination of the financial statement in order to express an opinion as to whether the statement is prepared in accordance with auditing standards, and other mandatory professional reporting requirements. The audit report is included in the agency's annual report, which becomes a public document when it is tabled in Parliament, providing assurance to the Parliament and other stakeholders of the financial position of the organisation. It also provides an appropriate level of transparency and accountability in the management of the Commonwealth's financial affairs.

Financial auditing has evolved from a narrowly based procedure, which concentrated on the examination of individual transactions, to a risk based business approach, which is practised today. This methodology focuses on the examination of key elements of financial statements, coupled with the practice of bringing issues of concern to the attention of management early in the process to facilitate timely corrective action. This approach provides the assurance required by Parliament and at the same time adds value by assisting management in improving their operations.

Performance auditing

Performance audits involve assessing the management and operational performance of Commonwealth organisations and consider questions of economy, efficiency and administrative effectiveness of the operations for which management is responsible. Performance audits are wider in scope than the well-defined boundaries of financial statements audits and provide Parliament and the public with critical evaluations of a wide range of public sector activity in all Commonwealth organisations.

Performance audits are designed not only to report on performance, but also to add value to public sector administration with constructive criticism and recommendations for improvement. These audits are also tabled in Parliament, are subject to scrutiny by its Joint Committee of Public Accounts and Audit, and become public documents.

Performance audits do not comment on government policy. However, they often deal with current and controversial issues about the implementation of policy, which can attract considerable attention in Parliament and by the media in general. Performance audits are an important source of independent and objective assessment of public sector performance. They are a valuable source of information to assist Parliament in its role of holding the government-of-the-day to account.

Performance audits have been instrumental in achieving considerable savings in public money through improved administration. A related activity by the Auditor-General has been the issue of Better practice guides, which aim to improve public administration by ensuring that better practices are recognised and promulgated to the whole of the APS. This can involve examining practices in both the public and private sectors in Australia and overseas. Better practice guides issued over the last four years include:

• Managing Parliamentary workflow, 2003
• Internal budgeting, 2003
• Administration of grants, 2002
• Performance information in Portfolio Budget Statements, 2002
• Life cycle costing, 2001
• Some better practice principles for developing policy advice, 2001
• Internet delivery decisions, 2001
• Planning for the workforce of the future, 2001
• Contract management, 2001
• Building better financial management support, 1999.

Risk management

Since the early 1990s there has been an increasing focus on managing risk in the APS. This reflects a shift in the prevailing culture which many regarded as risk averse and process-driven, to a more strategic approach for identifying and managing risk.

In 1996, the Management Advisory Committee's predecessor (the Management Advisory Board) produced the Guidelines on managing risk in the Australian Public Service. They are broadly based on the information contained in the Standards Australia publication, Australian/New Zealand standard for risk management, and are an integral part of APS reform.

The guidelines are intended to provide a broad overview of risk management, and agencies are to interpret the guidelines in the context of their own environments. They aid in the development of specific risk management approaches, and encourage managers and staff to manage risk in a systematic and comprehensive way.

The objectives of the guidelines are to:

• provide a generic framework for managing risk
• be a reference point for managers and staff when developing processes, systems, and techniques for managing risk, which are appropriate to the functional organisational context of their agency.

The guidelines outline how to develop a risk policy or program and specify the responsibilities of agencies at all levels. They particularly include the need for each agency to be able to satisfy scrutiny through the principal APS accountability mechanisms, which include Parliamentary committees, the Administration Appeals Tribunal, the Australian National Audit Office, the Commonwealth Ombudsman, and the Australian Public Service Commissioner.

In 1998 these guidelines were strongly reinforced by the Charter of Budget Honesty Act which requires half-yearly disclosure of fiscal risks and contingent liabilities which may affect the Budget balances. The Finance Minister's Orders require disclosure of contingent liabilities in agency annual financial statements.

Risk management of information technologies

Governments in Australia have been keen to take advantage of the capabilities of developing technologies and the internet to extend community access to government information and improve services to business. The impact of these initiatives is discussed in Chapter 8.

Further implementation of the e-government agenda presents public service managers with managerial, technical and accountability challenges. Exchanging information content from agency to agency, and providing cross-agency management information, adds to the challenge of collaboration and integration of services,. And, as delivery of government services is shared with, or transferred to, the private or non-government sectors through contracts or partnership arrangements, agencies need to carefully consider issues of privacy, confidentiality and the security of data provided by citizens to government.

In 2002 the Management Advisory Committee completed an investigation into what will be needed, from a whole-of-government perspective, to improve the compatibility and interoperability of the Commonwealth's governmental information communication technology. The report, Australian government use of information and communications technology, aims to find a balance between a strategic, whole-of-government approach to maximise efficiency gains and benefits to governments and citizens in terms of service delivery, and the responsibilities of agencies to manage their own IT procurement, strategies, and development.

MAC has established a high level Information Management Strategy Committee to provide leadership and advice to the Service on ICT strategic and governance issues with support from a group of key business strategy and support decision-makers-the Chief Information Officer Committee-and, where appropriate, working groups to address specific matters.

The report notes that new arrangements have been established for protecting critical infrastructure and enhancing e-security. New efforts are being made to develop stronger authentication of individuals with access to private information as data linking between agencies, with appropriate safeguards, will increasingly be required to improve government efficiency and the service provided to citizens.

TWO FEDERAL GOVERNMENT PERSPECTIVES

HealthConnect and the EDGE System A proposed network of electronic health records will allow consumer health information to be collected electronically. To be known as 'HealthConnect', it will ensure that information is safely stored and exchanged between authorised health care providers within strict privacy safeguards that rely on the consent of the individual client. 'HealthConnect' is currently undergoing two-years of research and development, funded by Commonwealth, state and territory governments. The 'EDGE System', used by Centrelink, is a decision support system that applies legislative and policy rules to the assessment of clients' entitlements to payments and services. The range of employment support, health and welfare related payments and services offered by Centrelink are complex, wide-ranging and subject to high levels of change. The aim of the system is to improve the accuracy, consistency, clarity and comprehensiveness of information given to clients with regard to their entitlements.

Fraud control

Fraud imposes a significant cost on Australian society. In 1997, the Australian Institute of Criminology estimated that fraud cost the community between A$3 billion and A$3.5 billion per year. Fraud against the Commonwealth is also a major concern to government.

The changing environment in which the public sector is now operating has increased the opportunity for fraudulent activity. Agencies are now required to develop strategies to identify possible fraud risks and how these risks will be managed and minimized, and where fraud does occur, it is rapidly detected, effectively investigated, appropriately prosecuted and losses minimised.

The Attorney-General's Department is responsible for providing advice to the government and Commonwealth agencies on the Commonwealth's fraud control policy. The policy is designed to counter fraud against the Commonwealth, either by those external to the Commonwealth or by Commonwealth employees.

The 2002 Commonwealth fraud control guidelines have updated the Commonwealth's approach to fraud control by providing a framework for fraud risk management and control which incorporates the latest developments in corporate governance, modern business practices and fraud control initiatives. Some features of these guidelines include:

• facilitating the integration of fraud risk management into corporate and business risk management strategies
• greater specification of fraud control arrangements for outsourcing
• introducing mandatory training qualifications for fraud investigators
• improved fraud reporting to government
• establishing a Fraud Trend Information Network.

The Fraud Trend Information Network acts as a forum for agencies to meet and report on the nature and extent of fraud against their agencies and against the Commonwealth in general.

All agencies covered by the FMA Act, and those agencies subject to the CAC Act that receive 50 per cent or more of their operating costs from the Commonwealth or a Commonwealth agency, are required to certify in their annual reports that they have complied with the requirements of the guidelines on fraud.

Internal auditing

Internal auditing systematically examines, evaluates and monitors the adequacy and effectiveness of the control structure of organisations with the aim of promoting ethical business practices, improving risk management, enhancing decision-making and performance reporting, and promoting effective governance. Internal auditors assist management in meeting their obligations to manage efficiently and effectively. To be effective, internal audit must be responsive to the needs of the agency, taking into account key business processes and critical business risks.

An Audit Committee, comprising a mixture of senior management and external representatives, generally manages the function. The Committee will generally report directly to the agency head, possess appropriate authority to direct a broad and comprehensive audit program, and remain independent of the activities audited.

Parliamentary scrutiny

The APS Values require the Service to be accountable, within the framework of Ministerial responsibility, to the Government, the Parliament, and the Australian public. For its part the Parliament has established a committee structure, comprising members of one or both Houses of Parliament, for purposes of scrutinising the activities of Ministers, their departments and other agencies coming within the particular portfolio responsibilities of individual Ministers.

Parliamentary committees are empowered to conduct inquiries into matters related to their specific charters, or as otherwise assigned to them by Parliament. Committee processes include taking written submissions on the subject mater, hearing witnesses and reporting to Parliament their conclusions with any related recommendations.

Committees may direct their attention to policy issues, scrutiny of legislation and the conduct of public administration by government agencies. Their inquiries may involve overseeing the expenditure of public money, and may be directed to calling on he government or the public service to account for their actions and to explain or justify administrative decisions. In that general accountability context, a number of the committees have particular significance for APS agencies. The work of two of these is outlined below.

Joint Committee of Public Accounts and Audit

The JCPAA has a statutory base in the Public Accounts and Audit Committee Act 1951.

In broad terms, the Committee’s charter is to scrutinise, usually by means of public inquiry, the performance of all Commonwealth agencies in spending the funds appropriated to them by the Parliament. In this way it is the Parliament’s watchdog, helping ensure that Commonwealth agencies are held to account for their use of public money.

The authority to consider and report on any circumstances connected with reports of the Auditor-General, or with the financial accounts and statements of Commonwealth, is one of the main sources of the JCPAA’s authority—it gives the Committee the capacity to initiate its own references and, to a large extent, to determine its own work priorities. This power is unique among parliamentary committees and gives it a significant degree of independence from the executive arm of government.

Its duties are described in its Act as being to:

• examine the accounts of the receipts and expenditure of the Commonwealth including the financial statements transmitted to the Auditor-General
• examine the financial affairs of authorities of the Commonwealth to which the Act applies and of inter-governmental bodies to which the Act applies
• examine all reports of the Auditor-General (including reports of the results of audits) copies of which have been laid before the Parliament
• report to both Houses of the Parliament, with such comment as it thinks fit, any items or matters in those accounts, statements and reports, or any circumstances connected with them, to which the Committee is of the opinion that the attention of the Parliament should be directed
• report to both Houses of the Parliament, any alteration which the Committee thinks desirable in the form of the public accounts or in the method of keeping them, or in the mode of receipt, control, issue or payment of public moneys
• inquire into any question in connexion with the public accounts which is referred to it by either House of the Parliament, and to report to the House upon that question.

The Committee also sets the guidelines for agency annual reporting. The Public Service Act requires each agency to report to its Minister at the end of each financial year on the agency's activities during the preceding year. Those reports must be prepared in accordance with guidelines approved, on behalf of the Parliament, by the JCPAA.

Outside its responsibilities in relation to monitoring expenditure of public moneys, the Committee conducts inquiries which assess APS resource management frameworks, standards and practices, and reviews relevant Bills, as and when they are referred by the Parliament. In the last few years, its activities have included the following reports on:

• Review of the accrual Budget documentation, 2002
• Contract management in the APS, 2000
• Corporate governance and accountability arrangements for Commonwealth business enterprises, 1999
• Provision of an advisory report on the Public Service Bill 1997 (which was ultimately to become the 1999 Public Service Act), 1997
• Accrual accounting-a cultural change, 1995
• Public business in the public interest-an inquiry into commercialisation in the Commonwealth public sector, 1995
• Managing people in the APS-dilemmas of devolution and diversity, 1992
• Review of the independent auditor-watching the watchdog, 1992.

Senate committees

In 1970, a comprehensive system of legislative and general purpose standing committees, which would stand ready to inquire into any matters referred by the Senate, was introduced. Estimates committees were also established at this time to scrutinise the particulars of proposed government expenditure and providing a further avenue for achieving greater accountability to Parliament.

In October 1994, the Senate restructured its committee system by establishing eight standing committees each of which covers a particular range of subjects. Each committee operates as both a Legislation committee and a References committee in its area of responsibility.

Legislation committees are responsible for inquiring into, and reporting upon matters referred to them by the Senate relating to estimates of expenditure, Bills or draft Bills, annual reports, and the performance of the particular departments and agencies allocated to them. The annual reports of all government departments and agencies are automatically referred to one of these eight committees for consideration.

References committees inquire into, and report upon, any other matters referred to them by the Senate.

Legislation Committees

The Legislation committees provide an opportunity for the Parliament to examine 'line by line' the government's expenditure proposals. These estimates are contained in the main appropriation Bills introduced into Parliament as part of the Budget, usually in May, and in the additional appropriation Bills, usually introduced in November to January.

Committee consideration typically involves the following process:

• hearings are held twice a year
• the process for most portfolios is an extended one-to at least a full day (ten to twelve hours) on each occasion
• the Minister, or Senator representing the Minister, also attends, but most questions are answered by the senior managers of each agency
• while questions are ostensibly focussed on the appropriation Bills, it is accepted that questions will range broadly, including any matters of interest to the Committee in the agency's annual report. Few questions will be about proposed expenditure per se.

The practice of referring more Bills to one of the Committees at an early stage has integrated the Committees' work more closely into the legislative process itself.

Through their consideration of annual reports the Committees are given a mandate to monitor the performance of departments and agencies.

Senate Finance and Public Administration Committee

The Finance and Public Administration (F&PA), one of the eight standing committees, has a particular responsibility for public administration issues. (While the House of Representatives has a similar titled committee, the Standing Committee on Economics, Finance and Public Administration, this has tended to focus more on economic and financial issues than issues of public administration.)

The F&PA Legislation committee has particular responsibility for oversighting the Parliamentary Departments and those agencies in the Prime Minister's portfolio and the Finance and Administration Minister's portfolio. These include the APS Commission and the Australian National Audit Office.

When operating as a References committee, the scope of interest of issues referred to the F&PA by the Senate has been broad, as illustrated by the select list below:

• Recruitment and training in the APS (current inquiry)
• The necessity for public accountability of all government services provided by government contractors (current inquiry)
• Re-booting the IT agenda in the APS-final report on the Government's information technology outsourcing initiative, 2001
• APS employment matters, first report: Australian Workplace Agreements, 2000
• Consideration of legislation referred to the Committee: Provisions of the Public Service Bill 1997
• Contracting out of government services: information technology, 1997
• Service delivery by the APS, 1995
• Inquiry into the implementation of performance based pay in the APS, 1993
• Development of the Senior Executive Service: performance based pay, 1990
• Development of the Senior Executive Service, 1990.

Further information:

The Department of Finance and Administration web site at http://www.finance.gov.au includes the guidelines and reports on financial management, GBE oversight and procurement referred to above.

Financial Management and Accountability Act 1997-List of Sections http://scaleplus.law.gov.au/html/pasteact/2/3068/top.htm

The Commonwealth Authorities and Companies Act 1997—List of Sections http://scaleplus.law.gov.au/html/pasteact/2/3067/top.htm

The Auditor-General Act 1997—List of Sections http://scaleplus.law.gov.au/html/pasteact/2/3066/top.htm

Federal Budgets are at http://www.budget.gov.au/

Department of Environment and Heritage http://www.ea.gov.au/about/index.html

See the NSW Treasury web site http://www.treasury.nsw.gov.au for financial management policies and reports, Budget papers and relevant legislation. The NSW Council on the Cost and Quality of Government is at http://www.ccqg.nsw.gov.au

ANAO's web site http://www.anao.gov.au

Management Advisory Committee 2002, Australian government use of information and communications technology http://www.apsc.gov.au/mac

Key Commonwealth fraud control policy documents, including the Guidelines, are available on the Attorney-General's Department's website at http://www.ag.gov.au/fraud

Government guidelines for official witnesses before Parliamentary Committees and related matters (1989), on the Department of the Prime Minister and Cabinet's website at: http://www.dpmc.gov.au

Joint Committee of Public Accounts and Audit http://www.aph.gov.au/house/committee/jpaa/index.htm

Senate Finance and Public Administration Committee http://www.aph.gov.au/senate/committee/fapa_ctte/index.htm

Older references not on the internet:

Dawkins, John 1983, Reforming the Australian Public Service: A statement of the Government’s intentions, AGPS, Canberra.

Management Advisory Board 1996, Guidelines on managing risk in the Australian Public Service (MAB report no. 17), AGPS, Canberra.

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