Policies and procedures could be improved

The Financial Management Act 2016 (FMA) and Treasurer’s Instructions (TIs) specify requirements for the administration, accounting, and disclosure of special purpose accounts. Accounts are also supported by either a special purpose trust statement approved by the Treasurer, or an agreement or legislation which specifies conditions and restrictions, as well as administration, accounting and reporting requirements.

Within this complex framework, policies and procedures are of heightened importance to provide clarity to staff by summarising requirements in a single repository or reference, which is tailored for the entity’s systems, processes and delegations. Comprehensive, overarching policies and procedures ultimately help to ensure that specific purpose monies are being identified, managed and reported appropriately – and, moreover, spent for the purpose intended. Policies and procedures are particularly important to manage the risk of mismanagement of special purpose funds where accounts are transferred between entities. 

We noted that the level of detail in entity policies and procedures directly correlated with the number and complexity of specific purpose monies held. Overall, we identified instances where policies and procedures were lacking in detail or not present due to entities placing too much reliance on the FMA, TIs and supporting statements, agreements, and legislation to govern the management and use of specific purpose monies.

We found that 2 of the 8 entities had good policies and procedures. Two entities did not have any policies and procedures, while 4 had policies and procedures requiring improvement. Some of the documentation reviewed appeared to be outdated, for example, 1 entity’s document did not reflect the impact of recent machinery of government changes.

Special purpose account reconciliations were not always performed regularly

Regular monitoring of account balances is essential for effective cash management and ensuring specific purpose monies are being used for their intended purpose. Receipts and payments should be verified on a regular basis, and closing balances should be checked against the cash position.

We found 1 entity did not prepare and review reconciling items in a timely manner as part of the bank reconciliation process, resulting in a temporary negative cash position of an account. At another entity, we could not evidence independent review of the reconciliation prepared for a special purpose account. Inadequate oversight of key reconciliations can result in financial reporting errors or fraud passing undetected.

Expenditure transactions were not always appropriately scrutinised and recordkeeping was sometimes inadequate

Regular independent scrutiny of expenditure is required to ensure that monies are spent appropriately and transactions allocated to an account are valid and appropriate.

For 1 entity we found insufficient recordkeeping of transactions allocated to a special purpose account. Invoices were raised by the entity in 2013-14 but were not paid over a number of years. When debtors requested further information, staff could not substantiate these debts due to inadequate records, and recently reversed the invoices by using credit notes. These debts should have been written off with appropriate senior management approval.

We also found weaknesses in key controls such as the checking of eligibility and approving the charging of payroll expenses against special purpose accounts. These included:

• For 1 entity there were insufficient controls to ensure accurate and appropriate allocation of employee expenditure to the special purpose account. We found an instance where an employee’s time representing operational expenditure was being funded from the special purpose account. This resulted in funds being used for purposes other than the intended purpose of the special purpose account.
• Two errors in an employee’s timesheet which resulted in an overpayment of the employee costs being inappropriately charged to the special purpose account.
• For the same entity, we also noted that for 2 special purpose accounts a number of accounting journal entries were not independently reviewed. These journal entries related to the transfer of employees between cost centres and allocation of payroll expenses.

Special purpose accounts with nil balances not reported

At 2 entities where special purpose accounts had a nil balance, this had not been reported in the financial statements.

TI 1103 requires disclosure of the purpose, the opening and closing cash balances and the total cash receipts and payments for special purpose accounts. This also applies to special purpose accounts with a nil balance. 

Specific purpose monies were not always reported appropriately in the financial statements

TI 1103 requires specific purpose monies held by the entity for the benefit of the State to be recognised as restricted cash in the balance sheet, with a disclosure describing the nature of the restriction. Funds held by the entity on behalf of a beneficiary other than the State are considered to be private monies, and should not be recognised on the entity’s balance sheet and should be disclosed in the notes to the financial statements.

We found 1 instance where an entity had recognised private monies held on behalf of a beneficiary as part of their restricted cash balance on the balance sheet. The total value of trust monies incorrectly recognised in the balance sheet in 2017-18 was $34.1 million. Once identified by our audit, the entity was able to correct this error as part of their 2018-19 financial report.

We also noted that the same entity did not correctly disclose some specific purpose monies as restricted cash in their balance sheet. The funds, totalling $17.8 million, were recognised as part of the general operating cash balance.