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SOUTH AUSTRALIAN WATER CORPORATION

 

 

FUNCTIONAL RESPONSIBILITY AND STRUCTURE

 

Establishment

 

The South Australian Water Corporation (the Corporation) was established pursuant to the South Australian Water Corporation Act 1994 (the Act).

 

Application of the Public Corporations Act 1993

 

The South Australia Water Corporation is a public corporation subject to the provisions of the Public Corporations Act 1993.  That Act requires a charter and performance statement to be prepared by the Corporation’s Minister and the Treasurer after consultation with the Corporation.  The charter for the Corporation outlines:

 

·                     the nature and scope of commercial and non-commercial activities, including financial investment activities;

·                     financial standards and reporting, including interim reports on operations; the form and content of accounts and financial statements; and accounting and internal auditing systems and practices;

·                     the operating environment of the Corporation, asset management and control and the basis for setting fees and charges.

 

Objectives and Functions

 

The key objectives of the Corporation are to:

 

·                     provide value for money water services within South Australia;

·                     develop and commercialise leading water and related services, including technology solutions;

·                     assist in promoting economic development in South Australia;

·                     manage the assets (including intellectual property) of the Corporation prudently and effectively and provide agreed returns to Government;

·                     optimise the value of the Corporation whilst achieving other key requirements of the Government.

 

The primary functions of the Corporation in accordance with the Act are to provide services for the:

 

·                     supply of water by means of reticulated systems;

·                     storage, treatment and supply of bulk water;

·                     removal and treatment of wastewater by means of sewerage systems.

 

Additional functions of the Corporation as set out in the Act include researching and undertaking works to improve water quality and wastewater treatment; developing and marketing commercially viable products, processes and intellectual property; and encouraging and facilitating private or public sector investment and participation in the provision of water and wastewater services and facilities.

 

Structure

 

The structure of the South Australian Water Corporation is illustrated in the following organisation chart.

 

AUDIT MANDATE AND COVERAGE

 

Audit Authority

 

Audit of the Financial Report

 

Subsection 31(1)(b) of the Public Finance and Audit Act 1987 and subsection 32(4) of the Public Corporations Act 1993 provides for the Auditor-General to audit the accounts of the South Australian Water Corporation in respect of each financial year.

 

Assessment of Controls

 

Subsection 36(1)(a)(iii) of the Public Finance and Audit Act 1987 provides for the Auditor-General to assess the controls exercised by the South Australian Water Corporation in relation to the receipt, expenditure and investment of money, the acquisition and disposal of property and the incurring of liabilities.

 

Scope of Audit

 

The audit program covered major financial systems and was directed primarily to obtaining sufficient evidence to enable an audit opinion to be formed with respect to the financial statements and internal controls.

 

During 2005-06, specific areas of audit attention included:

 

·                     contract management

·                     asset management and control

·                     revenue raising including cash receipting and banking

·                     expenditure including accounts payable and payroll

·                     budgetary control and management reporting.

 

The work done by the internal auditor was considered in planning the audit programs. 

 

 

AUDIT FINDINGS AND COMMENTS

 

Audit Opinions

 

Audit of the Financial Report

 

In my opinion, 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 Accounting Standards and other mandatory professional reporting requirements in Australia, the financial position of the South Australian Water Corporation as at 30 June 2006, the results of its operations and its cash flows for the year then ended.

 

Assessment of Controls

 

In my opinion, the controls exercised by the South Australian Water Corporation in relation to the receipt, expenditure and investment of money, the acquisition and disposal of property and the incurring of liabilities, are sufficient to provide reasonable assurance that the financial transactions of the South Australian Water Corporation have been conducted properly and in accordance with law.

 

Audit Communications to Management

 

Matters arising during the course of the audit were detailed in management letters to the Chief Executive Officer and, by arrangement, copies were forwarded to the Chair of the Corporation’s Audit Committee.  Responses to the management letters were considered to be satisfactory.  Major matters raised with the Corporation and the related responses are considered herein.

 

Revenue - Customer Service Information System (CSIS)

 

The Customer Service Information System (CSIS) is the Corporation’s main revenue system.  Its function includes the billing and recovery cycle process, the recording of customer property valuations and the application of customer rates and exemptions to charges.  The system is highly automated and is characterised by on-line processing, checking and authorisation of transactions.  Accordingly, there is a significant reliance on automated system controls.

 

Issues arising from the audit primarily related to the systems aspects of rating and billing.  The issues were concerned mainly with the potential for incorrect billing to customers as a result of incorrect rating codes within the system.   Similar issues have been raised with the Corporation over a number of years.  Given the nature of this system and the large number of customer accounts this is an area of ongoing risk.  Over the past two years the Corporation has implemented a range of checking procedures and increased training for staff.  Due to the timing of implementation of some of these measures they have yet to impact on the error rate with the results of testing in 2005-06 indicating the error rate has not decreased.  The full impact of the measures implemented by the Corporation should be realised in 2006-07.

 

Audit is of the view that the Corporation should give consideration to analysing the cause of errors to enable training to be targeted to address the main issues identified along with maintaining an increased level of additional checking to detect any incorrect billing.

 

In response the Corporation indicated that, noting the effect of timing, action taken would appropriately resolve the matters identified.

 

Payroll

 

The audit of the payroll function identified that improvements had been made in relation to the issue and follow up of bona fide reports, an area which had been raised with the Corporation over a number of years.  This control is now operating satisfactorily.

 

Audit did consider, however, that there was room for improvement in the management of flexitime arrangements.  In response the Corporation indicated that action would be taken to address the issue.

 

Contract Management – Economic Development Obligations

 

SA Water has a contract in place for the manufacture and supply of water meters to the Corporation.  That contract has a number of economic development obligations.  Audit review of the processes adopted by the Corporation to ensure that these obligations were satisfied revealed that there was room for improvement in the timeliness of SA Water’s review of compliance with the contractual requirements.  Audit was also of the view that some of the evidentiary requirements contained in the contract were insufficient to enable an adequate assessment of compliance to be made.

 

The Corporation’s response indicated that action would be taken to address all of the issues identified.

 

Expenditure

 

The audit of the expenditure function revealed that controls could be improved regarding review of exception reports and modifications to the supplier masterfile.  These issues have been raised with the Corporation since 2003-04, however, the remedial action taken by the Corporation has not been effective in addressing the issues.

 

In response the Corporation indicated that further action would be taken to improve the controls in operation.

 

Business Continuity and Emergency Management

 

In 2005-06 Audit undertook a follow up review in relation to a number of issues raised with the Corporation in 2003-04 regarding improvement to business continuity and emergency management planning.  In relation to business continuity the review revealed that although a number of studies had been undertaken, the Corporation had yet to endorse a preferred approach and that little progress had been made over the two year period.

 

In response the Corporation advised that a firm deadline had been set for the development of a project plan to guide the implementation of its business continuity planning.

 

Infrastructure Assets

 

The audit of processes and controls in relation to the recording of infrastructure assets revealed that there was room for improvement in a number of areas in relation to the accurate and complete input of data into the Corporate Geographic Information System which is used to record details of the Corporation’s water and sewer infrastructure assets.

 

The Corporation indicated in its response that action would be taken to address the issues raised.

 

 

INTERPRETATION AND ANALYSIS OF FINANCIAL REPORT

 

The implementation of Australian equivalents to International Financial Reporting Standards (AIFRS) occurred in 2005-06.  Data for both 2005-06 and 2004-05 has been prepared using AIFRS.  Earlier data has not.  Note 47 to the financial statements sets out adjustments arising from the adoption of AIFRS.

Highlights of Financial Report

 

 

2006

2005

Percentage

 

$’million

$’million

Change

INCOME

 

 

 

Rates and charges

550

538

2

Community service obligations

152

103

48

Other

129

141

(9)

Total Income

831

782

6

EXPENSES

 

 

 

Employment expenses

79

73

8

Depreciation and amortisation expense

132

126

5

Finance cost

84

87

(4)

Other expenses

209

217

(4)

Total Expenses

504

503

-

Net Profit after income tax expense

229

196

17

 

 

 

 

Net Cash Flows from Operations

400

276

45

 

 

 

 

ASSETS

 

 

 

Current assets

90

165

(45)

Non-current assets

7 134

6 879

4

Total Assets

7 224

7 044

3

LIABILITIES

 

 

 

Current liabilities

187

174

7

Non-current liabilities

1 852

1 774

4

Total Liabilities

2 039

1 948

5

EQUITY

5 185

5 096

2

 

Income Statement

 

Income

 

Total income increased by $48.7 million to $831.2 million. The increase was due mainly to income from rates and charges (up by $11.7 million or 2 percent) and community service obligations (up $48.7 million) offset by a decrease in other income of $12 million.  The increase in income from community service obligations was a result of the implementation in 2005-06 of the new Financial Ownership Framework agreed with the Department of Treasury and Finance.  There has been a corresponding increase in dividends paid as discussed under the heading ‘Contributions to the State Government’ herein.

 

A structural analysis of operating revenues for the Corporation in the five years to 2006 is presented in the following chart.

 

Expenses

 

Total expenses increased by $722 000 to $504.3 million.  This compares with a $48.1 million increase in 2005.

 

Depreciation and amortisation increased by $6.1 million to $131.8 million (26 percent of total expenses) as a result of higher asset values.

 

Finance costs decreased by $2.7 million in 2006.  The increase in these costs since 2004, as shown in the chart below, is a result of a change in accounting policy whereby all finance costs are now expensed.  Prior to 2005 some finance costs were capitalised, and as such are not directly comparable to 2005 and 2006. 

 

Employment expenses increased by $5.2 million in 2006 due mainly to increased pay rates, lower levels of capitalisation of employment costs and higher superannuation contributions.  Employment expenses have increased by $27 million over the past five years. 

 

Other expenses decreased by $8 million primarily as a result of decreased services and supplies costs, down $9.8 million and decreased electricity expenses, down $1.2 million offset by increased expenses for operational and service contracts, up $3 million. 

 

A structural analysis of the main expense items for the Corporation for the five years to 2006 is shown in the following chart.

 

 

Operating Result

 

The Corporation’s profit has increased by $32.6 million or 16.6 percent compared with a $17 million (9.5 percent) increase the previous year.  Total income and total expenses both increased in 2006, up $48.7 million and $722 000 respectively and along with an increase in income tax equivalent expenses of $15.4 million resulted in the increase in overall profit.

 

The following chart shows the income, expenses (including tax equivalent expense) and profit after income tax for the five years to 2006.

 

Balance Sheet

 

The Corporation’s financial position is dominated by non-current infrastructure assets and related borrowings.  Current assets and liabilities are, while significant in their own right, not material relative to the non-current assets and liabilities.  Notwithstanding, at 30 June 2006 current liabilities amounted to $187 million, exceeding current assets of $90 million by $97 million.  Current assets decreased by $75 million from the previous year due mainly to a decrease in receivables in relation to community service obligations of $74 million arising from the revised arrangements under the new Financial Ownership Framework.  While such a large deficiency in working capital would normally be of concern, the Corporation has a strong cash flow position from operating activities which would enable all of its current liabilities to be satisfied.

 

A structural analysis of non-current assets and non-current liabilities for the five years to 2006, is shown in the following chart.

 

 

Non-current assets increased by $255 million (4 percent) in 2006 to $7.1 billion.  Of the increase $183 million was as a result of the revaluation of water and sewer infrastructure assets and $186 million was from payments for construction and purchase of assets including $10 million for tradeable water allocations.  These increases were offset by depreciation and amortisation expense of $131 million.  The value of all other assets and liabilities remained relatively unchanged over the period although other non-current liabilities increased in 2005 as a result of increased deferred income tax liability arising from changed accounting requirements under AIFRS.

 

Cash Flow Statement

 

The following table summarises the net cash flows for the five years to 2006.

 

 

2006

2005

2004

2003

2002

 

$’000

$’000

$’000

$’000

$’000

Net Cash Flows

 

 

 

 

 

Operations

400 436

276 844

272 371

266 890

254 896

Investing

(105 893)

(114 613)

(184 293)

(123 253)

(91 209)

Financing

(290 455)

(162 689)

(88 310)

(143 462)

(163 205)

Change in Cash

4 088

(458)

(232)

175