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1 Preparation of Financial Statements by Public Sector Entities Better Practice Guide June 2009
2 ISBN No Commonwealth of Australia 2009 COPYRIGHT INFORMATION This work is copyright. Apart from any use as permitted under the Copyright Act 1968, no part may be reproduced by any process without prior written permission from the Commonwealth. Requests and inquiries concerning reproduction and rights should be addressed to the Commonwealth Copyright Administration, Attorney-General s Department, 3 5 National Circuit, Barton ACT For questions or comments on the Guide may be referred to the ANAO at the address below. The Publications Manager Australian National Audit Office GPO Box 707 Canberra ACT Website:
3 Foreword Effective financial management is critical to public sector entities 1 being able to meet their policy and service delivery responsibilities. An important aspect of financial management and stewardship, and the primary mechanism by which entities meet their financial accountability obligations, is the preparation and publication of annual audited financial statements in entities annual reports. It is generally acknowledged that the timely finalisation of an entity s financial statements, accompanied by an unmodified audit opinion, is an important indicator of the effectiveness of an entity s financial management performance. Sound financial management fosters confidence in the entity on the part of Ministers, the Parliament and other stakeholders. As such, the preparation of entities financial statements and the necessary systems, procedures, and practices that underpin them should be a high priority. The environment in which entities are required to prepare their annual financial statements continues to be a challenging one. Ongoing enhancements to accounting standards and changes to the Government s financial framework are some of the issues faced by entities in preparing accurate and timely audited financial statements. This Guide updates and replaces the Guide issued in April It includes material relating to agencies whole of government reporting responsibilities and the Certificate of Compliance process, and provides further guidance on using the work of experts. This guidance is particularly relevant in the context of the requirement for a number of financial statement items to be measured at fair value. While much of this Guide provides practical guidance material relating to the preparation of financial statements, it is recognised that the underpinning management and internal control regimes need to be functioning effectively if an entity s financial statements are to comply with legislative and policy requirements. We are confident that this updated Guide will continue to be a useful reference document to assist all those involved in the preparation of financial statements in the public sector. As with most activities of this nature, there is not one right approach. While the accounting and auditing standards provide a common framework, no two entities are the same and their financial statement preparation processes are at different stages of maturity. As such, the material in the Guide should be interpreted, customised and used to meet each entity s own particular circumstances. Entities also need to be alert to ongoing legislative and policy changes. The ANAO acknowledges the willing assistance of a number of entities who provided useful material to update the Guide. Ian McPhee Auditor General June In this Guide, the term entities applies to all organisations subject to the Financial Management and Accountability Act 1997 and the Commonwealth Authorities and Companies Act 1997, as well as business operations that prepare separate financial statements. i
4 Introduction Introduction Key components of any governance and accountability system in the public sector are the preparation of financial statements in accordance with well-understood and generally accepted accounting standards. 2 Financial statements are an important means of demonstrating how the public sector, both at individual entity and whole-of-government level, meets its financial management responsibilities. Entities devote considerable resources and effort to their financial management responsibilities including the preparation of the financial statements at an individual entity and a whole of government level. A fundamental element of external accountability is the need for public sector entities to prepare annual financial statements and publish them in their annual report. The purpose of financial statements is to present a true and fair view of an entity s financial performance, financial position, equity and cash flows. As such, they are an important means of demonstrating how the public sector, both at individual entity and whole of government level, meets its financial management responsibilities. For many years Australia, and in particular the Australian public sector, has been at the forefront of financial management reforms. Notable reforms include:» The introduction of accrual based financial statements for all departments and agencies from the financial year» whole of government accrual financial statements were developed in the mid 1990s and first audited in the financial year» implementation in 1997 of an accrual based outcomes and outputs framework to more directly align the budget process with the annual reporting framework including the first accrual budget, and full accrual monthly financial statements for material entities from » the enactment, with effect from 1 January 1998, of the Financial Management and Accountability Act 1997 (FMA Act), the Commonwealth Authorities and Companies Act 1997 (CAC Act) and the Auditor General Act 1997 that collectively prescribe the financial management, accountability and audit regime for public sector entities, and» the preparation of the Australian Government s Budget Papers, based on AASB 1049, Whole of Government and General Government Sector Financial Reporting. More recently, reforms have involved increasingly compressed timetables for the preparation of audit cleared 3 financial information, the adoption of Australian Equivalents to International Financial Reporting Standards and the harmonisation of Generally Accepted Accounting Principles and Government Finance Statistics. These reforms are part of a wider global recognition of the need to improve financial management and the quality of financial information across public and private sector organisations. Entities devote considerable resources and effort to their financial management responsibilities including the preparation of the financial statements at an individual entity and a whole of government level. Nevertheless, the capacity and ability of entities to prepare their financial statements within required timeframes is variable across the public sector. This Guide is therefore intended to provide guidance to entities to assist them in gaining additional assurance about the integrity of financial reporting and the efficiency of the preparation of financial statements. 2 Ian Ball, Chief Executive, International Federation of Accountants, Achieving Greater Accountability in Government through Improved Public Sector Financial Reporting, in Proceedings of the 54th Annual Professional Development Conference & Exposition of the Association of Government Accountants, Florida, July Audit-cleared means that although the ANAO has not issued an audit report, the audit of material balances has not disclosed any issues that would prevent the Department of Finance and Deregulation from consolidating financial information for the purpose of preparing the Statement of Final Budget Outcome and the Consolidated Financial Statements. ii Better Practice Guide Preparation of Financial Statements June 2009
5 Coverage and terminology This Guide is aimed at general purpose financial statements prepared by public sector entities that are normally prepared and presented at least annually. The Guide does not address special purpose financial statements 4 but many of the matters addressed may be relevant and could be adopted for that purpose. For the purposes of this Guide and for ease of presentation, the term Chief Executive is used generically for entities where responsibility and accountability rests with an individual (such as for the majority of entities subject to the FMA Act). The term Board is used for those entities where there is collective responsibility and accountability for the financial statements. For ease of reference and presentation, a number of terms are used in this Guide to describe similar matters or arrangements:» Finance team: the staff directly responsible for closing the books and for financial reporting in the entity» Business areas: various work areas, which may be known as sections, branches, divisions, or groups that contribute to the financial statements» Public sector entities: all organisations subject to the FMA or CAC Acts, and» External audit(or): this generic term is used throughout the Guide, while recognising that the Australian National Audit Office (ANAO) is the external auditor of Australian Government entities in accordance with the provisions of the Auditor General Act Special purpose financial statements include prospectuses and computations prepared for taxation purposes. iii
6 Introduction Structure of the Guide The Guide is divided into four parts as indicated in Figure 1: Figure 1: Structure of the Guide PART 1 PART 2 PART 3 Legal and Policy Framework Important Factors in Financial Statement Preparation Preparing Entity and Whole-of- Government Financial Statements Public sector financial reporting framework Roles and responsibilities of key stakeholders Outlines the objective of financial statements, relevant legislation, standards, policies and requirements and the roles and the responsibilities of various stakeholders. Demonstrating ownership and commitment Maintaining robust risk management practices and internal controls Adopting good financial reporting practices throughout the year Establishing open and constructive relationships between key stakeholders Managing staff and other resources effectively Outlines six key factors that contribute to the successful preparation of an entity s financial statements. Effective planning, management and co ordination Technical, review and recordkeeping considerations Management sign offs and certification of the financial statements Reporting and publishing the financial statements Outlines a range of critical processes involved in preparing an entity s financial statements. PART 4 Toolkit Examples Checklists Proforma Meeting whole-ofgovernment responsibilities Monitoring and review arrangements Provides examples, checklists and proforma of various documentation that is typically generated as part of the preparation of the financial statements. iv Better Practice Guide Preparation of Financial Statements June 2009
7 PART 1 Legal and Policy Framework
9 PART 1 Legal and Policy Framework CONTENTS 1. Public sector financial reporting framework Introduction Public sector entity requirements Audit reports Annual reports Users of public sector financial statements Roles and responsibilities of key stakeholders Public sector entities Australian National Audit Office Department of Finance and Deregulation Appendix A: Relevant legislation, standards, policies and guidance Appendix B: Management assertions
10 Part 1 Legal and Policy Framework 1. Public sector financial reporting framework 1.1. Introduction The Australian Accounting Standards Board (AASB) 5 sets the financial reporting standards for all reporting entities in Australia. These standards reflect those set by the International Accounting Standards Board (IASB). The objective of financial statements as set out in the Framework for the Preparation and Presentation of Financial Statements 6 (Framework) is to provide information about the financial position, financial performance and cash flows of an entity that is useful to a wide range of users in making economic decisions. Financial statements are also the means by which management or the governing body of a reporting entity discharges its accountability to the users of the reported financial information Public sector entity requirements Financial statements are the means by which management or the governing body of a reporting entity discharges its accountability to the users of the reported financial information. Australian public sector reporting entities are required to prepare financial statements under the Financial Management and Accountability Act 1997 (FMA Act), the Commonwealth Authorities and Companies Act 1997 (CAC Act) or the Corporations Act 2001, as applicable. These Acts, together with the Finance Minister s Orders, 7 set the financial reporting framework for public sector entities. FMA Act agencies, and CAC Act entities, including those reporting under the Corporations Act, make up the large majority of the reporting entities in the public sector. 8 With few exceptions, reporting entities report on a financial year basis. Appendix A provides details of the main legislation, policies and guidelines relevant to the preparation of financial statements by public sector entities and a brief summary of each of these elements. The Chief Executive and Chief Financial Officer (FMA Act agencies) or responsible director and the Chief Executive Officer (CAC Act entities) are required to certify that the financial statements of the reporting entity have been prepared based on properly maintained financial records, and that they give a true and fair view of the matters required by the Finance Minister s Orders (FMOs) (or Corporations Act, where applicable). This certification forms part of the entity s financial statements. 5 The Australian Accounting Standards Board (AASB) is an independent agency of the Australian Government with responsibility to make accounting standards under section 334 of the Corporations Act 2001, to formulate accounting standards for other purposes and to participate in and contribute to the development of a single set of international accounting standards for world wide use. The Chairman of the AASB reports to the Minister for Superannuation and Corporate Law regarding the organisation s operations.. 6 AASB, July This framework was issued by the AASB to replace parts of the previous Australian conceptual framework (SAC 3 Qualitative Characteristics of Financial Information and SAC 4 Definition and Recognition of the Elements of Financial Statements) that overlapped with the Framework for the Preparation and Presentation of Financial Statements issued by the International Accounting Standards Board. The Framework is concerned with general purpose financial reports including consolidated financial statements. It does not cover special purpose financial reports. 7 The Minister for Finance and Deregulation issues requirements for the reporting of financial statements of public sector entities. These are issued annually as Finance Minister s Orders and are referred to as such throughout this Guide. Specifically, the Orders comprise the Financial Management and Accountability Orders (Financial Statements) and the Commonwealth Authorities and Companies Orders (Financial Statements) and include Schedule 1 Finance Minister s Orders for Financial Reporting, Requirements for the Preparation of Financial Statements of Australian Government Entities. The Orders incorporate Australian Accounting Standards and Interpretations issued by the AASB, together with financial reporting guidance and policies designed specifically for public sector reporting entities. 8 There are some additional reporting entities, e.g. FMA agency business operations such as the Therapeutic Goods Administration. Entities of this kind also prepare financial statements in accordance with the Finance Minister s Orders. 2 Better Practice Guide Preparation of Financial Statements June 2009
11 In addition to the financial statements of each reporting entity, the Government presents whole of government financial results in annual consolidated financial statements 9 covering all Government-controlled entities. The Minister for Finance and Deregulation certifies the Australian Government Consolidated Financial Statements (CFS). The CFS is subject to audit by the Auditor General. The Minister also publishes monthly financial statements on the General Government Sector (GGS) 10 in a form consistent with the Budget estimates. 11 The Treasurer and the Minister for Finance and Deregulation also produce a set of financial statements for the Final Budget Outcome (FBO) 12 : the statements are based on the Government s accounting policy that Australian Bureau of Statistics (ABS) accrual Government Finance Statistics (GFS) 13 remains the basis of budget accounting policy, except where the Government applies Australian Accounting Standards (AAS) because it provides a better conceptual basis for presenting information of relevance to users of public sector financial reports. These statements are integral to the Government s financial reporting framework, and complement the Budget process by providing outcomes against Budget estimates. The Government aims to report the FBO to Parliament within 45 days of the end of the financial year, rather than 90 days as required by the Charter of Budget Honesty Act To assist in achieving this timeframe, the Department of Finance and Deregulation (Finance) sets a timetable for entities to provide financial information relevant to the reporting of the FBO. The requirements are more stringent for material entities, 14 that is, those entities that comprise 99 per cent of significant balances in the CFS Audit reports An audit report on the financial statements of an entity provides an independent opinion on whether the financial statements are prepared and give a true and fair view, in all material respects, in accordance with an identified financial reporting framework. Audit procedures and reporting are conducted in accordance with standards and guidance set by the Auditing and Assurance Standards Board (AUASB). 15 In accordance with section 24 of the Auditor General Act 1997, the Auditor General sets ANAO Auditing Standards that prescribe the required standard of work expected of auditors conducting audits on behalf of the Auditor General. These standards adopt the standards and guidance set by the AUASB. The FBO and monthly financial statements are integral to the Government s financial reporting framework, and complement the Budget process by providing outcomes against Budget estimates. An audit report on the financial statements of an entity provides an independent opinion on whether the financial statements are prepared and give a true and fair view, in all material respects, in accordance with an identified financial reporting framework. 9 The Consolidated Financial Statements are required under section 55 of the FMA Act. 10 The General Government Sector comprises services that are mainly non market in nature, and for the collective consumption of the community, or involve the transfer or redistribution of income. 11 The monthly financial statements are required by section 54 of the FMA Act. 12 The Final Budget Outcome is required by the Charter of Budget Honesty Act 1998 and is to be tabled no later than three months after the end of the financial year. 13 The GFS reporting framework is a specialised financial reporting system designed to support economic analysis of the public sector. It allows comprehensive assessments to be made of the economic impact of government and is consistent with international statistical standards (the System of National Accounts 1993 (SNA93) and the International Monetary Fund s (IMF) Government Finance Statistics Manual 2001). Further information on ABS GFS is provided in the ABS publication Australian System of Government Finance Statistics: Concepts, Sources and Methods, Material entities comprise 99 per cent of the revenues, expenses, assets and liabilities of APS entities, including bodies controlled by the Government, such as those under the CAC Act, that are not part of the Government itself. Departments of State are also material agencies, regardless of their size, on the basis that they are material in nature. All remaining agencies are described, for budget and financial reporting purposes, as non material agencies. At the time of preparation of this Guide, material entities are required to provide audit cleared financial information to Finance by 15 August. The deadline for non material agencies is 31 August. 15 The AUASB is an independent agency of the Australian Government with responsibility to make auditing standards under section 336 of the Corporations Act 2001, to formulate auditing and assurance standards for other purposes and to participate in and contribute to the development of a single set of auditing standards for world wide use. Auditing and Assurance Standards issued by the AUASB are legislative instruments under the Legislative Instruments Act 2003, with effect under the Corporations Act
12 Part 1 Legal and Policy Framework 1.4. Annual reports Annual reports are the principal vehicle by which the Parliament and the community are able to hold a public sector entity accountable for its performance. Annual reports are the principal vehicle by which the Parliament and the community are able to hold a public sector entity accountable for its performance. All entities are required to present annual reports to the responsible Minister in accordance with relevant legislative requirements. Further details are included in Section 2.1 of this part. The FMA and CAC Acts require each reporting entity to include a copy of the financial statements and the audit report in its annual report. 16 The Government s consolidated financial statements and the audit report thereon are tabled in the Parliament as a separate document Users of public sector financial statements There are a large number of parties that are actual or potential users of individual entity and whole of government financial statements. These include:» Ministers and the Government» Parliamentary Committees and individual Parliamentarians» taxpayers and the community generally» employees» external providers of goods and services» beneficiaries and other recipients of goods and services provided by Government» industry and community groups, and» the media. This wide and diverse range of users underlines the importance of public sector entities meeting their financial accountability responsibilities. 2. Roles and responsibilities of key stakeholders 2.1. Public sector entities Financial management responsibilities A fundamental tenet of public administration is the need for entities to fully comply with the Australian Government s financial management framework. A fundamental tenet of public administration is the need for entities to fully comply with the Australian Government s financial management framework. Effective implementation of the financial framework requires entities to have in place a range of delegations, policies, instructions and procedures that outline in a clear and consistent manner the responsibilities and accountabilities within the entity for the various components of the framework. These components also form part of an entity s governance structure. The preparation and publication of audited annual financial statements is an important component of the Australian Government s and individual entities financial management framework. The responsibility for entities to prepare, and publish, financial statements is as follows:» section 49(1) of the FMA Act requires the Chief Executive of each agency to give to the Auditor General the annual financial statements required by the Finance Minister s Orders. Public sector entities annual audited financial statements are subsequently made public through the 16 The audit report is normally placed immediately before the financial statements. 4 Better Practice Guide Preparation of Financial Statements June 2009
13 annual report of each entity 17. Annual reports for FMA Act agencies are required by subsections 63(1) (Departments of State) and 70(1) (Executive Agencies) of the Public Service Act 1999, and by Government policy for other agencies» section 9 of the CAC Act requires the directors of a Commonwealth authority to prepare an annual report in accordance with Schedule 1 of the Act. The annual report must include a report of operations, financial statements and the Auditor General s report on those financial statements, and» Government-controlled companies are required to comply with Part 2M.3 of the Corporations Act that requires certain companies to prepare and publish financial statements in accordance with the relevant provisions of this legislation. Chief Executives/Boards are responsible for the overall financial management of their entities. In particular, they are required to state whether, in their opinion, the entity s financial statements have been prepared on the basis of properly maintained financial records and give a true and fair view of the matters required by the FMOs (or Corporations Act, as applicable). In doing so, management implicitly or explicitly makes assertions 18 regarding the recognition, measurement, presentation and disclosure of the various elements of a financial report and related disclosures. These assertions are outlined in Appendix B, Management Assertions. Chief Executives/Boards are responsible for the overall financial management of their entities. Risk management practices and internal controls To enable the Chief Executive/Board to meet their financial statement responsibilities, entities need to have systems and procedures in place to accurately and reliably record all relevant financial transactions and other information needed to be disclosed in its financial statements. Entities also need to design, implement and maintain risk management practices and internal controls to: comply with relevant legislative and policy requirements; accurately record all relevant financial transactions; and to prevent or detect and correct misstatements, whether due to fraud or error. In addition, supporting systems and processes, appropriate to the size and complexity of the entity, need to be in place to provide the Chief Executive/Board with the information and the level of assurance that they need in relation to these matters. Audit Committees Audit Committees are a key component of effective governance arrangements, in both public and private sector organisations. In the public sector, the importance of Audit Committees is reflected in the requirements for all entities operating under the FMA Act and CAC Act to establish an Audit Committee. The review by the Audit Committee of an entity s financial statements is a significant function of all Audit Committees, with the acceptance of the financial report by the Chief Executive/Board being the culmination of one of the Audit Committee s key responsibilities. 19 Audit Committees are a key component of effective governance arrangements, in both public and private sector organisations. 17 The management or governing body of each entity is responsible for the replication of the certified financial statements and audit report in the annual report, and for ensuring the accuracy and completeness of the information presented therein. The audit of the financial statements does not relieve management or the governing body of these responsibilities. See ASA 200 Objective and General Principles Governing an Audit of a Financial Report, paragraph Australian Auditing Standard ASA 502 Audit Evidence. 19 The responsibilities of Public Sector Audit Committees are discussed in the ANAO Better Practice Guide: Public Sector Audit Committees, February 2005, page 11. 5
14 Part 1 Legal and Policy Framework Reporting to Finance Entities are required to provide monthly accrual financial statements to Finance to enable the Finance Minister to publish monthly financial statements on the General Government Sector in accordance with the FMA Act. Entities are also required to provide Finance with audit cleared financial information at the end of each financial year to enable the preparation of the Final Budget Outcome (FBO) and Consolidated Financial Statements (CFS) for the Australian Government. Publication of annual reports Under the Requirements for Annual Reports, Ministers are required to table the annual reports of FMA Act agencies in the Parliament by 31 October each year. Under the Requirements for Annual Reports, Ministers are required to table the annual reports of FMA Act agencies in the Parliament by 31 October each year. 20 Subsection 9(1) of the CAC Act requires Directors of CAC authorities to provide Ministers with the authority s annual report by 15 October each year where the reporting year is 30 June. In turn, under subsection 9(3) of the Act, Ministers are to table the annual report in Parliament as soon as is practicable. Subsection 36(4) of the CAC Act requires the responsible Minister to table a Commonwealth company s annual report in the Parliament as soon as is practicable after receiving it (whollyowned companies) or after the annual general meeting (partly owned companies). Online reporting The Requirements for Annual Reports encourages departments, to make their annual reports accessible from the Internet. The Requirements for Annual Reports encourages departments, to make their annual reports accessible from the Internet and most if not all entities annual reports are available from their respective websites Australian National Audit Office The Auditor General, through the ANAO, provides an independent review of the performance and accountability of public sector entities. The Auditor General s mandate extends to all Australian Government agencies, authorities, companies and subsidiaries with the exception of performance audits of Government Business Enterprises (GBEs) and of persons employed or engaged under the Members of Parliament Act Performance audits of wholly-owned GBEs may only be undertaken at the request of the responsible Minister, the Finance Minister or the Joint Committee of Public Accounts and Audit (JCPAA). Audits conducted by the ANAO must be in accordance with the auditing standards set by the Auditor General under section 24 of the Auditor General Act. Audits conducted by the ANAO must be in accordance with the auditing standards set by the Auditor General under section 24 of the Auditor General Act. The ANAO Auditing Standards adopt the standards set by the Auditing and Assurance Standards Board (AUASB). Financial statement audits The Auditor General, or delegate, conducts financial statement audits to express an opinion on whether the financial statements have been prepared in accordance with the Government s financial reporting framework and give a true and fair view, in accordance with Australian Accounting Standards and other mandatory financial reporting requirements in Australia, of the 20 The Requirements for Annual Reports are issued by the Department of the Prime Minister and Cabinet in accordance with subsections 63(2) and 70(2) of the Public Service Act 1999 and approved each year by the Joint Committee of Public Accounts and Audit. 6 Better Practice Guide Preparation of Financial Statements June 2009
15 financial position of each entity as at year end, and of its performance and cash flows for the year then ended. The aim of the financial statement audit is to provide reasonable assurance as to whether the financial statements are free from material misstatement. However, as the nature of an audit is influenced by factors such as the use of professional judgement, selective testing, the inherent limitations of internal control, and the availability of persuasive, rather than conclusive evidence, an audit cannot guarantee that all material misstatements will have been detected. The audit opinion is formed on the basis of audit procedures, which include:» assessing the effectiveness of management s internal controls over financial reporting and legal compliance» examining, on a test basis, information to provide evidence supporting the amounts and disclosures in the financial statements, and» assessing the appropriateness of the accounting policies and disclosures used, and the reasonableness of significant accounting estimates made by the Chief Executive/Board. The aim of the financial statement audit is to provide reasonable assurance as to whether the financial statements are free from material misstatement. The audit procedures also extend to key aspects of legislative compliance, such as the appropriation of moneys. This coverage is enhanced in circumstances where the ANAO is concurrently conducting a performance audit that includes in depth coverage of legislative compliance issues. The results of these and other relevant performance audits are considered in determining the audit opinion on the financial statements. The audit opinion is issued to the responsible Minister (or shareholders in the case of companies) and is included with an entity s financial statements in the entity s annual report. In addition to the audit opinion on financial statements, the ANAO provides each entity with a report on the results of the financial statement audit. The ANAO also tables two cross-entity assurance reports in the Parliament each year. The first details the results of the interim phase of the audit of the financial statements of major entities, and the second report provides a summary of the results of all financial statement audits undertaken in each year. Key activities undertaken by the ANAO in the context of its audits of entity financial statements include:» attendance, as observers, at Audit Committee meetings. Such meetings provide both the ANAO and the Committee an opportunity to discuss a range of issues relating to the entity s financial statements 21» working closely with entities and Finance, as required, to resolve matters involving the interpretation and application of accounting standards and related internal control issues (this matter is discussed at Part 3, Section 2.3, Liaison with external audit)» participation in CFO Forums» consultation with Finance including on the content of the FMOs and PRIMA financial statements» the periodic conduct of client information seminars that discuss accounting and auditing developments, and» providing comment, in conjunction with State and Territory Auditors-General where appropriate, on accounting and auditing Exposure Drafts. Key activities undertaken by the ANAO in the context of its audits of entity financial statements include attendance, as observers, at Audit Committee meetings. 21 Such issues can include the scope, timing and cost of the external audit; the impact of new or revised accounting standards; business and policy initiatives and major system changes; the result of both financial statement and performance audit activity; the implementation of audit recommendations; and any proposed internal audit coverage relevant to the financial statements. 7
16 Part 1 Legal and Policy Framework 2.3. Department of Finance and Deregulation Finance has a significant role relating to the facilitation of Australian Government accountabilities. The Department of Finance and Deregulation (Finance) has a significant role relating to the facilitation of Australian Government accountabilities. This includes transparent financial reporting, both ex ante and ex post, including the preparation, accountability and transparency of whole of government financial statements. Details of the whole of government annual and monthly financial statements, prepared by Finance on behalf of the Australian Government, are set out in Section 1.2 of this part. Finance also develops and promulgates accounting policies and financial statement presentation and disclosure requirements through the Finance Minister s Orders (FMOs). These policies are based on Australian Accounting Standards, accounting interpretations, guidance and other financial reporting policies developed by Finance. To assist entities to discharge their responsibilities under the FMA and CAC Acts, Finance publishes PRIMA (illustrative financial statements), FinanceBriefs (that provide, on a needs basis throughout the year, timely clarification and guidance on accounting and financial reporting policies), and ongoing financial reporting advice to Australian Government entities. This involves interpretations of accounting policies, advice on reporting and appropriation requirements and development and maintenance of the budget and reporting framework. Finance is also the convenor of the CFO Forum, which is a vehicle for the discussion of accounting, auditing and related topics. The Forum is generally convened on a monthly basis. 8 Better Practice Guide Preparation of Financial Statements June 2009
17 Appendix A: Relevant legislation, standards, policies and guidance Legislative requirements Australian Constitution Administrative Arrangements Orders Acts enabling statutory office holders, agencies, authorities and other bodies Acts enabling taxes, customs and other revenues Acts enabling special appropriations and special accounts Annual Appropriation Acts Financial Management and Accountability Act 1997, including Finance Minister s Orders and Regulations Commonwealth Authorities and Companies Act 1997, including Finance Minister s Orders and Regulations Auditor General Act 1997 Corporations Act 2001 Public Service Act 1999 Charter of Budget Honesty Act 1998 Public Accounts and Audit Committee Act 1951 Standards, policies and requirements Australian Accounting Standards AASB Interpretations Framework for the Preparation and Presentation of Financial Statements and Statements of Accounting Concepts Other applicable requirements including annual reporting requirements 22 Australian Auditing and Assurance Standards Guidance material Finance policies and guidance PRIMA illustrative financial statements Entity instructions Chief Executive s Instructions (or equivalent) A summary of these elements is set out below. 22 Other relevant requirements such as those outlined in annual reporting requirements, Commonwealth Competitive Neutrality Policy Statement 1996, and Government Arrangements for Commonwealth Government Business Enterprises
18 Part 1 Legal and Policy Framework The following is a brief summary of the primary legislation, standards, policies and guidelines that impact on the preparation of the financial statements of public sector entities. Commonwealth of Australia Constitution Act (the Constitution) The Constitution underpins the Australian Government s financial framework. It includes provisions broadly governing the ways in which the Commonwealth can collect, retain and spend money. It is designed to safeguard the Parliament s ultimate control over expenditure of public money through its role in approving the Government s Budget and Appropriation Bills. It is the primary source of the legislative enactments that apply, amongst other things, to the financial and accounting arrangements of Australian Government entities. It provides the legislative power to impose taxes under section 51(ii), and an exclusive right to impose customs and excise duties under section 90. It establishes the Consolidated Revenue Fund (CRF) into which all revenues of the Commonwealth of Australia are paid (section 81) and provides that moneys cannot be drawn from the CRF except under an appropriation made by law (section 83). Administrative Arrangements Orders Under the Constitution, the Governor-General, on the advice of the Prime Minister, appoints Ministers, establishes Departments of State and formally allocates executive responsibility among Ministers through the Administrative Arrangements Orders (AAOs). The AAOs are published in the Commonwealth Gazette. They set out the matters dealt with by each Department of State and the legislation administered by a Minister of State administering a Department. The AAOs for each Department of State cover the principal matters and legislation administered by all entities within the relevant portfolio. There is a wide range of laws and regulations in relation to matters such as defence, foreign affairs, economic policy, trade, immigration and social security. Acts of particular significance to the presentation of financial statements are referenced below. Acts enabling statutory office holders, agencies, authorities and other bodies Legislation administered under the AAOs includes Acts enabling statutory office holders, agencies, authorities and other bodies. Examples include the Commonwealth Ombudsman (office holder), the Australian Consumer and Competition Commission (agency) and the Australian Broadcasting Corporation (authority). These entities, together with the Departments of State (in the AAOs), Parliamentary Departments, other agencies prescribed by regulation and Government-owned companies form the bulk of the entities reporting financial statements under the FMA and CAC Acts. In the case of statutory authorities, the enabling legislation usually provides for the establishment, functions and management of the entity. Management provisions generally include organisational arrangements such as Board responsibilities, staffing and financing. 10 Better Practice Guide Preparation of Financial Statements June 2009
19 Acts enabling taxes, customs and other revenues Acts enabling special appropriations and special accounts Some Acts provide for the raising of revenue. These principally include Acts on taxation and customs duty, administered by the Australian Taxation Office (ATO) and the Australian Customs Service respectively. For example, the Income Tax Assessment Act 1936, administered by the ATO, provides the authority for the collection of income tax revenue from individuals and entities liable to taxation. There are also many other Acts, administered by a range of entities, that provide for levies, licence fees and other charges imposed by Government. Collectively, these Acts provide for the bulk of Government revenue. Special appropriations are provided for in Acts that are not the Annual Appropriation Acts. They are generally those contained in specific legislation, typically establishing a monetary entitlement or setting out the terms and conditions on which the moneys are to be paid. These appropriations provide the authority for the majority (approximately eighty per cent) of Government expenditure. There are different kinds of special appropriations including those which:» provide appropriation of a specific amount for a particular purpose over an extended period of time (e.g. Appropriation (HIH Assistance) Act 2001)» establish a method for calculating the amount to be spent, often triggered by eligibility criteria (e.g. welfare payments under the Social Security Act 1991), or» provide an automatic appropriation in certain situations (e.g. repayments by the Commonwealth under section 28 of the FMA Act). Standing appropriations are a sub category of special appropriations. They are generally defined as those special appropriations which provide for the automatic payment of funds where an entitlement exists. The entitlement is usually calculated in accordance with a law rather than being specified by amount in a special appropriation. Special accounts are established for specific purposes under sections 20 and 21 of the FMA Act. They are standing appropriations which provide the authority for expenditure up to the uncommitted balances recorded in the accounts. Special Accounts are ledger accounts in the CRF that allow money to be set aside for a particular purpose or purposes. They are generally used to support the delivery of programs that are funded by indirect taxes or other compulsory imposts, contributions by other Governments, or contributions by members of the community. 11
20 Part 1 Legal and Policy Framework Annual Appropriation Acts The Annual Appropriation Acts are the source of funding for approximately twenty per cent of all Government expenditure. The remaining is funded by special appropriations. The Annual Appropriation Acts generally appear in pairs because the provisions which appropriate money for the ordinary annual services of the government must (under section 54 of the Constitution) be separated from those provisions that appropriate money for the services of the government other than ordinary annual services.» Annual appropriations for the ordinary annual services of the government include the ordinary operating costs of government entities and typically include salaries, accruing employee entitlements and operating expenses.» Annual appropriations for other than ordinary annual services of the government covers financial assistance to the States, Territories and local government and non operating costs commonly referred to as capital costs. The Annual Appropriation Acts are expressed by year. In general, departmental appropriations are available until they are spent while administered expense appropriations are subject to an annual determination by the Minister for Finance and Deregulation. Financial Management and Accountability Act 1997 The Financial Management and Accountability Act 1997 (FMA Act) provides for the proper use and management of public money, public property and other public resources. It applies to all Departments of State, Departments of the Parliament and certain other bodies prescribed by regulation. Many of the detailed rules are contained in Finance Minister s Orders made under section 63, and regulations made under section 65 of the Act (see below). Relevant aspects of the legislative provisions for financial statements include:» promotion of efficient, effective and ethical use of public resources: section 44» establishment and maintenance of an audit committee: section 46» maintenance of accounts and records as required by the Finance Minister s Orders: section 48» preparation of annual financial statements: section 49» provision of additional financial statements and information: section 50» authorisation of the Chief Executive to give instructions to agency officials: section 52, and» audit of the annual financial statements by the Auditor General: section 57. The FMA Act requires the Finance Minister to publish annual financial statements for the Commonwealth as soon as practicable after the end of each financial year: section 55. These financial statements are known as the Consolidated Financial Statements for the Australian Government. An agency s input into these statements is derived from its audited annual financial statements, prepared in accordance with section 49 of the FMA Act and the Finance Minister s Orders. 12 Better Practice Guide Preparation of Financial Statements June 2009