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

Welcome2013-14 Financial Audit Seminar

Mr Malcolm PrenticeActing Director, Financial Audits

Address by the Chair, Standing Committee on Public Accounts

Mr Brendan Smyth, MLA

Key Audit Findings from Past Audits

Mr Saman (Sam) MahaarachchiAudit Manager

Outline

• Audit Findings• Computer information systems• Risk management• Other findings

• Quality of financial statements

Audit Findings

• Matters of governance interest• Reported to those charged with governance• Include:

- weaknesses in governance and internal controls

- Fraud- legislative breaches- reporting errors

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.

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.

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Risk registers being out of date, incomplete or inconsistent

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

Quality of Financial Statements

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

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.

Questions?

Thank You

Accounting Update

Emerging issues in the public sector

Adrian King

Amy Senti

www.pwc.com.au

PwC

Agenda

Key topics:

Employee benefits – AASB 119

Fair value – AASB 13

Control – AASB 10

Changes on the Horizon

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Employee Benefits – AASB 119

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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 101 - no change

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?

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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’

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Fair Value – AASB 13

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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“Exit ” Price

Not settlement or extinguishment

Not settlement or extinguishment

Not liquidation/forced sale

Not liquidation/forced sale Not entity-specificNot 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.

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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 requirementsCredit risk

Highest & best use (non–fin assets)

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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

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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

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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

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Control – AASB 10

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Consolidation

PowerPower

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 returnsExposure or rights to variable returns

Ability to use power to affect returnsAbility to use power to affect returns

Principal/agent assessment

De facto agent assessment

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Consolidation by not-for-profits (NFPs)

• Could significantly impact consolidation by NFPs

• AASB 2013-8 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.

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Changes on the Horizon

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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

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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

PwC

PwC Contacts

Adrian KingDirector – Assurance

P: +61 (2) 6271 9247 E: [email protected]

Amy SentiSenior Manager – Assurance

P: +61 (3) 8603 6404E: [email protected]

Risk of Fraud

Friday 2 May 2014

Allister Higgins – Associate Director

KPMG Forensic

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 8001-2008) 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”



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



Conditions that allow fraud

$

OpportunityUnder the organisation’s control

Incentive orPressureGenerally Not under the organisation’s control

Rationalisation

Perpetrators ability to justify their actions

How does Fraud Occur



The crime

More than 50% of large organisations experiencing fraud

Who is affected?

Small

Medium

Large



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

■ 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



Profile of the fraudster

Who is the face of major fraud?

What are the other characteristics of a typical fraudster?



Profile of the Fraudster



The power of collusion

410410

665665

2010

2012

Average time (days) to detect collusive fraud



Most important factor contributing to the largest fraud incident



In considering fraud risk, where should you look?



What is most likely in the ACT?

■ Theft of Assets

■ Procurement Fraud

■ Abuse of official position

■ Bribery

■ Data Theft



Assessing the Risk of Fraud – what should you be doing?



Questions?

Thank you

Allister Higgins

Associate Directors

KPMG

[email protected]

© 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.

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

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

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

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

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

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

Fair Value – Model Financial Statements

o Applies to 2013-14 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

Fair Value – Hierarchy 3 Levels

Level 1Quoted 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 3Inputs that are unobservable for particular assets or

liabilities.

57

Example – Fair Value Hierarchy

2014 Property, Plant & Equipment at Fair Value

Classification by to Fair Value Hierarchy ($’000)

Level 1 Level 2 Level 3 Total

Land 38,350 6,524 44,874

Buildings 61,375 22,701 84,076

Lease Improvements 5,806 5,806Infrastructure Assets 3,408,660 3,408,660Community & Heritage Assets 144,738 144,738

99,725 3,588,429 3,688,154

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

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


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


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


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

Fair Value Measures Using Significant Unobservable Inputs (Level 3)

2014 Land Buildings LeaseholdImproves

Infra-structure

Assets

Community & Heritage

Assets

Fair Value at start of period 3,808 17,853 5,958 3,462,299 129,139

Additions 928 1,571 600 32, 250

Assets Classified as Held for Sale

Revaluation increments/(decrements) recognised in Profit or Loss - - - -Revaluation increments/(decrements) recognised in Other Comprehensive Income 1,256 3,450 7,610

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

Fair Value Measures Using Significant Unobservable Inputs (Level 3) - Continued

2014 Land Buildings LeaseholdImproves

Infra-structure

Assets

Community & Heritage

AssetsAcquisition/(Disposal) through Administrative Restructuring 238 340 15,640

Acquisition/Disposal From Transfers 452 421 (871)Impairment Losses Recognised in the Operating Surplus/DeficitReversal of Impairment Losses Recognised in the Operating Surplus/Deficit

Other Movements (158) (162) (1,130)

Fair Value at end of period 6,524 22,701 5,806 3,408,660 144,738Total 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 - - -

- -


64


Information - Significant Unobservable Inputs Level 3 Fair Value MeasurementsDescription 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 m2

($500per m2)

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 (m2)

$5,000 - $5,200/m2

($5,075/m2)

Higher historical cost per m2 increases fair value.

65


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



50% - 10% Greater consumption of economic benefit or increased obsolescence lowers fair value.

Infrastructure Assets$3,408,660



20% - 1%(4% per year)


Historical cost per cubic metre (m3)

$500 - $550 per m3

($530 per m3)Higher historical cost per cubic metre (m3) increases fair value.

Community and Heritage Assets$144,738



20% - 1%(4%)


2013-14 Whole of Government Reporting

Requirements

Natasha BourkeSenior Manager– Budget Coordination and Reporting Chief Minister and Treasury Directoratex 70133 [email protected]

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

Web Book

9 July Open Based on Oracle 6th working day

10 July Close Data will be consolidated for Government Finance Statistics reporting to the ABS

25 July Open Based on Oracle ADJ period

28 July Close Data will be consolidated to produce the June Quarter Report (interim outcome)

This data must match agency certified statements

30 July Close Variance comments closed

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

Key Issues – Whole of Government

Largely unchanged from 2012-13 Accuracy of interim outcome to financial

statements Variance explanations – little improvement in

quality for 2012-13 Internal trade errors – target <$100m

‒ 2012-13 = $299m‒ 2011-12 = $416m‒ 2010-11 = $102m

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

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

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 (6th 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

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

Dr Maxine Cooper (Auditor-General)

Address by the Auditor-General

Mr Malcolm PrenticeActing Director, Financial Audits

Conclusion

Thank You

Documents

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