The key role of funding in public sector audit performance

By Gary Anders

The request for more funding from the Australian Government’s auditor-general Grant Hehir FCPA in 2020 foreshadowed a critical emerging issue relevant to public sector accountability and transparency.

The Australian National Audit Office (ANAO) – the integrity agency that Hehir oversees – had fallen six performance audits short of its 2019-2020 target of 48 performance audits.

ANAO’s important role involves conducting independent financial and performance audits of Commonwealth entities and then reporting its findings to Parliament. 

Past performance audits by the ANAO have led to the identification of significant matters of public interest. One such example is the Commonwealth’s nearly A$30 million purchase of land adjacent to Western Sydney Airport in 2018 that one year later was valued at A$3 million.

The ANAO has also identified matters relating to taxpayer-funded federal grants to sports clubs in 2019, an issue that attracted much public scrutiny.

Since Hehir’s appeal, the ANAO’s funding has been increased. The ANAO has also been allocated additional funds to help build up its capacity to undertake performance audits in the 2022 Federal Budget.

“We utilised this funding to support the delivery of the ANAO’s mandatory financial statements audits for inclusion within entities’ annual reports, for the scrutiny of Parliament,” Hehir notes in the ANAO 2021-22 Annual Report. 

“The ANAO also began rebuilding performance audit capacity that had been reduced in prior years. The restoration of capability within this area will enable the ANAO to meet a target of 48 performance audits by 2024-2025.”

Auditors general face state funding pressures

Hehir is not the only auditor-general who has voiced their views on government funding.

In 2022, South Australian auditor-general Andrew Richardson FCPA said a requirement for his department to produce A$1.49 million in savings over the next four financial years had put the independence of his office at risk.

Richardson has noted that the funding cut has negatively affected on the auditor-general’s functions and powers. “The current budget undermines the auditor-general’s independence.

“Our ability to meet Parliament’s requirements is constrained by the resources made available for audit services.

“For many years, the budget allocated to my department has been sufficient for the services we have delivered. Now, as circumstances have changed, I consider the budget insufficient,” Richardson writes.

The South Australian Government has since attempted to address these concerns. In its State Budget 2022-23 Mid-Year Budget Review, it allocated additional funding to the state’s auditor-general’s department, “to ensure the auditor-general retains sufficient resources to meet statutory audit responsibilities to the Parliament”.

Why independence is critical

Western Australian auditor-general Caroline Spencer FCPA says the role of independent public sector oversight agencies – such as the Office of the Auditor-General for WA – is critical in a healthy and thriving democracy.

“Adequate funding to agencies like ours ensures we can not only do our job, but do it well, to best serve the interests of the public, in what is an increasingly challenging environment,” Spencer says.

Spencer also raised concerns publicly in May 2023 over the way the Western Australian Government managed the purchase of rapid antigen tests at the height of the pandemic, where it spent close to A$600 million on the purchase of 110 million test kits.

She has also drawn attention to other aspects of public spending, including infrastructure and health. More recently, Spencer has argued that the WA Parliament and the public should be more regularly updated on the cost, time and status of major spending projects.

In March 2023, New South Wales auditor-general Margaret Crawford FCPA issued a report on the NSW Government, finding it had routinely outsourced core public service work and spent A$1 billion on external advisers over five years.

 

"Adequate funding to agencies like ours ensures we can not only do our job, but do it well, to best serve the interests of the public, in what is an increasingly challenging environment."

 

“Our review of a selection of consulting engagements from 10 NSW government agencies indicates that these agencies do not procure and manage consultants effectively,” Crawford said.

“We found that most agencies do not have a strategic approach to using consultants, or systems for managing or evaluating their performance. We also found examples of non-compliance with procurement rules, including contract variations that exceeded procurement thresholds.”

Spencer adds, “A lot is at stake if we don’t have strong and adequately funded oversight agencies helping to ensure the public service does its job and meets community expectations regarding integrity, accountability and transparency in government.

“In recent budget rounds, our office sought and was granted increased funding for our financial audits. This was required to meet the forecasted increased cost of services, largely because of increases in contract audit firm charges, public sector wage increases, and the requirements of new accounting and auditing standards.

“In the 2022-23 budget, we received funding from the Digital Capability Fund for a key element of our budget costs – the procurement and implementation of our new audit software and the replacement of our financial audit methodology tool.”

Spencer says both will improve her office’s capabilities and increase efficiencies as it seeks to innovate and provide value for money services across the sector.

Risks to audit transparency

Des Pearson AO FCPA, a former auditor-general in both Victoria and Western Australia, and a former CPA Australia president, says there were good advances in the independence and oversight of auditors-general across Australia following what he calls “the excesses of the 1980s”.

However, he says there are now major risks associated with public sector auditing budgets being contained or reduced.

“When you’ve got a government of the day cutting the budget of the independent auditor, that’s cutting across their financial and administrative autonomy,” Pearson says.

“If you constrain the resources of the auditor-general, you also increase the audit risk because it’s stretched even further trying to do the task. 

“It’s arguably reducing transparency, because all the auditors’ reports are public. If they are forced to do less, the public have less insight into what’s happening.”

Pearson says that allocating resources is a challenging balancing act for all audit program managers. However, good audit coverage is essential to maintain trust in the public sector and ensure independent and objective opinions and reports on the standard of public administration.

“It’s bad enough the budget is being constrained, but if it’s being cut that’s really a worry, because it’s reducing transparency. It’s the first step back to the ‘bad old days’ where it’s being regarded as an overhead rather than an important service.”

CPA Australia’s senior manager – reporting and audit policy, Ram Subramanian CPA, agrees that any squeeze in government budgets in respect of independent auditing functions creates less visibility.

“Any reduction in funding not only affects the capacity to undertake the standard financial statement audits, but it also affects their capacity to undertake performance audits,” he says. 

“That means the public’s visibility into how well the public sector is functioning is reduced.”

The impact of the audit skills shortage

Subramanian says the ongoing shortage of skilled auditors is another issue that inhibits public sector oversight functions.

“Keeping that shortage in mind, a reduction in funding is not going to help at all, because not only are you going to struggle to resource yourself now, you’re going to struggle to resource yourself for the future,” he says.

“What changes is the choices you make in how many engagements you do, and what areas you cover. The risk is doing fewer performance audits.”

Australian auditor-general Grant Hehir FCPA points to the same issue in the latest ANAO annual report.

“While the additional funding has alleviated some budgetary pressures in the delivery of our products, the increasing demand for audit-related expertise has led to a competitive recruitment environment, tight labour market and increased costs associated with contracted staff.

 

"Any reduction in funding not only affects the capacity to undertake the standard financial statement audits, but it also affects their capacity to undertake performance audits. That means the public’s visibility into how well the public sector is functioning is reduced."

 

“We have identified that maintaining resourcing requirements is a strategic risk for the organisation, across all audit disciplines.”

Des Pearson FCPA AO points out that public sector salaries are not always competitive, particularly in the accounting and auditing professions, where the private sector is able to respond more quickly and offer better employment packages to attract and retain staff.

“The public sector is not as good at that, and we’re not that competitive in the market at various levels,” Pearson says.

“Cutting resources is almost going a step too far. When you look at the audit function or task, it’s a well-structured undertaking. There’s definitive auditing standards put out by the Australian Auditing and Assurance Standards Board.

“Auditors are required to follow strict procedural fairness. We consult with people in the Parliament about developing our annual plan. We then consult with the individual agencies as we develop a plan for a particular audit.

“It's a very tight, professional and disciplined approach, and it should be valued rather than diminished.”