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Welcome 2013-14 Financial Audit Seminar Mr Malcolm Prentice Acting Director, Financial Audits.

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Presentation on theme: "Welcome 2013-14 Financial Audit Seminar Mr Malcolm Prentice Acting Director, Financial Audits."— Presentation transcript:

1 Welcome Financial Audit Seminar Mr Malcolm Prentice Acting Director, Financial Audits

2 Address by the Chair, Standing Committee on Public Accounts Mr Brendan Smyth, MLA

3 Key Audit Findings from Past Audits Mr Saman (Sam) Mahaarachchi Audit Manager

4 Outline Audit Findings Computer information systems Risk management Other findings Quality of financial statements

5 Audit Findings Matters of governance interest Reported to those charged with governance Include: - weaknesses in governance and internal controls - Fraud - legislative breaches - reporting errors

6 New Audit Findings 69 new findings compared to 208 in the previous year Higher numbers in the previous year were mostly due to – recently formed agencies; and – an increase in the scope on information technology systems. New findings were mostly relating to: – computer information systems; – risk management; and – quality of financial statements.

7 Computer Information Systems Lack of policies and procedures to: – review audit logs; and – manage user access. Absence of approved or tested: – business continuity plans; – disaster recovery plans; and – backup and restoration processes. Lack of complex passwords enforced by computer systems.

8 Risk Management Inconsistent process for assessing and recording operational risks Mitigation strategies not having implementation or review dates Risk registers being out of date, incomplete or inconsistent

9 Other Audit Findings Incomplete accounting workpapers Breach of financial delegations No evidence of the satisfactory receipt of goods and services Deficiencies in the review of fortnightly payroll reports

10 Quality of Financial Statements

11 Strategies to Improve Quality 1. Accounting and Reporting Issues – Identify early – Timely communication of issues – Draft a position paper – Obtain external advice 2. Financial Statement Disclosures – Review Accounting Standards – Review model financial statements – Tailor disclosures – Prepare shell financial statements

12 Strategies to Improve Quality 3. Variance Explanations – Concise and clear explanations – Objective and supported by evidence – Performed progressively throughout year 4. Quality Assurance Processes – Allocate resources and time – Thorough proof reading – Peer review.

13 Questions? Thank You

14 Accounting Update Emerging issues in the public sector Adrian King Amy Senti

15 PwC Agenda Key topics: Employee benefits – AASB 119 Fair value – AASB 13 Control – AASB 10 Changes on the Horizon

16 PwC Employee Benefits – AASB 119

17 PwC AASB 119 Employee benefits (revised) Discounted for Long Term Undiscounted for Short Term Balance sheet: current/non-current Rem report: long/short term Whole obligation Short/long-term - measurement and presentation Step 1: Classify as Short/Long-Term for measurement purposes Step 2: Measure the benefits Step 3: Presentation - Balance sheet - Remuneration report SHORT/LONG TERM Measurement Remuneration Report AASB 119 CURRENT/ NON-CURRENT Balance Sheet AASB no change

18 PwC AASB 119 Employee benefits (revised) What about other changes? Terminations benefits – must be no link to future service. What are the major changes for defined benefit plans?

19 PwC Employee benefits – discount rates Market yield on high quality corporate bonds, unless there isn’t a deep market Government bond rate if no deep market Australia:  Still no deep market, continue to use government bonds  Could use blended rate of Federal and State bonds Discussions globally – what is ‘high quality’

20 PwC Fair Value – AASB 13

21 PwC AASB 13 Fair Value Measurement Objectives Provide single source of guidance Clarify definition of fair value Provide clear framework for measuring fair value Enhance fair value disclosures “Exit ” Price Not settlement or extinguishment Not liquidation/forced sale Not entity-specific The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

22 PwC AASB 13 Fair Value Measurement Main themes Application AASB 13 is to be applied prospectively Disclosure requirements under AASB 13 need not be applied in comparative information provided for periods before initial application of this standard Bid-Ask Price Principal market Disclosure requirements Credit risk Highest & best use (non–fin assets)

23 PwC AASB 13 Fair Value Measurement Challenges in implementation by the public sector Many assets in the public sector have no known or observable markets and have few or no alternative uses; many infrastructure assets are specialised and depreciable replacement cost is the fair value technique adopted. Many public service assets may have uses that appear sub-optimal from a market participant perspective  consider restriction on use of assets (e.g. heritage assets)  service potential considerations

24 PwC AASB 13 Fair Value Measurement Disclosures Disclosures required for: valuation techniques and inputs used fair value hierarchy effect on Profit and Loss/Other Comprehensive Income of recurring level 3 measurements Applies to: recurring and non-recurring fair value measurements after initial recognition financial and non-financial instruments

25 PwC AASB 13 Fair Value Measurement Potential ways to address the challenges Prepare an inventory of assets -Categorise assets into classes -Understand restrictions on assets Understand the previous valuation methodology prior to AASB 13 Assess under AASB 13 principles the appropriate fair value methodology. This may involve early consultation with the Valuer Prepare a template checklist of disclosure requirements that are specific to the valuation methodology for an asset class Engage with the Valuer on information that must be included in valuations Implementation will be time consuming so start as early as possible

26 PwC Control – AASB 10

27 PwC Consolidation Control Power What activities significantly affect returns (“relevant activities”)? How are decisions about relevant activities made? Do investor’s rights provide current ability to direct relevant activities? Exposure or rights to variable returns Ability to use power to affect returns Principal/agent assessment De facto agent assessment

28 PwC Consolidation by not-for-profits (NFPs) Could significantly impact consolidation by NFPs AASB applicable for not-for-profit entities Effective for reporting periods after 1 January 2014 NFP needs to assess whether any power they have over another entity is exercised in their own right, or on behalf of another entity. Examples include 1) rights to give policy directions to the governing body of the investee that give the holder the ability to direct the relevant activities of the investee; and 2) rights to approve or veto operating and capital budgets relating to the relevant activities of the investee.

29 PwC Changes on the Horizon

30 PwC Service Concession Arrangements: Grantor – Emerging AASB Standard Current direction: use IPSAS 32 as basis for AASB Standard All assets “controlled or regulated” by grantor on balance sheet o Control: Direct use of asset, users of asset, and price of services o Control can arise through third-party regulation o Look to AASB 10 for guidance on determining ‘control’ Subsequent accounting: o Financial liability model (i.e. availability model) – no significant change to current accounting o Grant of rights model (i.e. user pay) – significant change to existing accounting as assets will be recognised on balance sheet

31 PwC Leasing – revised exposure draft All leases on balance sheet! Pattern of expense recognition to differ for equipment and property leases Distinction between leases and service/supply agreements sharpened

32 PwC PwC Contacts Adrian King Director – Assurance P:+61 (2) Amy Senti Senior Manager – Assurance P:+61 (3)

33 Risk of Fraud Friday 2 May 2014 Allister Higgins – Associate Director KPMG Forensic

34 34 © 2014 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International. Definitions of fraud Australian Standard, Fraud and Corruption control (AS ) defines: Fraud as “Dishonest activity causing actual or potential financial loss to any person or entity” Corruption as “Dishonest activity in which a director, executive, manager, employee or contractor of an entity acts contrary to the interests of the entity and abuses his/her position of trust in order to achieve some personal gain or advantage for him or herself or for another person or entity” Commonwealth Fraud Control Guidelines (March 2011) defines: Fraud as “Dishonestly obtaining a benefit or causing a loss by deception or other means”

35 35 © 2014 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International. Definition of Fraud Fraud Obtain benefit (not entitled to) or advantage to the detriment of another e.g. diversion of opportunity Deceit, trickery, breach of trust Intention

36 36 © 2014 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International. Conditions that allow fraud $ Opportunity Under the organisation’s control Incentive or Pressure Generally Not under the organisation’s control Rationalisation Perpetrators ability to justify their actions How does Fraud Occur

37 37 © 2014 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International. The crime More than 50% of large organisations experiencing fraud Who is affected? Small Medium Large

38 38 © 2014 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International. Other Examples to Consider Financial statement fraud Corruption & misconduct Theft of assets ■ Performance bonus ■ Market expectation ■ Continuation of employment ■ Conceal fraudulent conduct ■ Appease regulator ■ Underpin share price ■ Evade / minimise taxation ■Fictitious revenue ■Timing of revenue ■Conceal liabilities ■Deferral of expenditure ■Improper disclosures ■Improper asset valuation ■Inappropriate related party transactions ■Capitalise expenditure ■ Conflict of interest ■ Diversion of assets to own use ■ Kickbacks/gifts ■ Supplier favouritism ■ Sale of information ■ Insider trading ■ Greed/Lifestyle ■ Gambling ■ Financial hardship ■ Revenge ■ Culture ■ Drugs ■ Theft of inventory/cash ■ Theft of information or intellectual property ■ False invoicing ■ Payroll fraud ■ On-line banking transfer ■ Fraudulent cheque ■ Accounts receivable fraud ■ External attack

39 39 © 2014 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International. Profile of the fraudster Who is the face of major fraud? What are the other characteristics of a typical fraudster?

40 40 © 2014 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International. Profile of the Fraudster

41 41 © 2014 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International. The power of collusion Average time (days) to detect collusive fraud

42 42 © 2014 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International. Most important factor contributing to the largest fraud incident

43 43 © 2014 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International. In considering fraud risk, where should you look?

44 44 © 2014 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International. What is most likely in the ACT? ■ Theft of Assets ■ Procurement Fraud ■ Abuse of official position ■ Bribery ■ Data Theft

45 45 © 2014 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International. Assessing the Risk of Fraud – what should you be doing?

46 46 © 2014 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International. Questions?

47 Thank you Allister Higgins Associate Directors KPMG

48 © 2014 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. The KPMG name, logo and ‘cutting through complexity’ are registered trademarks or trademarks of KPMG International Cooperative (KPMG International). Liability limited by a scheme approved under Professional Standards Legislation. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

49 Presenter - Geoff Britt (CPA) Accountant Financial Framework Management & Insurance (FFMI), Economic and Financial Group, Chief Minister and Treasury Directorate Employee Benefits and Fair Value

50 50 Employee Benefits – LSL Liability 2014 Review  June 2009 – Australian Government Actuary (AGA) Report on Shorthand Valuation Method For Long Service Leave Liabilities of ACT Government Employees.  Accounting policy on Employee Benefits issued.  AGA recommended findings be reviewed within 5 years.

51 51 Employee Benefits – 2014 Review  April 2014 AGA Report (Advanced Draft at time of preparation of slides)  Data covered in the 2014 Review: 90% of ACT Government Employees – Previous 2009 review data covered 60% of employees.

52 52 Employee Benefits – LSL Liability 2014 Review Findings  Minimal Change in Probability factors of reaching unconditional entitlement for long service leave.  Discussion of agency specific probability factors (results not materially different 5 large agencies).  36 % long service leave taken in service (50% 2009).  90% annual leave taken in service (90% 2009).

53 53 Employee Benefits – LSL Liability 2014 Review Findings  Discount factor table used by CMTD to advise agencies of long service leave liability calculation updated.  Suggested shorthand method for annual leave in light of the revised AASB 119 Employee Benefits.

54 54 Employee Benefits – What now for the Findings  AGA findings are being reviewed by an actuary engaged by the Auditor-General’s Office.  New policy on employee benefits and advice to agencies to be issued.

55 55 Fair Value – Model Financial Statements o Applies to Financial Statements o Applies to a number of asset categories – Example to follow on: Note 27 - Property Plant & Equipment o Classify property, plant and equipment into a Fair Value Hierarchy – 3 levels o The Hierarchy reflects the significance of the inputs used in determining their fair value.

56 56 Fair Value – Hierarchy 3 Levels Level 1 Quoted prices (unadjusted) in active markets for identical assets or liabilities that the agency can access at the measurement date. Level 2 Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 Inputs that are unobservable for particular assets or liabilities.

57 57 Example – Fair Value Hierarchy 2014 Property, Plant & Equipment at Fair Value Classification by to Fair Value Hierarchy ($’000) Level 1Level 2Level 3Total Land38,3506,52444,874 Buildings61,37522,70184,076 Lease Improvements 5,806 Infrastructure Assets 3,408,660 Community & Heritage Assets 144,738 99,7253,588,4293,688,154 Exempt from showing comparatives for periods before initial applying of the standard. There have been no transfers between Levels 1, 2 and 3 during the reporting period.

58 58 Example – Level 2 Valuation Techniques and Inputs Valuation Technique : Land and buildings - market approach that reflects recent transaction prices for similar properties and buildings (comparable in location and size). Inputs: o Prices by market transactions of comparable land and buildings were considered. o Crown Lease terms and tenure, The Australian Capital Territory Plan and the National Capital Plan, and current zoning.

59 59 Example – Level 3 Valuation Techniques and Inputs Valuation Technique: o Land - no active market or significant restrictions value at market approach with value of selection of land with similar approximate utility. o Buildings, Leasehold Improvements, Infrastructure Assets and Community and Heritage Assets are: Specialised Assets by the Valuers. – Measured using the cost approach that reflects the cost to a market participant to construct assets of comparable utility adjusted for obsolescence. – For Buildings, historical cost per square metre of floor area was also used in measuring fair value.

60 60 Example – Level 3 Valuation Techniques and Inputs Inputs: o In determining the value of land with similar approximate utility significant adjustment to market based data was required. o In determining the value of buildings, leasehold improvements, infrastructure assets and community and heritage assets regard was given to: – age and condition of the assets, – estimated replacement cost and current use. This required the use of data internal to Agency.

61 61 Example – Level 3 Valuation Techniques and Inputs Inputs Continued: o There has been no change to the above valuation techniques during the year. o Transfers in and out of a fair value level are recognised on the date of the event or change in circumstances that caused the transfer.

62 62 Fair Value Measures Using Significant Unobservable Inputs (Level 3) 2014LandBuildings Leasehold Improves Infra- structure Assets Community & Heritage Assets Fair Value at start of period 3,80817,8535,9583,462,299129,139 Additions 9281, , 250 Assets Classified as Held for Sale Revaluation increments/(decrements) recognised in Profit or Loss Revaluation increments/(decrements) recognised in Other Comprehensive Income 1,2563,4507,610 Transfers (from/(to) Level 2) --- Impairment Losses Recognised in Other Comprehensive Income (176) Depreciation -(596)(752)(85,889)(5,650) Example Level 3 - Measures Using Significant Unobservable Inputs

63 63 Fair Value Measures Using Significant Unobservable Inputs (Level 3) - Continued 2014LandBuildings Leasehold Improves Infra- structure Assets Community & Heritage Assets Acquisition/(Disposal) through Administrative Restructuring ,640 Acquisition/Disposal From Transfers452421(871) Impairment Losses Recognised in the Operating Surplus/Deficit Reversal of Impairment Losses Recognised in the Operating Surplus/Deficit Other Movements(158)(162)(1,130) Fair Value at end of period6,52422,7015,8063,408,660144,738 Total gains or losses for the period included in profit or loss, under ‘Other Gains’ Change in unrealised gains or losses for the period included in profit or loss for assets held at the end of the reporting period Example Level 3 - Measures Using Significant Unobservable Inputs

64 64 Example Level 3 - Measures Using Significant Unobservable Inputs Information - Significant Unobservable Inputs Level 3 Fair Value Measurements Description and fair value as at 30 June 2014 $000 Valuation technique(s) Significant Unobservable inputs Range of unobservable inputs (weighted average) Relationship of unobservable inputs to fair value Land $6,524 Market approach Selection of land with similar approximate utility $400 - $710 per m 2 ($500per m 2 ) Higher value of similar land increases estimated fair value. Buildings $22,701 Depreciated Replacement Cost Consumed economic benefit/ obsolescence of asset 20% - 1% per year (5% per year) Greater consumption of economic benefit or increased obsolescence lowers fair value. Historical cost per square metre floor area (m 2 ) $5,000 - $5,200/m 2 ($5,075/m 2 ) Higher historical cost per m 2 increases fair value.

65 65 Example Level 3 - Measures Using Significant Unobservable Inputs Information - Significant Unobservable Inputs Level 3 Fair Value Measurements – continued Description and fair value 30 June 2014 $’000 Valuation technique(s) Significant Unobservable inputs Range of unobservable inputs (weighted average) Relationship of unobservable inputs to fair value Leasehold Improvements $5,806 Depreciated Replacement Cost Consumed economic benefit/ obsolescence of asset 50% - 10%Greater consumption of economic benefit or increased obsolescence lowers fair value. Infrastructure Assets $3,408,660 Depreciated Replacement Cost Consumed economic benefit/ obsolescence of asset 20% - 1% (4% per year) Greater consumption of economic benefit or increased obsolescence lowers fair value. Historical cost per cubic metre (m 3 ) $500 - $550 per m 3 ($530 per m 3 ) Higher historical cost per cubic metre (m 3 ) increases fair value. Community and Heritage Assets $144,738 Depreciated Replacement Cost Consumed economic benefit/ obsolescence of asset 20% - 1% (4%) Greater consumption of economic benefit or increased obsolescence lowers fair value.

66 Whole of Government Reporting Requirements Natasha Bourke Senior Manager– Budget Coordination and Reporting Chief Minister and Treasury Directorate x

67 67 Timing – Agencies No changes expected from interim timetable  Statements provided by SSC one day later this year (day 10)  Certified statements to Audit Office and Treasury on 15 July (Group 1) and 24 July (Group 2)  Some agencies on differing timetables – ACTIA, ACTEW, CMTD, CWD, CTP, TBA and SPA  Agency audit reports provided by 17 September

68 68 Web Book 9 JulyOpenBased on Oracle 6 th working day 10 JulyClose Data will be consolidated for Government Finance Statistics reporting to the ABS 25 JulyOpenBased on Oracle ADJ period 28 JulyClose Data will be consolidated to produce the June Quarter Report (interim outcome) This data must match agency certified statements 30 JulyCloseVariance comments closed

69 69 Timing – Whole of Government Draft Report to Audit Office 22 September  Based on interim results from agencies with most material amendments already progressed during agency audits  Whole of Government Report for release by 7 November

70 70 Key Issues – Whole of Government Largely unchanged from  Accuracy of interim outcome to financial statements  Variance explanations – little improvement in quality for  Internal trade errors – target <$100m ‒ = $299m ‒ = $416m ‒ = $102m

71 71 Consolidation Packs  Consolidation packs based on second download (match to certified statements)  Due 29 July (Group 1) and 5 Aug (Group 2)  New section for PP&E hierarchy

72 72 Instruments/Drawdowns  Final drawdown 17 June  Additional date will be advised  Unspent appropriation on superannuation cannot be drawn down for any other purpose  Final instrument requests to Treasury by 30 May (excluding grants)

73 73 Collection of Functional Data  Templates will be provided to identify against Government Purpose Classification and Asset Classification by 25 July  Due 5 August  Important – data will be based on June (6 th working day) and will not be updated for the second download  The allocations are proportionate in nature in Treasury’s system and the same proportionate splits will apply as numbers change

74 74 Closing  Upcoming Treasury memos: – Final audit timetable (no changes anticipated from interim) – Instruments and Cash Disbursements – Functional data reporting  More detailed training again in June – Please send your agency representatives

75 Dr Maxine Cooper (Auditor-General) Address by the Auditor-General

76 Mr Malcolm Prentice Acting Director, Financial Audits Conclusion

77 Thank You


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