Audit Results Report – Annual 2017-18 Financial Audits of State Government Entities

Other financial reporting, accountability and audit matters

This part of the report details matters of current significance and legislative compliance:

  • amalgamation of entities
  • related party disclosures
  • use and acquittal of funds from the Local Projects, Local Jobs program
  • continued late tabling of Statements of Corporate Intent
  • reducing the cost of financial reporting for small entities
  • future impact of changes to accounting standards.

Amalgamation of entities

Numerous entities were amalgamated on 1 July 2017, following the 2017 Machinery of Government changes gazetted in June 2017. As a result, some departments were abolished and their staff resources, and those of several statutory authorities, were transferred to 11 newly created departments.

Table 6 - Machinery of Government - new departments

For 2017-18, we audited the financial statements, KPIs and financial controls of the new departments, as well as the 16 statutory authorities that are proposed to be amalgamated as part of the restructuring. At November 2018, although staff of the statutory authorities have been transferred to the new departments, the statutory authorities continue as separate entities under their existing legislation and as reporting entities under the FM Act. Annual audits for these statutory authorities will be required until legislative changes are made.

Our 2017-18 audits of the new departments included:

  • testing of the complete and accurate transfer of assets, liabilities and contracts to the new departments
  • review of the new financial control processes and delegations
  • assessment of the relevance of KPIs, some of which were revised as part of the amalgamation process
  • in some instances, the new departments are providing information system and other corporate services support to the statutory authorities. We therefore undertook procedural fairness for our audit findings with management of the new departments, and the boards of related statutory authorities.

An important financial reporting issue faced by 9 of the new departments in their first year of operation, has been a decrease in the value of land and buildings. This followed a revaluation by the Valuer General, and was mainly due to the current economic environment. Because the new departments did not have any asset revaluation reserve[1] they were required to treat the revaluation decrements as expenses in the statement of comprehensive income. This contributed, in some instances significantly, to financial results with lower surpluses or, in some instances deficits, for their first reporting period.

However, at a whole of government level, the impact is not recorded in the operating statement. In these reports the revaluations from the operating statement are transferred to the balance sheet where the decrements are offset against whole of government reserves.

Audit Findings and significant issues considered during our audits

A number of significant issues were identified in relation to the restructuring, including:

  • we qualified the audit opinion of the Department of Water and Environmental Regulation. Details on page 11.
  • progress with amalgamating systems of the various constituent entities is slow, with most departments continuing to operate on several financial, human resource and administrative systems. This is impacting the realisation of cost savings that can be achieved by rationalising systems.
  • Some entities are still in the process of determining their appropriate OBM structures and appropriate KPIs that will best represent their performance.


  1. For future entity amalgamations, consideration be given to retaining one of the amalgamated entities as an ongoing entity to counter any impact of accounting for the assets being revalued when transferred.
  2. Amalgamated entities expedite the merging of systems and development of their OBM structures and KPIs.

Related party disclosures

Measures to ensure that the entities we audited in 2018 complied with Australian Accounting Standard AASB 124 Related Party Disclosures created a lot of additional work for Ministers, Treasury and entities, and generally did not add value to end of year reporting. We consider that AASB 124 is directed primarily at disclosures by key management personnel (including directors) in private sector businesses and its application to the Western Australian public sector, where established probity and disclosure arrangements already exist, needs review.

Our State’s existing disclosure requirements include:

  • annual returns from parliamentarians required under the Members of Parliament (Financial Interests) Act 1992
  • annual declarations by senior officers of entities, pursuant to Treasurer’s Instruction 924 Related Party Disclosures, and reported under the FM Act in each entity’s annual report
  • preparation of consolidated accounts for whole of government, which eliminate but disclose inter-entity transactions.

Furthermore, public sector probity mechanisms include:

  • Public Sector Commission’s Code of Ethics and Commissioner’s Instruction No. 7 detailing minimum standards of conduct and integrity for all public sector entities
  • Each entity’s own Code of Conduct required under the Public Sector Management Act 1994
  • Financial Management Act 2006 and Treasurer’s Instructions’ requirements for purchasing, contracting and disclosure of interests
  • Department of Finance/State Supply Commission published Procurement Practice Guide (latest October 2018) which is a framework for goods and services contracting and procurement that reflects best practice principles and arrangements that public sector entities must comply with.

The information Treasury sought in 2018 from Ministers, in conjunction with the Department of Premier and Cabinet, was used to inform the relevant Chief Finance Officers of any material related party transactions for their consideration for disclosure. In most instances, however, this occurred towards the end of the audit process. Due to this late timing, the process of reviewing and amending the notes to the financial statements created inefficiencies and took significant additional entity time and audit effort. The revised notes, prepared and approved within the entity, then had to be submitted (or in some instances resubmitted) to Treasury, the Board/Accountable Authority and the Minister before finalisation. This resulted in further time delay before the financial statements could be signed by the Accountable Authority.


  1. Treasury should liaise with the Department of the Premier and Cabinet to leverage existing processes relating to disclosure of interests of Members of Parliament.
  2. Treasury should consider an appropriate level of adoption of AASB 124, Related Party Disclosures, for whole of government reporting and entity level reporting which:
  3. meets the intended purpose of the standard
  4. is fit for purpose in the Western Australian public sector context, and
  5. avoids duplication and time consuming processes that do not demonstrably enhance governance.

Local Projects, Local Jobs program – accountability and acquittal of projects

Following the 2017 State election, funding for commitments made by elected local candidates for local projects was approved through the budget process and provided using grant agreements under the Local Projects, Local Jobs program. There is no formal State policy on how election commitments should be administered. The budget process and grant agreements provided a level of governance and transparency in funding these projects.

The funding estimates are identified in the 2017-18 Budget Papers as ‘spending changes – election commitments – local projects, local jobs’. Funding amounts ranged from $300 to $750,000. Actual funding totalling $38.1 million was provided to fund 858 projects across 2017-18 and 2018-19.

The Department of the Premier and Cabinet administered the allocation of funding, and along with several other entities, are managing the grant agreements. Figures 5 and 6 show the proportion of projects and funding, by entity.

[1] Australian Accounting Standards do not allow the reserves of amalgamated organisations to carry over to the new entity.

Figure 5 and Figure 6 - Projects and money allocated by entity

At 30 June 2018, 354 of the 858 projects under the Local Projects Local Jobs program, worth $10.1 million, had been fully acquitted.

Table 7 shows the departments managing the program and examples of the projects funded.

Table 7 - Departments distributing local project funds

Audit testing performed

Our audit testing covered the payment of project funding to recipients and acquittal of the projects. Of the projects acquitted at the time of our audit, we tested a sample of 40 projects across the 6 entities, to confirm that the funds were applied in accordance with the agreements, and that the projects were adequately acquitted. We found the following shortcomings:

  • At Department of Education, we noted 3 instances where schools used the funds for a purpose that differed from the agreement. For 1 of these, there was no documented approval of the change.

For the other 2 instances, the change in scope was approved by the local member of Parliament for the area in which the schools were located. However, for one of these there was no documented evidence of endorsement of the change by the relevant Minister or authorised delegate within the entity. DPC informed us that ‘agencies were advised to undertake liaison with their relevant Minister’s Office and the local Members to ensure the details of the grant agreements met expectations and were agreed by all parties involved. Local Members were required to be made aware of suggested changes to scope and agree but not provide the approval. In this case it appears there may have been some confusion around this liaison being interpreted as “approval” from Members at the time, as it was early in the transition of projects being managed by the agencies.’

The Department of Education also advised that the school had determined that it was in the best interests of its students to change the scope of the project and sought support from the local member who had instigated the original grant, and they considered there was minimal risk that the change in scope was not in the best interests of the students.

However, if local Members of Parliament, who do not have responsibility for a department, determine the use for project funding by the department, there is a risk that the funds may not be used for the best purpose.

We were advised that DPC subsequently modified this change of scope approval process, and that the Department currently adheres to a process where the school requests central office to seek approval from the Minister for Education and Training.

  • At the Department of Communities, the acquittal process did not require visual evidence of the completed project. In instances where physical inspection by the department is not feasible, photographs can be a practical alternative way of confirming the project was completed according to requirements.


If an entity, or a section of an entity, wishes to change the purpose of project funding received under the Local Projects, Local Jobs program, then approval should be obtained from the relevant Minister or delegate in the funding department.

Continued late tabling of Statements of Corporate Intent

Relevant entities are continuing to have their annual Statements of Corporate Intent (SCI) tabled after the beginning of the financial year to which they relate and outside the legislated timeframe. For example, the SCIs of 4 entities for 2017-18 were not tabled before or during that year.

There are 21 state entities that operate at arm’s length from Government and prepare an SCI which must be tabled by their Minister at the beginning of the financial year. For 2018-19, 3 were tabled before 1 July 2018, 2 in July, 7 in August, 5 in September and 3 in October 2018. At 31 October, one SCI for 2018-19 was still not tabled.

Why are SCIs important?

SCIs are a form of annual agreement between the entities listed in Table 8 below and the Government, and are therefore an important governance and accountability mechanism. These ‘self-funded’ entities operate outside of the budget process and at arm’s length from Government. Until their SCIs are tabled, key information about their future budgets, planning and direction is not available for parliamentary or public scrutiny.

SCI information varies with entity legislation, but generally includes:

  • an outline of objectives and major planned achievements for the next financial year
  • nature and scope of functions proposed to be performed during that year
  • performance targets and other measures by which performance may be judged
  • an outline of capital expenditure, proposed borrowings, pricing arrangements and dividend policy
  • accounting policies that apply to the preparation of financial statements
  • types of information to be given to their Minister, including periodic and annual reporting
  • nature and extent of community service obligations to be performed, costing and funding of these activities and any compensation arrangements
  • other matters agreed on by the Minister and the Board.

SCIs have been tabled late for many years

We have reported to Parliament on the late or non-tabling of SCIs for the past 19 years. Figure 7 shows the tabling achievements for the last 5 years.

Figure 7 - Five year history of the talbing of SCIs

Table 8 shows the SCI tabling dates for the various entities for the last 2 years.

Table 8 - Statements of Corporate Intent tabled in Parliament

What are the requirements?

Entities are required by their Act or regulations to draft the annual SCI, which is consistent with their Strategic Development Plan (SDP), for agreement with their Minister and, in most instances, with concurrence of the Treasurer. The agreement process can include negotiations between the entity, the Minister and the Treasurer, with the Minister responsible for tabling the SCI in Parliament within 14 days of it being agreed.

Tabling requirements vary slightly between entities but generally SCIs are either required or expected to be tabled before the commencement of the financial year or early in the financial year to which they relate. Where the Minister has not agreed or the Treasurer has not concurred, then the latest draft SCI takes effect. However, tabling of the SCI does not take place until full agreement is reached.

Reforms in 2016

Treasury advised of reforms in 2016 which included:

  • government trading enterprises (GTE) submitting ministerially endorsed pre-budget SCIs and SDPs with their budget submissions
  • requirement that the pre-budget SCI and SDP reflect the GTE’s strategic direction and the content of their budget submission
  • GTEs updating their SCI and SDP post-budget to reflect the outcome of the budget process as well as detail any risks of budget decisions.

Treasury noted the improvement for 2016-17 SCIs but acknowledged that the majority of SCIs were still not tabled within the prescribed legislative timeframe. Treasury advised that in the medium to longer term, they continue to seek a more seamless approval process through implementation of overarching governance legislation for GTEs.

Service priorities of new government in 2017

The Service Priority Review (October 2017) noted that ‘There is an opportunity to introduce external perspectives, including advice from portfolio departments, and a higher degree of consistency and rigour around statement of corporate intent and strategic development plan approvals to protect the Government’s policy goals and financial interests.’

Recommendation 9 of the Review proposed that Treasury ‘Prepare ‘umbrella’ legislation to reform governance, accountability and oversight of GTEs in light of key organisational principles.’

In addition, the Special Inquiry into Government Programs and Projects (February 2018) reported ‘the ineffectiveness of the Statement of Corporate Intent and the Strategic Development Plan process for some Government Trading Enterprises.’ The Special Inquirer went on to recommend that the requirement to produce SCIs and SDPs, and their content, needs review.

Current Treasury activity

Treasury advised in September 2018 that it is continuing to seek improvement in the timely tabling of SCIs, although some tabling delays occur for reasons outside of their direct influence. One being that ‘it is the responsibility of the portfolio Minister to ensure that each SCI addresses matters of importance to the Treasurer in order to facilitate timely concurrence’. Others factors are timing of the State Budget (typically May, but September in 2017), Government policy decisions and ministerial availability.

Treasury also noted that ‘the requirement to table SCIs before the end of the financial year needs to be weighed against the importance of ensuring the documents meet their intended purpose and are of sufficient quality.’

In response to the recommendations of the Service Priority Review and the Special Inquiry, Treasury advised that it has

‘established the GTE Reform Program to develop a framework which provides greater clarity on the purpose of SCIs and will review the effectiveness of the current legislative requirements in delivering on the purpose of the SCIs. In the interim, the Treasurer has recently written to all Ministers responsible for GTEs with his expectations from the forthcoming planning processes of GTEs. This should facilitate earlier engagement and concurrence of the 2019-20 SCIs.’


Treasury should facilitate timely tabling of Statements of Corporate Intent to ensure entities comply with their legislation.

Reducing the cost of financial reporting for small entities

The requirement for all entities to prepare a general purpose financial report complying with Australian Accounting Standards, including all disclosure requirements, places an avoidable reporting burden on small to medium sized entities.

Most of the State’s public sector entities are small to medium in size – over 60 entities account for only 1% of total government operating expenditure. Yet they are required to prepare a general purpose financial report complying with International Financial Reporting Standards (IFRS), with the same voluminous disclosure requirements as Australia’s largest not-for-profit government entities and listed companies.

We continue to champion changes to small entity reporting and the AASB initiating reform in the financial reporting framework for public sector entities. We recommend that Treasury continue to provide input and take up opportunities to reduce the financial reporting burden in the Western Australian public sector where it does not demonstrably add value for users of financial statements.


Treasury should continue to identify and implement suitable options that simplify financial reporting requirements, particularly those that reduce the reporting burden on small entities.

Future impact of changes to accounting standards

The following new and revised standards issued by the Australian Accounting Standards Board (AASB) are expected to require close attention by entity CFOs and our audit staff:

  • AASB 9 – Financial Instruments – This standard changed the classification and measurement of financial assets from 1 January 2018. Another change is earlier recognition of provisions for bad/doubtful debts based on expected credit losses.
  • AASB 15 – Revenue from Contracts with Customers – This standard requires revenue to be recognised by entities on the fulfilment of the performance obligations of an enforceable contract at a point in time or over time, as applicable. An example for government entities is receiving grant moneys. Entities need to allocate the grant amount to each performance obligation in the contract and recognise the revenue only when the related performance obligations are satisfied. Also, authoritative implementation guidance has been issued for not-for-profit public sector licensors reporting transactions involving the issue of licences. This standard applied from 1 January 2018 reporting for for-profit entities, and from 1 January 2019 reporting for not-for-profit entities.
  • AASB 1058 – Income of Not-for-profit Entities – This standard, in combination with AASB 15, establishes new principles for income recognition for not-for-profit entities from 1 January 2019 reporting. AASB 1058 applies to transactions where assets are acquired at significantly less than fair value, including peppercorn leases. It is anticipated that the implementation of these two standards will result in more delayed income recognition.
  • AASB 16 – Leases – For lessees, this standard removes the distinction between operating leases and finance leases, and requires all leases (except short-term leases and leases of low-value assets) to be recognised as lease assets and lease liabilities on the balance sheet. This will result in the grossing-up of the balance sheet and higher expense in the early years of the lease term. This standard applies from 1 January 2019.
  • AASB 1059 – Service Concession Arrangements: Grantors – This standard is applicable to public sector entities (grantors) that enter into service concession arrangements with private sector operators. It requires grantors to recognise a service concession asset and, where applicable, a service concession liability on the balance sheet. The initial balance sheet accounting, as well as the ongoing income statement impacts, will have implications for grantors and for whole-of-government reporting. AASB 1059 will apply for years beginning on or after 1 January 2019, although the AASB is known to be considering a 12-month delay in implementing this standard.

We acknowledge that there are varying degrees of readiness and preparation for these new accounting standards. We are preparing and training financial audit staff in the new and revised requirements and updating relevant audit policies and procedures.


  1. Treasury should consider appropriate levels of adoption of accounting standards for whole of government reporting and for entity level reporting that are fit for purpose in the Western Australian public sector context.
  2. Entities should continue to make timely preparations for implementation of the accounting standards changes.




















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