The Department for Administrative and Information Services (DAIS) is an Administrative Unit under the Public Sector Management Act 1995. The Department was established on 23 October 1997 and incorporates the activities of the following Administrative Units which were abolished on 23 October 1997, namely:
former Department for State Government Services;
former Department for Information and Technology Services;
former Department for Industrial Affairs (excluding the Human Resources Management Division which was transferred to the Department of the Premier and Cabinet);
Land Services Group of the former Department of Environment and Natural Resources;
Forestry Division of the former Department of Primary Industries.
The Department is the portfolio based agency for the Ministerial Portfolio of Administrative and Information Services. It has responsibility for a diverse range of government activities including:
project risk management, building asset management, procurement and contract services;
capital building works and major projects delivery;
information technology policy, support and management services;
internal services to government, for example forensic services and fleet management;
land valuation, survey and registration;
forestry operations and management;
workplace registration and regulation and industrial relations services.
Note 1 to the Department’s financial statements includes a diagrammatic representation of the organisation structure and Note 32 provides a breakdown of financial information in relation to the business unit operations of the Department.
The Department received funds appropriation in 1999-2000 of $157.8 million, comprising $91 million towards operations and $66.8 million as an equity contribution towards certain capital projects.
Total assets employed at 30 June 2000 were $1.5 billion ($1.4 billion).
The operations of South Australian Government Commercial Properties and South Australian Government Employee Residential Properties were consolidated into the accounts for the first time in 1999-2000. Comparative figures have been amended to reflect this.
$94 million was made available from Department funds towards reducing that part of the State’s past service superannuation liability in respect of both past and present employees of the Department. Note 5.2 to the financial statements refers. The Department’s contribution of $94 million represented a material item in the context of the final budget result of the South Australian Government for 1999-2000.
Subsection 31(1)(b) of the Public Finance and Audit Act 1987, provides for the Auditor-General to audit the accounts of the Department in respect of each financial year.
In undertaking the audit of the Department recognition was given to the diverse and self contained nature of the activities of a number of the functional areas of the Department. This acknowledged that separate financial accounting systems and processes were generally maintained in respect of the functional areas of each of the predecessor abolished Departments, particularly at the subsidiary system level.
In this regard the scope of audit in respect of the various functional areas of the Department was directed at ensuring financial systems and accounting record keeping processes and controls were at a level that provided assurance as to the integrity of processing of financial transactions and preparation of financial statement information. The reviews of the specific functional areas of the Department are, however, not undertaken in isolation of the recognition that the Department is required to operate within an overall financial management and accountability framework through consideration and appropriate application of the Financial Management Framework (FMF).
In this context specific audit attention to each functional area that was subject to review involved consideration of the:
diverse nature and risks of those areas;
integrity of the stand alone and subsidiary financial systems;
materiality of the financial operations of that area with respect to the Department’s overall operations and associated implications in regard to financial statement reporting on the Department’s operations;
requirements of the Financial Management Framework.
In more specific terms the scope of the audit included a review of the following areas of financial activity:
revenue collection, accounts payable, and personnel/payroll functions
maintenance of the general ledger and associated reconciliations and subsidiary systems
asset and liability identification, valuation and management
tendering and contract management processes
procurement and distribution operations
residential and commercial property management
Forestry operations
motor vehicle fleet management
management of whole-of-government contracts, including maintenance and information technology
management and financial reporting.
All significant matters identified during the course of the audit of the various functional areas of the Department, including financial accounting functions, systems and processes, were communicated in Audit Management letters to the Department. The letters outlined the scope of the audit and findings and recommendations emanating from the reviews. Responses received have been satisfactory. The commentary which follows in ‘Audit Findings and Comments’ hereunder provides an update on issues reported on last year and issues arising from the current years audit activity.
The Financial Management Framework (FMF) provides agencies of government with guidance on critical processes and controls to be put into place to enable the exercise of good financial management. The five basic components of the FMF are planning and analysis, reporting, asset and liability management, transaction processing and control. The FMF was issued by the Department of Treasury and Finance, effective from 1 July 1998.
As mentioned previously the external audit activity of DAIS has not been executed in isolation of the review of DAIS adherence with the requirements of the FMF. During the 1999-2000 financial year audit process, Audit has noted the progress within DAIS in reference to the application of some important aspects of the prescribed elements of the FMF. Audit observations and comments arising from an understanding of the status of the application of some of the key elements of the FMF are outlined below.
DAIS has an established strategic planning process. The process established by DAIS involves elements consistent with those of the FMF. The matter of strategic and business planning and it's linkage to the annual budget process and documents is to receive Audit review attention in the 2000-2001 financial year.
This component of the FMF covers elements of good quality reporting, both of an internal (management) and external (statutory and financial statement reporting) nature.
Audit has to date primarily focused on the external reporting requirements of DAIS to produce annually quality statutory financial statements. Audit has noted progressive improvement in the efficiency of preparation by DAIS of the annual statutory financial statements.
The issue of control over the assets of the Department was raised in last year's Report to Parliament, specifically in relation to the maintenance and reconciliation of the Fixed Asset Register. This matter is again the subject of further comment later on in this section of the Report.
This element of the FMF focuses on transaction processing in relation to the expenditure and revenue business cycles. As in the past, Audit's approach to the review of the business cycles (eg, Accounts Payable, Accounts Receivable etc) has addressed the majority of typical/traditional control matters relating to these two cycles. Where appropriate, Audit has forwarded during the year, separate Audit Management letters outlining the scope and findings arising from the reviews of the various business transaction cycles. These have been responded to by the Department in a satisfactory manner.
This component of the FMF is both integral to the FMF and to the annual opinion assessment of the Auditor-General on the reasonableness of controls exercised by DAIS in the conduct of it's financial affairs.
The following provides comments in respect of some important aspects associated with the control component of the FMF.
The implementation of the FMF from 1 July 1998 meant that a structured risk management practice is now formalised as an integral part of an overall effective agency management and control process.
In relation to DAIS, developments have proceeded since 1997-98 that align with certain requirements for risk management practice under the FMF. These developments have included the formulation of a Risk Management Policy, appointment of a Principal Adviser Risk Management and Audit Services, and the completion of a Risk Management Scoping Study of DAIS in February 2000.
Last year's Report to Parliament indicated that the Risk Management Scoping Study had been initiated and that its early completion would provide the critical basis for the preparation of an on-going Risk Management Plan. Such a Plan is described in the FMF as the central plank to risk management practice.
Although the abovementioned developments represent positive directions the Risk Management Policy and Risk Management Scoping Study are draft documents. It is considered important for DAIS to formalise endorsement of the documents (with any appropriate amendments) and to determine next actions (eg preparation of a Risk Management Plan and process regarding it's maintenance and monitoring).
The FMF requires agencies of government to implement a mechanism for monitoring and reporting on the effectiveness of the internal controls of the agency and the manner in which the controls support the agency's overall objectives. The FMF suggests the important roles that an Audit Committee and internal audit activity can play in the area of monitoring and reporting.
DAIS has implemented elements consistent with these important requirements of the FMF. DAIS has an established Audit and Risk Management Advisory Committee. It has also appointed a senior Internal Auditor to assist the Principal Adviser Risk Management in the conduct of internal reviews of the operations of DAIS as identified in the DAIS Strategic Internal Audit Plan that was prepared in conjunction with the Risk Management Scoping Study.
Again, as with the Risk Management Policy and the Risk Management Scoping Study the Strategic Internal Audit Plan is a draft document awaiting official endorsement to formalise the approved direction of Internal Audit review activity in 2000-2001 and beyond.
The FMF also emphasises the importance of establishing and maintaining an effective control environment by, among other things, documenting and distributing policies and procedures covering all major activities.
The requirement to have in place up to date key policies and procedures has been raised in some Audit Management letters issued during the year in connection with Audit reviews undertaken of various activities of DAIS.
It is considered that DAIS may need to undertake some form of project review to establish the position status concerning the completeness and adequacy of policy and procedural documentation and to determine priority areas for upgrade (where applicable) and timeframes for completion of upgrades.
Summary of Observations
DAIS is cognisant of the requirements of the FMF and is demonstrating progress through implementation of certain significant elements of the FMF. Some of these important elements now require formalisation through endorsement by the Executive of the Department to demonstrate the Department's commitment to full and effective implementation. It is considered that the Department's Audit and Risk Management Advisory Committee will need to play a critical and facilitative role in this regard. It is also Audit's view that policy and procedural documentation should receive attention to improve its currency and relevancy.
General Control Environment
The audit work undertaken and the resultant audit findings reflected the diverse nature of the activities undertaken by the Department and associated financial operation arrangements.
Issues of an internal control nature arising from the audit process, where applicable, were conveyed in Audit correspondence to appropriate management staff of the functional areas of the Department and responses advising action taken have been received or are in the process of consideration by the Department. Some matters relating to internal control are further commented on below.
The Auditor-General’s Department is presently implementing a new audit methodology software product which represents a more advanced product to that previously used. The new audit product was introduced in respect of a number of agencies during 1999-2000 including DAIS.
The new audit product requires an extended Audit review and documentation focus on the agency’s Information Systems and related Computer Processing Environments (CPE’s), in acknowledgement of their importance in supporting agency operations, providing credible information for agency financial reporting and being integral to an overall effective internal control framework of the agency. In essence the use of the new audit software product requires Audit to more fully evaluate and document the risk/control attributes associated with Information Systems and the CPE’s in forming opinions on agency internal controls and financial statements.
During 1999-2000, Audit obtained certain information from DAIS by way of an Audit Questionnaire in order to ascertain a more detailed understanding of the Key Financial Information Systems and CPE’s of DAIS. During that information gathering process, a number of important observations were made by Audit which are commented on below.
The main Audit observations from the information gathering process were:
There is a need for DAIS to finalise and promulgate policy in regard to DAIS’s internal operations in respect of Information Technology Policies and Procedures to ensure staff are aware of and adhere to the required standards.
DAIS needs to finalise a formal documented plan to comprehensively address its on going Business Continuity arrangements for the financial and operational computer systems and relevant CPE’s.
Audit noted that in relation to a computerised stock system and fleet management system, some user access levels to live production databases and Report Writing Software tools were in excess of the position responsibilities of the staff concerned.
Audit has in recent years communicated to DAIS in respect of the findings of certain information technology activity and system audits, including those undertaken of key financial information systems and in related areas. DAIS has appropriately responded to those past communications indicating that certain remedial actions would be taken. A number of those matters now need to be progressed to a stage of finalisation.
Those matters which require attention are the formalisation and documentation of business continuity plans, change management and system development methodology, security administration procedures manual, and some security specification documentation requirements within Service Level Agreements with EDS.
Additionally, certain systems used within DAIS need formal audit trails of transactions to be produced and reviewed. Further, systems in which individual uses cannot be identified (through the use of shared user identifiers), require formal mechanisms to be put in place to identify specific users of the relevant systems.
The above matters were formally communicated to DAIS in August 2000. In relation to the Audit observations and matters raised in past reviews, DAIS response of August 2000 indicated action was under consideration or being implemented.
Prior years’ Reports have referred to the role of the Department, through the Supply SA business unit (now Contract Services), in undertaking the process of tendering and management of contracts, including tendering and contract management on behalf of the State Supply Board. The Reports have also included comments on issues that have arisen from reviews of processes covering tendering and contracting performed by Contract Services.
The Procurement Reform initiative of government has resulted in changed roles and responsibilities of the State Supply Board, Contract Services and the ministerial portfolio government department agencies in regard to tender and contract management arrangement for the procurement of goods and services. In particular, the implementation of reforms has seen the devolution of certain tendering and contracting responsibilities to the government department agencies that were previously undertaken by Contract Services on behalf of the State Supply Board.
In recognition that the reform change was in full operational effect during 1999-2000 Audit undertook to review certain aspects of the change concurrent with a review of matters in relation to the administration of tender and contract arrangements associated with a category of medical and surgical supplies contracts.
Due to certain major developments within government that have required both immediate and focussed Audit examination (Electricity Assets Lease/Sales Program; Hindmarsh Soccer Stadium Project Examination) the intended review coverage has not been completed in its entirety.
Audit has finished a review of the legal and policy framework underpinning the procurement reform. The outcome of that review is discussed in Part A of this Report. Audit is now progressing the review associated with the tender/contract arrangements covering medical and surgical supplies contracts. This review is being undertaken within an overall context of examining other important aspects of the procurement reform change implemented within government.
On 23 June 1999 the Minister for Administrative Services signed a Strategic Alliance Deed (the Contract) which outsourced the warehouse logistics operations of Supply SA. The Contract followed an October 1998 Cabinet submission that approved the contracting out of the warehousing operations that were previously undertaken by the Department. Financial analysis provided as an attachment to the Cabinet Submission suggested the operations to be outsourced had estimated annual receipts of approximately $20.5 million, and the restructured operations would reduce net operating expenditure by approximately $1 million per year.
During 1999-2000 Audit undertook a review of some salient matters associated with the changeover to the service provider including certain aspects of the contractual arrangements. The review revealed a number of significant matters with respect to contractual arrangements, stock management control and information systems arrangements. Audit considered that these issues needed to be resolved as a matter of priority, particularly as the warehousing arrangements involve ongoing private sector participation. The matters are outlined hereunder.
Audit noted that the contract arrangements for the Supply SA warehousing operations did not address the Auditor-General’s requirements under the Public Finance and Audit Act 1987. The contract reserves the right of the Minister to audit the Contractor’s performance of the logistics services. However, it was noted that the contract did not provide for access or audit rights to the Auditor-General.
It is important to note that the contractual arrangements have implications for the processing and security of Government information and systems, and extends to the contractor’s responsibility over physical stock owned by the State. In the absence of an adequate contract clause for the Auditor-General to access and review the operations under the contract there is a potential limitation on the audit process and the ability of the Auditor-General to discharge responsibilities under the Public Finance and Audit Act 1987.
To facilitate future Audit review processes Audit recommended that DAIS formally communicate with the contractor advising the statutory audit position of the Auditor-General and informing the contractor that an annual review of systems and processes will be undertaken by the Auditor-General’s Department.
The Department advised its intention to amend the contract to specifically provide for Auditor-General access.
Audit noted that some intended conditions to apply in respect of the proposed outsourcing arrangements and which were considered by Cabinet and included in tender documents did not proceed to inclusion in the final outsourcing contract arrangement. This resulted from inadequate due diligence of some issues important to the proposed outsourcing arrangement prior to seeking Cabinet endorsement and formulation of tender and contract documentation.
The Department has acknowledged deficiencies in the due diligence process associated with the information of the final contract and indicated that a review will be undertaken to explore the nature of those deficiencies.
For a period of time there were limitations in the effective control exercised over warehousing stock prior to its transfer to the service provider.
Prior to the stock transfer, deficiencies were present in the stock system recording stock and stock movements. As a consequence uncertainty existed over the integrity of stock information recorded on the system. Although this unsatisfactory position existed, the transfer of stock from the Department to the service provider proceeded in October 1999 without a complete and formalised stocktake transfer process.
Stock variations between the service provider’s records of stock takeover and the Department’s system and records of stock holdings and transfers were not able to be adequately explained due to the deficiencies in the stock system and stocktake transfer process.
It was only in March 2000 that the Department and the service provider jointly undertook a formal stocktake to establish an agreed stockholding figure. The Department has indicated that the agreed stock holding coming out of the March 2000 stocktake has now been formally signed off by both parties. Formal policies have also been established with respect to stock losses.
The service provider is utilising a computerised stock control system to manage warehousing stock. In this regard the Department needs to be satisfied that the system is reliable both from an operation and control viewpoint. Audit raised with the Department a number of issues, including information system security and continuity planning arrangements, that required examination and actioning to obtain some assurance as to the ongoing reliability of information produced from the system and used by the Department.
The Department has indicated that the issues raised by Audit have been addressed or will receive attention.
The cost to the State of the provision of services by the Contractor involves a management fee plus reimbursement for costs that are not subject to specific limits. Therefore, the ability of DAIS to restrict such reimbursable costs is effectively limited to ongoing negotiation with the Contractor.
In this regard Audit considered it important that the Department put in place regular key financial performance reviews of reimbursable costs through Key Performance Indicators, including the establishment of upper and lower limits over cost levels.
The Department has advised that it will pro-actively manage the contractual arrangement to ensure the appropriateness of costs subject to reimbursement.
In any contract where service provision is outsourced to the private sector, monitoring of compliance with contract conditions is of fundamental importance. Audit noted that monitoring processes had not been formalised, including the reporting protocol to senior levels of management in respect of the outcome of these monitoring processes.
The Department is developing a contract management plan involving a compliance checklist to be utilised in the monitoring of contract conditions.
In March and April 1998 the Department finalised outsourcing arrangements with respect to facilities management services provided in relation to selected Government agency assets. The overall arrangement provided for three private contractors (referred to as Facilities Managers) to supply building maintenance and minor works services, with each contractor being allocated service responsibilities to Government agencies within different geographical areas covering metropolitan Adelaide. The estimated value of work relating to the three contracts was $35 million. Building Maintenance Services of DAIS was retained to provide services to a fourth geographical region.
Concurrent with developments relating to the outsourced arrangements the Department, during 1997-98, proceeded to develop the Facilities Asset Management Information System (FAMIS) to be utilised by the Department, Facilities Managers and the relevant client Government agencies in the operational, financial and performance management of the outsourced maintenance activities.
The 1998-99 review of the operations of FAMIS revealed certain matters, which were raised with the Department. Two matters that were still being addressed at the time of the Audit, following review in 1999-2000, were:
The requirement to establish a check within FAMIS to ensure that all jobs are being charged at the correct rates, as outlined in the contracts.
The need to clarify the existing status and obligations of all parties with respect to the operation of the Incentive Payments scheme envisaged under the individual contracts with the Facilities Managers.
In relation to the first matter the Department has advised that a valid rate checking mechanism has been developed for implementation into the FAMIS computer system during October, 2000. A review process has also been established to monitor rate discrepancies.
Regarding the second matter the Department has indicated that it has advised the Facilities Managers of their performance obligations in relation to the incentive payments arrangements. Audit was also advised of the position status of the Facilities Managers concerning payment of incentives.
CKS Facilities Management (SSA) Pty Ltd (CKS) was one of the three original private contractors awarded a facilities management contract by DAIS. During 1999-2000 CKS appointed an administrator due to their insolvency. As a result of the appointment of the administrator and the financial difficulties being experienced by CKS, DAIS assessed that there existed a serious risk to continuity of service provision. Consequently the contract with CKS for the provision of facilities management services was terminated by DAIS.
The CKS Administrator advised DAIS that $1.43 million had yet to be billed to DAIS for work performed by CKS under the contract prior to contract termination. DAIS engaged a consultant to assess the validity of this amount and, in consideration of this work and negotiations with the Administrator, the Minister entered into a Deed of Company Arrangement whereby the Minister agreed to pay an amount of $1.3 million to settle the amounts owing.
This payment was made on the basis of certain conditions, including that the payment represented full and final settlement of any liability the Minister has to the Company and related parties, and that the money be directed to maximising the return to former employees and trade creditors of CKS.
The work that was previously performed by CKS was re-allocated to one of the existing private facilities management contractors and the Building Maintenance Services Business Unit of DAIS.
Audit noted problems being experienced by a private Facilities Manager in relation to billing for maintenance work performed. Audit communicated with the Department in relation to this matter requesting advice as to the process of confirmation to be implemented by the Department to satisfy itself regarding material claims submitted by the Facilities Manager for under-billed work.
The Department has indicated that a comprehensive audit process is to be applied to the verification of under-billed work and payments for outstanding claims is dependent on the results of the audit process. Audit will follow up on this matter.
My last Report made comment that resolution of management issues pertaining to the future management and funding arrangements of the Land Ownership and Tenure System (LOTS) had not been finalised and were the subject of discussion between DAIS and Department for Environment and Heritage (DEH) at that time. During the year Audit has communicated with both DAIS and DEH to ascertain an update status on the progress towards finalisation of these issues.
Advice received from the agencies indicates certain action has been taken towards facilitating resolution, notably, DAIS engaged independent consultants to provide a detailed independent commentary on the outstanding issues between DAIS and DEH, and assistance was sought from the Department of Premier and Cabinet in resolving these issues.
The independent consultant reports together with assistance from the Department of Premier and Cabinet have resulted in the development and negotiation of a Heads of Agreement document between the two agencies. The document defines the agencies roles and responsibilities, recognises that DAIS is the custodian of land administration data and the need for Service Level Agreements to be finalised for certain IT services provided by DEH. Audit understands that DAIS intends to progress matters within the Heads of Agreement document by December 2000.
Audit considers that significant progress of outstanding issues is of paramount importance, as it should result in clarification of critical matters, including the issue of ownership of software and applications of the LOTS system.
Finalisation of the future management and funding arrangements of LOTS has been outstanding for over two years. This is an important matter which needs to be progressed and finalised with a degree of urgency.
Audit review of the financial accounting operations of the Land Services Group (LSG) in 1999-2000 focussed on the revenue raising, receipting, and banking functions in relation to the registration of documents and provision of property information. The audit revealed that there was scope to improve controls over the following areas:
Introduction of increased segregation of duties in relation to the preparation of summary receipting and banking documents.
Need to enhance security arrangements over the banking of receipts and access to safe holding facilities.
Need to develop a comprehensive policy and procedures manual.
Clarification of arrangements and controls in place with respect to the receipting and forwarding of money by DEH to DAIS.
The Department has responded in a satisfactory manner to these issues.
The Real Estate Management Business Unit is responsible for managing the Government’s portfolio of owned and leased office accommodation and housing assets and comprises the Residential and Commercial Properties Divisions.
Audit review of this area identified delays in the implementation of key financial system upgrades within the Commercial Properties Division. As a result a number of important control procedures have not been operational. More specifically, there were significant delays experienced in implementing the AccPac general ledger. As a consequence the finance area have been unable to conduct a number of important control procedures such as reconciliation of accounts receivable and payable subsidiary system data, reconciliation to the DAIS Corporate General Ledger (Masterpiece) and lack of management review of actual profit and loss results.
Audit follow up of this matter as part of the year end audit process revealed that the upgrade to the financial systems had only been completed in June 2000 and as at 30 June unexplained variances existed between the AccPac General Ledger, the key subsidiary systems and the DAIS Corporate General Ledger. In recognition of this position Audit has performed additional alternative verification procedures to enable account balance confirmation for DAIS financial statement purposes. Audit will continue to monitor developments directed towards remedying this position.
In last year’s Report Audit raised a number of issues relating to the recording of fixed assets of the Department. The main issue related to material unexplained variances between the asset registers and the General ledger as at 30 June 1999, resulting in a number of asset write-off adjustments to the general ledger.
The Department recognised that better processes were required with respect to the recording of assets and indicated that a project team was to be established to set up one integrated asset register.
The Department, during the year, has not achieved implementation of the proposed integrated system. In 1999-2000 two primary asset register systems were maintained and Audit review of the arrangements and processes in place in relation to those systems identified a number of matters:
Regular (monthly) reconciliations were not being performed between the Asset Registers and the General Ledger.
Scope to improve system access controls.
The need to establish formal policy and procedure manuals.
The need to formalise contractual arrangements and clarify intellectual property rights with respect to the provider and developer of one of the asset registers.
The Department has responded that a new integrated fixed asset register system is due to commence operation early in the new financial year and will address the issues that have been raised by Audit.
In previous years my Report has included comment on a number of matters regarding the operations of the Concept payroll system. Concept is the main personnel and payroll processing system for the Department. While some of the matters raised previously have been addressed a number of issues raised remain outstanding. The outstanding matters relate to:
Some key checks over processing of personnel and payroll information were not being performed at the input and output stages of the processing cycle.
Regular reconciliation of Concept to the Masterpiece General Ledger;.
The need to establish documented policies and procedures.
The requirement to standardize the records retained with respect to termination payments.
These matters have been communicated to the Department and responded to in a satisfactory manner.
As required by subsection 36(1)(a)(iii) of the Public Finance and Audit Act 1987, the audit of the Department for Administrative and Information Services 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. The assessment also considered whether those controls were consistent with the prescribed elements of the Financial Management Framework as required by Treasurer’s Instruction 2 ‘Financial Management Policies’.
Audit formed the opinion that the controls exercised by the Department for Administrative and Information Services 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.
The Department recorded an operating profit before abnormal items and tax of $121.8 million. Note 32 to the financial statements provides operating performance information in relation to the business unit operations of the Department. The following graph provides a summary of the contribution to the operating result by the major business unit areas of the Department. Business and corporate services have been excluded from this analysis as the majority of their costs are recovered through re-charges to the other business units.
Assets under the control of the Department amounted to $1.5 billion at 30 June 2000. Over fifty percent of that asset holding relates to Forestry operations, including $578 million on account of growing timber. The following chart provides a summary of the major asset categories and their materiality proportionate to the total assets of the Department.
Other assets in the chart includes $36 million in connection with the establishment of the Government Radio Network. Note 2.8 to the financial statements provides information concerning the establishment of the communication network.
The Department, through Forestry SA, manages South Australia’s plantation forests and markets wood to industry at an agreed rate of return to the forest owner and also provides competitive services to the industry, community and government. The South Australian Forestry Corporation Act 2000 was assented to on 20 July 2000. When proclaimed the statutory corporation (the South Australian Forestry Corporation) established under this Act will undertake the functions and operations of Forestry SA. Refer ‘Further Commentary on Operations’ later in this section of this Report.
In May 1996 I tabled in Parliament a special report titled ‘Valuation of Forest Assets’. The technical report was concerned with the valuation of forests for the purpose of accounting and auditing an enterprise that owns, manages or leases forests.
Notwithstanding the fact that this report acknowledged that the technical standards adopted by the former Department of Primary Industries - Forestry are of a very high standard and probably without peer in Australasia, there are some matters where it has been acknowledged that steps can be taken to improve the acceptability for financial reporting and auditing purposes of the estimation of ‘growing timber’ in State forests.
In respect to the issue of auditability Forestry SA has been enhancing systems and databases associated with predicting growing timber and accounting for actual harvesting outcomes to improve comparability of information produced by these systems. Audit, during 1999-2000, 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 reassessed for removal from the Independent Audit Report. Consistent with prior years I have commented in the Independent Audit Report for the year ended 30 June 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.
The following table summarises valuations of growing timber for the past 5 years by region and revaluation increments (decrements).
|
2000 |
1999 |
1998 |
1997 |
1996 |
Region |
$’million |
$’million |
$’million |
$’million |
$’million |
South East Region: |
|
|
|
|
|
Young plantations |
24.9 |
22.4 |
23.5 |
24.1 |
25.0 |
Old plantations |
478.5 |
469.1 |
473.9 |
496.2 |
501.0 |
Central and Northern Regions: |
|
|
|
|
|
Young plantations |
3.4 |
3.3 |
3.7 |
3.6 |
3.8 |
Old plantations |
71.7 |
71.3 |
71.1 |
80.4 |
80.8 |
|
578.5 |
566.1 |
572.2 |
604.3 |
610.6 |
Revaluations: |
|
|
|
|
|
Increment (Decrement) |
12.4 |
(6.1) |
(32.1) |
(6.3) |
(4.5) |
As stated in Note 2.7 ‘Valuation Methodology - Growing Timber’ 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 Forestry SA should not be interpreted as a ‘current market valuation’ as its use by Forestry SA is not designed to represent those values that could be realised at the date of valuation.
The Government entered into a sale and leaseback facility managed by the Commonwealth Bank of Australia on 9 May 1996. On that date the Government sold all existing vehicles to a company for $175.8 million. The book value of the vehicles at the time was $169.9 million. The facility is set up on a perpetual basis with both parties having the option to terminate the agreement from year eight onwards. Once notice has been given that the facility is to be terminated the agreement has a ‘wind down’ period of seven years. The Department is responsible for the management of the motor vehicle lease arrangements.
Whilst Audit agreed with the Department that the lease facility was a finance lease as defined by Australian Accounting Standard AAS 17 ‘Accounting for Leases’, there was a divergence of opinion on the interpretation of a number of key definitions in the Standard. The matters on which there was a divergence of opinion were fully explained in Part B of the 1995-96 Report of the Auditor-General to Parliament. In summary, the Department considered that the underlying asset is not the individual vehicles used by government agencies but a ‘pool’ of vehicles which is available for use and that a component of the residual value on the vehicles is not guaranteed by the Government. Audit, however, considered that there are separate ‘lease agreements’ in place for each vehicle and that the Government, under the lease facility, guarantees the full residual value of the vehicles.
As the difference in interpretations resulted in a material difference to the amounts disclosed in the Department’s financial statements, Audit has issued a qualification since the inception of the lease facility in 1995-96 in respect of the following asset and liabilities:
Motor vehicles under finance lease.
Current borrowings ¾
finance lease on motor vehicles.
Non-current borrowings ¾
finance lease on motor vehicles.
Other current liabilities ¾
deferred profit on sale and leaseback of motor vehicles.
The Department for Administrative and Information Services (DAIS) has maintained, in respect of this year’s financial statements, the reporting treatment adopted in respect of last year’s financial statements. As such, Audit has again included a qualification in the Independent Audit Report for the year ended 30 June 2000 in respect of the aforementioned financial statement disclosure items. In Audit’s view had there been compliance with the requirements of the Standard, assets of DAIS would increase by $78.5 million and liabilities would increase by $75.2 million.
Previous Reports have included comment in relation to difficulties encountered by the Department in determining the value of linen rental stock in service in relation to Central Linen operations. This has been a result of the nature of delivery of linen to customers and its subsequent return to Central Linen, which has meant that it has not been possible to substantiate the value of linen establishment by stocktake. Because of these difficulties Audit was uncertain as to the reliability of the value assigned to this asset and the resultant effect on the Department’s operating result. In this regard the Independent Audit Reports issued in respect of prior years’ financial statements have included qualification comment in relation to this financial statement disclosure item.
Although the Central Linen business was sold during 1999-2000 a qualifying comment has been included in the Independent Audit Report covering the 1999-2000 financial statements with specific reference to the 1998-99 comparative figures.
Qualification
Growing Timber
The Department manages South Australia’s plantation forests. In relation to Forestry operations the Department 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 models used in the estimation of growing timber and to report on the auditability of the models. In summary, the consultant’s findings were that the models 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 auditability of the estimates of the volume of standing timber. This precludes the independent attestation of these estimates within an acceptable level of audit confidence.
The Department responded positively to the consultant’s recommendations and has been enhancing systems and databases associated with predicting growing timber and accounting for actual harvesting outcomes to improve comparability of information produced by these systems. Audit, during 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 reassessed for removal from the Independent Audit Report.
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.
Light Motor Vehicles
Note 2.13 to the Financial Statements sets out the accounting policy with respect to the sale and leaseback of motor vehicles previously owned by the Department. In my opinion the approach adopted by the Department is not consistent with the principles of Australian Accounting Standard AAS 17 ‘Accounting for Leases’, and in the absence of a superior standard does not appropriately reflect the value of the underlying assets and liability of the transaction. Financial statement balances affected are:
Assets
Motor vehicles under finance lease.
Liabilities
Current borrowings - Finance lease on motor vehicles
Non-current borrowings - Finance lease on motor vehicles
Other current liabilities - Deferred profit on sale and leaseback of motor vehicles
In my opinion, had the standard been properly adopted, assets would increase by $78.5 million and liabilities would increase by $75.2 million.
Linen Establishment
The 1999-2000 financial statements include comparative figures for the preceding financial year which were the subject of a qualification in the previous year in relation to Linen Establishment.
As indicated in Note 2.9 to the Financial Statements, linen establishment is the linen rental stock in service. As a result of the nature of delivery of linen to customers and its subsequent return to Central Linen, it is not possible to substantiate the value of linen establishment by stocktake. It is recorded at management valuation based on current operational practices and data for the industry. In my opinion there is uncertainty as to the reliability of the value assigned in 1998-99 to linen establishment of $4 000 000.
Qualified Audit Opinion
In my opinion, except for the effects on the financial report of the matters referred to in the qualification paragraphs, the financial report presents fairly in accordance with the Treasurer’s Instruction’s 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 Department for Administrative and Information Services as at 30 June 2000, the results of the Department’s operations and its cash flows for the year ended 30 June 2000.
The Department has responsibility for the planning and coordination activity associated with the whole-of-government direction in regard to Information Technology. In relation to the review of management arrangements and developments associated with Government IT initiatives, Audit’s observations on aspects of certain key initiatives subject to review during 1999-2000 are commented on below.
Last year’s Report made comment that the Economic Development Reports to be provided by EDS (Australia) Pty Ltd (EDS) were required to be certified by an independent auditor. I also indicated that it was considered necessary to develop a framework for the audit consistent with the certification requirement of EDS in respect of the Report. Further, the framework and audit process would require an amendment to the contract.
In August 1999, guidelines for the Economic Development Report verification process were agreed by the parties. Three EDS Economic Development Report’s for the periods to 30 June 1999 have been subject to Independent Audit Reports in accordance with the August 1999 agreed framework and have been received by DAIS. At the time of preparation of this Report, the required amendment to the contract had not been finalised.
Last year’s Report indicated that DAIS had initiated action regarding a market price review process for certain contract segments, and for a mainframe pricing audit. Audit sought advice from DAIS during the year as to the status of these reviews. At the time of preparation of this Report Audit understands that the reviews have not reached a stage of finalisation.
Management of EDS Payments and Receipts
Last year’s Report made comment that there was a need to formalise administrative procedures documenting the checking processes with respect to payments to EDS and recovery of those payments from Government agencies. Audit review of this matter in 1999-2000 identified that formal procedures had been established.
Review of EDS IPC
In last year’s Report, I advised that a review of certain EDS managed Information Technology Sites (including the EDS Information Processing Centre) was in progress and would be finalised in early 1999-2000. That review has now been finalised and the findings emanating from the review are commented on in Part A of this Report.
Audit is in the process of reviewing some matters associated with the Government Radio Network Contract (SA-GRN) project.
During 1999-2000, Audit sought and obtained documentation from DAIS relating to certain key events for the SA-GRN project.
Some of the more salient matters arising from Audit’s review of that documentation and through discussion with officers of DAIS, are commented on below, notably with respect to:
Completion - Key Milestones.
Asset Register and Management System.
Industry Development Activities.
The Network Operation Control Centre (Accommodation) and Metropolitan Business Region (Part of Business Region 1) have reached a stage of completion and have been formally accepted by DAIS. Business Region 1 is principally operational but had not been accepted as completed by DAIS at the time of preparation of this Report. Completion for Business Region 1 was due in June 2000. Certain other key deliverables were awaiting finalisation, acceptance and payment.
The agreement between the Government and Telstra Corporation Ltd (Telstra) requires an asset register and an asset management system to be maintained by Telstra to manage the infrastructure assets associated with the SA-GRN on behalf of the State. The Asset Management System was due for completion in July 2000. At the time of preparation of this Report, the Asset Management System had not reached a stage of finalisation.
With respect to the Asset Management System, Audit raised with DAIS the need to consider a policy statement on useful life and depreciation rates for the recording and management of GRN assets including agency small items such as mobile handsets, to ensure consistent management and accounting treatment amongst agencies.
The agreements with Telstra and Link Telecommunications Pty Ltd (Link), require the production of review reports to demonstrate achievement of Industry Development Initiatives. The reports are reviewed by a Review Committee comprising representatives of DAIS (including the Information Economy Policy Office), Department of Industry and Trade, Telstra and Link respectively. At the time of preparation of this Report, Audit has been provided with copies of reports to December 1999 and January 2000 respectively which had been subject to Review Committee appraisal.
Note 7 to the DAIS financial statements refers to the sale of Central Linen assets and outsourcing of linen services to a private sector operator. This sale and outsourcing occurred in January 2000. The arrangements put in place included:
The sale of land and assets pursuant to a Contract for the Sale and Purchase of Land and an Asset Sale and Purchase Agreement.
The execution of a linen service contract by the Minister for Human Services. This contract provides for the private sector operator to provide contract mandated linen services to public health units for an initial five year period with a further renewal period of five years.
A Cabinet approved submission of October 1999 noted that there are strong strategic reasons (in particular the avoidance of industrial, business and employee risks) for proceeding with the sale of Central Linen despite an estimated cost to Government of $5.8 million in net present value terms over ten years. A significant on-going cost to Government relates to the redeployees previously working within the Central Linen business unit. These redeployees continue to be the responsibility of DAIS and are managed by it’s Placement Services Unit.
In previous Reports comment has been included in relation to the abovementioned facility arrangement. Earlier comment in this section of this Report provides background information to the facility arrangement and discusses it’s financial reporting treatment. The main benefit from entering into the facility was the anticipated achievement of a lower cost of funding the Government’s vehicle fleet.
Audit comments in past Reports have communicated the importance of exercising proper management over the ongoing arrangements due to the long term nature of the lease facility and its expected benefits over the extended period of time. This required an ongoing analysis of the elements affecting motor vehicle lease rate calculations to enable a proper assessment of the potential impact on the cost of the leaseback facility to the Government and ultimately expected benefits to be derived. The elements requiring consideration include changes in residual values of vehicles; changes in taxation law; and the number of replacement vehicle leases.
In the latter part of 1999-2000 the Department of Treasury and Finance initiated a review of the facility to determine whether it remains economic, particularly in light of the changes to the taxation system. The Department of Treasury and Finance have advised audit that the review is expected to be finalised in September 2000.
The South Australian Forestry Corporatisation Act 2000 (the Act) was assented to on 20 July 2000. The Act requires the Corporation to comply with the provisions of the Public Corporations Act 1993. Specifically, the Act provides for the establishment of the South Australian Forestry Corporation (the Corporation) to carry out the following functions:
To manage plantation forests for commercial production.
To encourage and facilitate regionally based economic activities based on forestry and other industries.
To conduct research related to the growing of wood for commercial purposes.
Any other function conferred on the Corporation by an Act or the Minister.
The Act provides for a five member Board of directors to be established as the governing body of the Corporation. The Act will come into operation on a day to be fixed by proclamation. It is expected that the Act and the Corporation will come into operation early in the 2001 calendar year.
Presently, the States plantation forests are managed by the Forestry SA business unit of DAIS and these operations are reflected in the financial statements of DAIS. Once the Act comes into operation this function will be undertaken by the Corporation.
As part of the preparation for the establishment of the Corporation the responsible Minister instituted a Forestry SA Corporatisation Steering Committee. The Committee includes senior representation from DAIS (including Forestry SA and Office for Government Enterprises), the Department of Treasury and Finance and the Department of the Premier and Cabinet. The Steering Committee is chaired by the Chief Executive of DAIS. Three Working Groups currently report to the Steering Committee and undertake all project tasks forming part of the corporatisation program. The three groups are:
Financial/Corporate — to address issues such as capital structure, community service obligations, dividend policy, taxation arrangements and whole-of-government policies.
Legislation and Implementation — to cover matters such as project planning, the Charter and Performance Statement, Board appointments and other legislative matters.
Human Resources — to consider employee and union communications and employee transfer arrangements.
The Corporation will be subject to audit by the Auditor-General.