The South Australian Forestry Corporation (the Corporation) is a public corporation, established on 1January2001, under the South Australian Forestry Corporation Act 2000 (the Act). The Corporation effectively took over the functions previously undertaken by the Forestry SA Business Unit within the Department for Administrative and Information Services (DAIS). As such, as at 1January2001, the operations and employees as well as the assets and liabilities of Forestry SA were transferred to the Corporation.
The object of the Act was to establish a statutory corporation as a business enterprise with the principal responsibility of managing plantation forests for the benefit of the people and economy of the State. More specifically, the Act provides for the Corporation to carry out the following functions:
The Act provides for a Board of directors, consisting of five members, to be established as the governing body of the Corporation. The Act also specifies that the Corporation is a statutory corporation to which the provisions of the Public Corporations Act 1993 apply.
Under the Public Corporations Act 1993 the Minister and the Treasurer must prepare a charter and a performance statement for the Corporation after consultation with the Corporation. The charter outlines the nature and scope of the Corporation’s operations and its reporting obligations, while the performance statement sets out the various performance targets for the Corporation over a defined period.
The Corporation’s structure is represented in the following diagram.
Subsection 32(4) of the Public Corporations Act 1993 provides for the Auditor-General to audit the accounts and financial statements of the Corporation in respect of each financial year.
The audit of the Corporation focused on all key financial functions and was directed primarily at obtaining sufficient evidence to enable an audit opinion to be formed with respect to the financial statements and internal control. During 2000-2001 specific areas of audit attention included:
Audit findings and relevant recommendations arising from the various reviews and associated testing of the Corporation’s functions and financial systems and records have been communicated to the Chief Executive of the Corporation. The issues conveyed relate to general financial controls, computing operations and controls and the matter of the measurement and valuation of forest assets. Responses to Audit management letters are of a positive nature indicating either that the issues are under consideration, are being addressed or have been actioned.
The commentary that follows in ‘Audit Findings and Comments’ hereunder principally provides a summary of issues arising from the current years audit activity.
Prior to commentary on issues raised through Audit Management letter communication to the Corporation it is important to mention that the Corporation has established an Audit Committee and has recently introduced an Internal Audit activity, which is to be fully operative during the 2001-02 financial year.
The results of reviews of areas of operating and financial related systems and controls revealed certain opportunities to improve control practices and procedures. Matters raised by Audit included:
A number of recommendations were communicated to enhance security and control arrangements within the computer processing environments that influence the overall adequacy of controls exercised in relation to the abovementioned systems. See further explanation under the heading ‘Commentary on Computer Operations and Control’.
Audit noted that there was scope to enhance monitoring control over the contracts for harvesting and transporting expenditure. Specifically, Audit considered that there needed to be a formalised and regular process established to review variances between actual and contracted volume of work performed. In addition, variances outside of an agreed range should be subject to senior management approval.
Audit review of this area identified the need to strengthen physical access security arrangements, conduct formalised regular stocktakes and perform regular reconciliations between the stores and general ledger systems.
During the year, Audit undertook a review of certain Forestry Corporation computing operations at Mt. Gambier and Adelaide sites and EDS Glenside. Those sites represent the principal computer processing environment sites for Forestry Corporation key operational and financial systems. Audit’s focus was directed to the Forestry Logging System and Masterpiece System computer processing environments and operations.
A number of important areas were identified that were considered in need of management attention to effect required control improvements. Some of the more salient matters requiring control improvement are summarised as follows:
Note 1.4 to the Corporation’s financial statements provides a summary of the valuation methodology utilised by the Corporation in arriving at a value for growing timber. The value, in part, is based on volume estimates of growing timber. This is a matter of technical complexity and involves systems and databases associated with predicting growing timber.
In 1994, I appointed an independent consultant with expertise in forestry to examine the systems and processes used in the estimation of growing timber and to report with respect to their audit ability. In summary, the consultant concluded that the systems and processes used in the estimation of growing timber were generally of a high technical standard. Notwithstanding these comments, the consultant made a number of statements with regard to the audit ability of the estimates of the volume of standing timber. This precludes the independent attestation of these estimates within an acceptable level of audit confidence.
Audit, in the latter part of 1999-2000 completed an up to date assessment of systems and processes in relation to the estimation of growing timber. That assessment was undertaken with the assistance of an external forestry consultant. Although the assessment indicated that the Corporation (and its predecessor entities) have addressed certain issues relating to the reliability of the estimate, there exists matters that require resolution before consideration can be given to removing a qualifying comment that has been made in relation to the estimation of growing timber in my previous Independent Audit Reports on the Corporation’s (and its predecessor entities) accounts. I have again commented in the Independent Audit Report for the year ended 30June 2001 that I am not in a position to form an opinion on the reasonableness of the estimation of the value of the asset growing timber.
In November 2000, the Corporation responded to a report forwarded by Audit on the abovementioned up to date audit assessment of systems and processes regarding the estimation of growing timber and provided a summary of the progress towards addressing the outstanding issues.
Further comment on the Growing Timber valuation is provided in the section below titled ‘Interpretation and Analysis of Financial Statements’.
As required by subsection 36(1)(a)(iii) of the Public Finance and Audit Act 1987,the audit of the South Australian Forestry Corporation included an assessment of the controls exercised in relation to the receipt, expenditure and investment of money, the acquisition and disposal of property and the incurring of liabilities.
Audit formed the opinion that the controls exercised by the South Australian Forestry Corporation in relation to the receipt, expenditure and investment of money; the acquisition and disposal of property; and the incurring of liabilities, except for the matters outlined under ‘Audit Findings and Comments’, were sufficient to provide reasonable assurance that the financial transactions of the organisation were conducted properly and in accordance with the law.
As at 1 January 2001, the Corporation effectively took over the functions previously undertaken by the Forestry SA Business Unit within the Department for Administrative and Information Services (DAIS). Note 1.1 to the financial statements explains the specific nature and significance of the material transactions that were effected between DAIS and the Corporation as at establishment date.
As the Corporation was established on 1 January 2001 the Statement of Financial Performance only covers the six-month period from 1 January 2001 to 30 June 2001. Further, this statement does not contain comparative figures. However, as the Corporation effectively assumed the functions of the ForestrySA business unit of DAIS, the Corporation has provided full year financial information and comparative figures in Note 26 to the financial statements.
As stated in Note 1.4 ‘Forestry Accounting’ to the financial statements, the value of growing timber is calculated for financial reporting purposes only as a measure of forest management performance over the reporting period. The methodology assumes that the forest will be harvested over time and in an orderly manner.
This method does not provide a measure of the forest’s realisable value, that is, the amount for which an asset would exchange for on the date of valuations between a willing buyer and a willing seller in an arms-length transaction. Accordingly, the estimate brought to account by the Corporation should not be interpreted as a ‘current market valuation’ as its use by the Corporation is not designed to represent those values that could be realised at the date of valuation.
The following table summarises valuations of growing timber for the past five years by region and revaluation increments (decrements).
|
2001 |
2000 |
1999 |
1998 |
1997 |
|
|
Region |
$’million |
$’million |
$’million |
$’million |
$’million |
|
South East Region: |
|||||
|
Young plantations |
25.9 |
24.9 |
22.4 |
23.5 |
24.1 |
|
Old plantations |
486.5 |
478.5 |
469.1 |
473.9 |
496.2 |
|
Central and Northern Regions: |
|||||
|
Young plantations |
3.8 |
3.4 |
3.3 |
3.7 |
3.6 |
|
Old plantations |
77.2 |
71.7 |
71.3 |
71.1 |
80.4 |
|
593.4 |
578.5 |
566.1 |
572.2 |
604.3 |
|
|
Revaluations: |
|||||
|
Increment (Decrement) |
14.9 |
12.4 |
(6.1) |
(32.1) |
(6.3) |
Qualification
Growing Timber
The Corporation manages South Australia’s plantation forests. In relation to Forestry operations the Corporation has adopted a market based method of revaluation for the Non-Current Asset - Growing Timber. Under this method, the inventory ‘growing timber’ is valued at its ‘net market value’ at the reporting date.
In 1994, I appointed an independent consultant with expertise in Forestry to examine the systems and processes used in the estimation of growing timber and to report with respect to their audit ability. In summary, the consultant concluded that the systems and processes used in the estimation of growing timber were generally of a high technical standard. Notwithstanding these comments, the consultant made a number of statements with regard to the audit ability of the estimates of the volume of standing timber. This precludes the independent attestation of these estimates within an acceptable level of audit confidence.
Audit, in the latter part of 1999-2000, again with assistance from an external forestry consultant, undertook an up to date assessment of systems and processes in relation to the estimation of growing timber. Although the 1999-2000 review noted some progress with respect to systems and processes, there still existed certain matters requiring consideration and resolution before the qualifying comment of the Auditor-General in relation to the estimation of growing timber could be re-assessed for removal from the Independent Audit Report. The outstanding matters are receiving attention by the Corporation.
Consistent with prior years I am not in a position to form an opinion on the reasonableness of the estimation of the value of the asset growing timber.
Qualified Audit Opinion
In my opinion, except for the effect on the financial report of the matter referred to in the qualification paragraph, the financial report presents fairly in accordance with the Treasurer’s Instructions promulgated under the provisions of the Public Finance and Audit Act 1987, applicable Australian Accounting Standards and other mandatory professional reporting requirements, the financial position of the South Australian Forestry Corporation as at 30June2001, the results of its operations and its cash flows for the year then ended.