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Speech - External Scrutiny of Government Decisions -- Trends and Lessons Learnt.htm
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<DIV align=center><FONT face="Times New Roman" size=4></FONT><B><FONT face=Arial
size=7>External Scrutiny of Government <BR>Decisions – Trends and Lessons
Learnt</FONT></B><BR><BR><FONT face=Arial size=6>Address by Pat Barrett,
AM<BR>Auditor-General for Australia</FONT><BR><BR><FONT face=Arial
size=5>Special thanks to Ron Richards for his assistance in the </FONT><BR><FONT
face=Arial size=5>preparation of this address</FONT></DIV><BR><B><FONT
face="Times New Roman" size=5>I. Introduction</FONT></B><BR>
<UL>
<UL><I><FONT face="Times New Roman" size=4>I had …come to an entirely
erroneous conclusion which shows, my dear Watson, how dangerous it always is
to reason from insufficient data.</FONT></I><I><SUP><FONT
face="Times New Roman" size=4>1</FONT></SUP></I><I><FONT
face="Times New Roman" size=4> </FONT></I><FONT
face="Times New Roman"></FONT><BR></UL></UL>
<DIV align=right><B><FONT face="Times New Roman">Arthur Conan Doyle,
1892</FONT></B></DIV><BR><FONT face="Times New Roman" size=4>Decision-making is
central to human activity. That is, basically we are all decision makers. On a
daily basis managers tend to make many decisions. Some decisions are routine
while others may have a significant impact on the operations of the
organization. A good decision is unlikely to arise by accident, tossing a coin,
asking an oracle or using an astrologer. Nevertheless, it may often ultimately
depend on the judgement of the decision-maker. </FONT><BR><BR><FONT
face="Times New Roman" size=4>Critical decisions, ideally, should not be wrong
or have an adverse impact into the future. An example from the defence arena is
‘force structure’ decisions where sub-optimal decisions will not only place the
defence of the nation at risk but are almost impossible to correct or overcome
in the short to medium term. In our increasingly complex environment, the task
of decision-makers is becoming more challenging with managers needing to respond
quickly to events that seem to take place at an ever-increasing pace with a
bewildering array of choices and consequences to consider.</FONT><BR><BR><FONT
face="Times New Roman" size=4>The process of managerial decision-making is
synonymous with the practice of management, that is, decision-making is at the
core of all managerial functions. The complexity of today’s environment has
meant that it is no longer possible for one individual to be aware of all the
issues nor to make all decisions regarding an organisation’s operation – even
with a relatively small span of control. The factors affecting decisions are
often so numerous and their effects so pervasive that ‘seat of the pants’
decisions are no longer acceptable. Effective decision-making requires the
availability of information, analysed and summarised in a timely fashion. We are
now often required not only to defend our decisions, but also the basis on which
they are made.</FONT><BR><BR><FONT face="Times New Roman" size=4>Following this
theme, my colleague, Ron Richards, drew my attention to Paul Barry’s book
</FONT><I><FONT face="Times New Roman" size=4>‘Rich Kids’</FONT></I><FONT
face="Times New Roman" size=4> which provides an insight into some of the
excesses of decision-making at the ‘big end of town’, as the following
illustrates:</FONT><BR>
<UL>
<UL><I><FONT face="Times New Roman" size=4>Despite the chaos, Jodee was not
prepared to wait. His attitude had always been to get customers first and
fix problems later….One senior manager described it as a suicidal decision,
and says it [the launch of Next Gen] should have been delayed six months.
But Jodee is adamant that he made the right decision, and does not recall
anyone advising him against it….One.Tel had always been a thinly disguised
autocracy in which Jodee made all the key decisions, and it was getting more
like that as time went on .</FONT></I><SUP><FONT face="Times New Roman"
size=4>2</FONT></SUP><FONT face="Times New Roman" size=4> </FONT><FONT
face="Times New Roman"></FONT><BR></UL></UL>
<DIV align=right><B><FONT face="Times New Roman">Paul Barry,
2002</FONT></B></DIV><BR><FONT face="Times New Roman" size=4>Turning to my task
for today, I have been asked to give a watchdog’s perspective on government
decision-making. Although Lord Justice Lopes referred to auditors as
</FONT><I><FONT face="Times New Roman" size=4>‘a watchdog and not a blood
hound’</FONT></I><FONT face="Times New Roman" size=4> the former is not a term I
particularly like. However, staying with the term, this particular watchdog
relies significantly on the power of public disclosure. The ANAO operates mainly
in the context of public opinion of which Parliament is arguably the most
influential and the most vocal. Our central function is to report, that is, to
make people aware of what is happening. Like a watchdog, it is our bark that
alerts others to the existence of something wrong in public administration.
However, I would also add that, for the most part, we provide assurance that all
is well. To undertake this role, the independence of my Office is essential and
critical. </FONT><BR><BR><FONT face="Times New Roman" size=4>In the public
sector, external independent audit is a critical element in the accountability
chain and the importance of the independence of my Office in that respect cannot
be overstated. It is vital that Auditors-General have all the professional and
functional freedom required to fulfil fearlessly, professionally and
independently, the role required of them. This is particularly so in today’s
climate with the convergence of the public and private sectors, the management
environment becoming inherently less open and riskier, and with the heightened
concerns for public accountability. The latter reflects Senate action on
commercial-in-confidence considerations in contracts</FONT><SUP><FONT
face="Times New Roman" size=4>3</FONT></SUP><FONT face="Times New Roman">
</FONT><FONT face="Times New Roman" size=4>and the Joint Committee of Public
Accounts and Audit’s (JCPAA’s) support for audit access to private sector
information and premises, where warranted.</FONT><SUP><FONT
face="Times New Roman" size=4>4</FONT></SUP><FONT face="Times New Roman">
</FONT><BR><BR><FONT face="Times New Roman" size=4>Following the fallout from
the HIH, Enron and other large corporate failures, the private-sector auditor
independence debate still has a way to go in Australia with the recently
released Australian Securities and Investments Commission (ASIC) survey results
from 100 of Australia’s largest companies and the Government’s formal response
to the Ramsay Report being keenly awaited.</FONT><SUP><FONT
face="Times New Roman">5</FONT></SUP><FONT face="Times New Roman"> </FONT><FONT
face="Times New Roman" size=4>For example, the ASIC survey noted that most
companies lacked robust processes for ensuring that independence of audit was
not prejudiced by the provision of non-audit services.</FONT><SUP><FONT
face="Times New Roman">6</FONT></SUP><FONT face="Times New Roman">
</FONT><BR><BR><FONT face="Times New Roman" size=4>The United States (US)
Securities and Exchange Commission (SEC) has recognised the need to modernise
the rules for determining whether an auditor is independent, as the following
illustrates: </FONT><BR>
<UL>
<UL><I><FONT face="Times New Roman" size=4>Yet increased economic pressure
on the profession, coupled with greater competition and consolidation,
mandated that we bring clarity and light to the necessarily subjective
nature of independence.</FONT></I><I><SUP><FONT face="Times New Roman"
size=4>7</FONT></SUP></I><FONT face="Times New Roman">
</FONT><BR></UL></UL><FONT face="Times New Roman" size=4>In February 2001, the
SEC released a final ruling on the requirements for auditor independence that
sets out restrictions on financial, employment and business relationships
between an accountant and an audit client and restrictions on an accountant
providing certain non-audit services to an audit client. My counterpart in the
US, the Comptroller General and head of the General Accounting Office (GAO),
recently announced (25 January 2002) significant changes to the auditor
independence requirements under Government Accounting Standards</FONT><SUP><FONT
face="Times New Roman">8</FONT></SUP><FONT face="Times New Roman" size=4>. The
new standards deal with a range of auditor independence issues with the most
significant changes relating to the rules associated with non-audit, or
consulting services. </FONT><BR><BR><FONT face="Times New Roman" size=4>Before
leaving the independence theme, I will briefly canvass my role in providing
independent assurance to Parliament on the </FONT><U><FONT
face="Times New Roman" size=4>overall</FONT></U><FONT face="Times New Roman"
size=4> performance and accountability of the public sector in delivering the
Government’s programs and services and implementing effectively a wide range of
public sector reforms.</FONT><BR><BR><BR><B><FONT face="Times New Roman"
size=5>II. The Boundary Tension Between Policy and Its
Implementation</FONT></B><BR><BR><FONT face="Times New Roman" size=4>Performance
audits are the main vehicle by which my Office evaluates the economy, efficiency
and effectiveness of the management of public sector entities. This entails: the
examination and assessment of resource use; related information systems; outputs
and outcomes, including performance targets, indicators, assessments and
measures; monitoring systems; and legal compliance. </FONT><BR><BR><FONT
face="Times New Roman" size=4>The four national audit agencies making up the
Public Audit Forum in the United Kingdom believe that:</FONT><BR>
<UL>
<UL><I><FONT face="Times New Roman" size=4>... there are three fundamental
principles which underpin public audit:</FONT></I><BR></UL></UL><FONT
face=Wingdings size=2>q </FONT><I><FONT face="Times New Roman" size=4>the
independence of public sector auditors from the organisations being
audited;</FONT></I>
<UL>
<UL>
<UL>
<UL>
<UL></UL></UL></UL></UL></UL><FONT face=Wingdings size=2>q </FONT><I><FONT
face="Times New Roman" size=4>the wide scope of public audit that is covering
the audit of financial statements, legislatively (or legality), propriety (or
probity) and value for money; and</FONT></I>
<UL>
<UL>
<UL>
<UL>
<UL></UL></UL></UL></UL></UL><FONT face=Wingdings size=2>q </FONT><I><FONT
face="Times New Roman" size=4>the ability of public auditors to make the results
of these audits available to the public, and to democratically elected
representatives.</FONT></I><I><SUP><FONT face="Times New Roman"
size=4>9</FONT></SUP></I><I><FONT face="Times New Roman" size=4>
</FONT></I><FONT face="Times New Roman"></FONT><BR><BR><FONT
face="Times New Roman" size=4>The ANAO’s performance audits can, and do,
evaluate how effectively and efficiently government policy has been implemented.
Sometimes there can be a perception of an audit commenting on policy,
particularly where the implementation performance reflects a problem with the
policy itself rather than with its delivery. </FONT><BR><BR><FONT
face="Times New Roman" size=4>One particular challenge in the current
environment of change is the increasing tension regarding the role of
Auditors-General and the boundaries between government policy and its
implementation. The issue was given some prominence in the following two
performance audits my Office undertook recently - property sales and IT
Outsourcing.</FONT><SUP><FONT face="Times New Roman" size=4>10</FONT></SUP><FONT
face="Times New Roman"> </FONT><FONT face="Times New Roman" size=4>The nub of
the issue is summed up by Professor Richard Mulgan:</FONT><BR>
<UL>
<UL><I><FONT face="Times New Roman" size=4>The principles of performance
auditing allow the Auditor-General to assess whether government policy has
been efficiently and effectively implemented but they require him to take
government policy as given. Had the Auditor General crossed the line [in
these two audits] which bars him from questioning government policy?
Certainly the Opposition treated the report as providing ammunition not only
against [the Department of] Finance but also against the Minister and
government policy. On the other hand, the Auditor General was clearly aware
of the potential difficulty and his report takes care to confine the audit
to claim that his audit was confined to implementation and administration.
Criticism is aimed exclusively at Finance and the substance of its advice to
government…</FONT></I><BR><BR><FONT face="Times New Roman"
size=4>and</FONT><BR><BR><I><FONT face="Times New Roman" size=4>On the
whole, public opinion, as expressed in media comment, seems to side with the
Auditor-General. He was exercising his time-honoured role as investigator of
government inefficiency and guardian of the public purse. Pointing out that
public funds would be wasted by a particular method chosen for selling
governments properties could hardly be beyond the purview of the public’s
financial watchdog.</FONT></I><SUP><FONT
face="Times New Roman">11</FONT></SUP><FONT face="Times New Roman">
</FONT></UL></UL><BR><FONT face="Times New Roman" size=4>I responded to
Professor Mulgan’s article, making the point that:</FONT><BR>
<UL>
<UL><I><FONT face="Times New Roman" size=4>Policy advising is an output of
Finance and it is clearly within the mandate of the Auditor-General to
review how effectively the department delivered its output. That the
government subsequently may have endorsed a policy based on such advice does
not take away from the mandate of the Auditor-General to review the
department’s development of the advice nor its possible
implications.</FONT></I><SUP><FONT face="Times New Roman"
size=4>12</FONT></SUP><FONT face="Times New Roman" size=4> </FONT><FONT
face="Times New Roman"></FONT><BR></UL></UL><FONT face="Times New Roman"
size=4>Clearly, it is politicians not public servants who take responsibility
for policy and it is for this reason that performance audits are restricted to
the efficiency, effectiveness and propriety with which policy is implemented. As
I noted earlier, they are not extended to cover the merits of the policy itself.
However, problems can arise where policy is difficult to separate from
implementation, for example as in the subject matter of the above comments:
</FONT><BR>
<UL>
<UL><I><FONT face="Times New Roman" size=4>What was the policy in this case
[that is, property sales] ? To maximise long-term benefit to the
Commonwealth by selling buildings only where it is profitable to do so? In
this case, the Auditor General, had every right to indicate where financial
losses were likely. Such losses would indicate that the policy was badly
implemented. Alternatively, the policy may have been to divest the
government of a large number of buildings within a stated time, even if the
long-term effects on the Commonwealth were doubtful…In this case, the
Auditor-General could be seen to be on more dangerous grounds in questioning
the criteria for putting buildings on the market or suggesting that
prospective sales should have been reconsidered if the price was
inadequate.</FONT></I><I><SUP><FONT face="Times New Roman"
size=4>13</FONT></SUP></I><FONT face="Times New Roman" size=4> </FONT><FONT
face="Times New Roman"></FONT></UL></UL><BR><FONT face="Times New Roman"
size=4>One ‘positive’ to come out of this tension is the recognition that
government policy objectives need to be stated in less ambiguous terms with the
lines between policy and implementation made reasonably clear. </FONT><BR>
<UL>
<UL><I><FONT face="Times New Roman" size=4>Performance audit assumes a clear
distinction between policy objectives (set by elected governments) and
policy implementation (carried out by servants or contractors). Auditors are
assumed to leave the objectives to government and confine themselves to the
efficiency, effectiveness and probity with which these objectives have been
implemented.</FONT></I><I><SUP><FONT face="Times New Roman"
size=4>14</FONT></SUP></I><I><FONT face="Times New Roman" size=4>
</FONT></I><FONT face="Times New Roman"></FONT><BR></UL></UL><BR><FONT
face="Times New Roman" size=4>That said, the performance audit mandate has
become an essential element in the accountability process of any public
jurisdiction, especially the new public management environment. It is not a
static process and there will be a continuing emphasis on improving the service
to Parliament. Conflict and controversy may be inevitable. However, as one
senior Australian bureaucrat remarked:</FONT><BR>
<UL>
<UL><I><FONT face="Times New Roman" size=4>The bulk of performance audits
are good at working out what is happening in a field, giving a useful report
on it and striking an appropriate balance in not dabbling in policy and
seriously discussing how implementation is going.</FONT></I><I><SUP><FONT
face="Times New Roman" size=4>15</FONT></SUP></I><I><FONT
face="Times New Roman" size=4> </FONT></I><FONT
face="Times New Roman"></FONT></UL></UL><BR><FONT face="Times New Roman"
size=4>With that observation, I will now move on to the decision-making trends
and issues that the ANAO has highlighted during our performance audits over the
last few years. I will then follow this up with a short discussion on some of
the particular matters arising from these audits, that is, risk management,
records management, ethics, privacy, and IT support systems. All these aspects
bear directly on organisational decision-making and its external scrutiny. They
reflect the wide-ranging nature of, and need for checks and balances in, the
public sector environment.</FONT><BR><BR><B><FONT face="Times New Roman"
size=5>III. An Overview of Recent Performance Audits</FONT></B><BR><BR><FONT
face="Times New Roman" size=4>Performance audits generally reflect the
complexity of administrative decision-making in the public sector. As such,
there can be significant demands made on management which are further
complicated by notions of cooperation, coordination and collaboration
increasingly required by partnerships/joint activity being established across
agencies, across levels of government and with the private sector as both
service providers to, and for, the public sector. I was interested to read a
recent observation by Dr Peter Shergold, Secretary of the Department of
Education, Science and Training, that public servants should not simply see
themselves as public administrators but as knowledge managers who:</FONT><BR>
<UL><I><FONT face="Times New Roman" size=4>turn vast amounts of information –
research, evaluation, experience, skill – into knowledge that can inform in a
robust way the deliberations of government. That requires of us not only to
ensure that we can inform our Ministers to the highest standards of accuracy,
but that we can anticipate the information that is required; that we can be
creative in the policy options we provide; and that we show a bias for action
in translating policy into well-administered programmes and
services</FONT></I><FONT face="Times New Roman" size=4>.</FONT><SUP><FONT
face="Times New Roman" size=4>16</FONT></SUP><FONT face="Times New Roman"
size=4> </FONT><BR><I><FONT face="Times New Roman" size=4></FONT></I></UL><FONT
face="Times New Roman" size=4>One of the more significant issues in performance
audits in recent years has been the impact of the loss of corporate knowledge in
public sector organisations. This has occurred mainly because of the age
structure of public servants, downsizing or rightsizing, and the greater
flexibility to move between the public and private sectors. Not surprisingly,
the loss of corporate knowledge impacts markedly on administrative processes,
understanding of the environment and the related legislation and the links to
decisions made, including the need for credible records which are increasingly
electronically based.</FONT>
<UL></UL><B><U><FONT face="Times New Roman" size=4>Magnetic Resonance Imaging
(MRI) Services</FONT></U></B><BR><BR><FONT face="Times New Roman" size=4>The MRI
Audit Report</FONT><SUP><FONT face="Times New Roman" size=4>17</FONT></SUP><FONT
face="Times New Roman" size=4> </FONT><FONT face="Times New Roman"
size=4>concerned the administrative processes involved in the negotiation and
development of the MRI policy measure including allegations of improper
behaviour. The report focussed on the processes that surrounded the decision to
allow Medicare benefits to be paid for MRI services provided with equipment
ordered up to the delivery of the budget speech on 12 May 1998. Accordingly, one
of the key concerns arising in relation to this audit was whether there was a
leak of Budget information that led to a pre-Budget rush of orders. The most
significant interactions between the Commonwealth and the profession in
connection with this matter occurred in the final stages of negotiations.
</FONT><BR><BR><FONT face="Times New Roman" size=4>The major areas of weakness
uncovered during the audit were:</FONT><SUP><FONT face="Times New Roman"
size=4>18</FONT></SUP><FONT face="Times New Roman" size=4> </FONT><FONT
face="Times New Roman"></FONT><BR><BR><FONT face="Times New (W" size=4>(a) Risk
management associated with budget sensitive information.</FONT><BR><BR><FONT
face="Times New Roman" size=4>Risk management can no longer be seen as
discretionary but must be an essential element of sound corporate governance and
management practice. I will be addressing risk management more generally later
in the paper but in this specific case, there was insufficient consideration
given to risk identification and management for some aspects of the policy
development process and the measure itself, particularly in regard to the
decision to include machines ordered by Budget night. As a result, there were
exposures on both these fronts, which could have been better managed. This is
not just a judgement made in hindsight, but reflects the importance of risk
identification and treatment as an integral part of management at all levels of
an organisation. Clearly, there are challenges in managing budget sensitive
information and its is essential that agencies develop suitable risk management
strategies to preserve the integrity of this information to protect the
interests of all concerned.</FONT><BR><BR><FONT face="Times New (W" size=4>(b)
Probity and confidentiality arrangements for negotiations with radiologist
representatives.</FONT><BR><BR><FONT face="Times New Roman" size=4>Negotiating
new policy measures with professional and other organisations presents
significant challenges in managing budget sensitive matters, particularly where
those involved may gain knowledge or insights which could benefit them
financially. The ANAO concluded that the Department’s management of the probity
arrangements surrounding the negotiations for the MRI measure was not adequate
for the circumstances. The arrangements in place lacked structure and clarity.
Specifically, the Department did not seek to agree with members of the Task
Force what confidentiality arrangements would apply to certain information and
procedures. </FONT>
<P><BR><FONT face="Times New Roman" size=4>Similarly, there were no agreed
procedures or arrangements for declarations of any conflict of interest. As a
result, the Department did not achieve a shared understanding of, and commitment
to, what was to be treated in confidence and what could reasonably be discussed
more openly. This was primarily the responsibility of the Department as part of
its accountability for the process. Once established, all parties would then
have been bound by the agreed arrangements.</FONT><BR><BR><FONT
face="Times New (W" size=4>(c) Lack of adequate
documentation.</FONT><BR><BR><FONT face="Times New Roman" size=4>A key plank in
sound administration and accountability is the adequate recording and
documentation of the business of government – this is another issue I will
revisit later. In the MRI case, there was a lack of adequate documentation by
the Department of the negotiations with the College (the Royal Australian and
New Zealand College of Radiologists). No record was kept of meetings between the
Department and the College and there was no record of what was agreed. The
pressure on the department to progress sensitive consultations over a short time
actually demand greater discipline in record keeping and accountability as part
of sound corporate governance.</FONT><BR><BR><FONT face="Times New Roman"
size=4>There was also a lack of adequate documentation in relation to the
development of some elements of the policy on MRI, specifically about the
merits, risks and alternative options in relation to the inclusion of machines
on order. Official records were not taken or maintained of some significant
briefings of, and decisions by, the Minister. As a consequence, there is limited
departmental documentation on the development of the key elements of the MRI
supply measure. Such documentation also would have assisted in better informing
senior departmental management of the progress with the development of the
policy proposal in view of their functional and operational responsibilities.
</FONT><BR><BR><FONT face="Times New (W" size=4>(d) The quality of the processes
supporting advice to the Minister.</FONT><BR><BR><FONT face="Times New Roman"
size=4>The policy measure itself provided for benefits to be paid for MRI
services by registered providers on eligible machines in place, or ordered,
before Budget night. The Department’s processes for developing the proposal to
include machines on order before Budget night in the Budget measure, and in
providing advice to the Minister on this matter, could have usefully involved
greater consideration and attention to </FONT><U><FONT face="Times New Roman"
size=4>all</FONT></U><FONT face="Times New Roman" size=4> relevant options. As
well, more consideration could have been given to attendant benefits and risks
for delivering the key supply measure and to the provision of information
relevant to the Minister’s assessment of departmental advice. This conclusion
applies both to advice at Budget time and to subsequent advice concerning
emerging problems with respect to machines on order. By way of illustration, in
the weeks immediately preceding the Budget, the Department considered the most
significant issue to be addressed in developing the policy measure was the risk
of not achieving an agreement with the college.</FONT><BR><BR><FONT
face="Times New (W" size=4>(e) Potential Conflicts of Interest </FONT><BR>
<UL>
<UL><I><FONT face="Times New Roman" size=4>It is noteworthy that five of the
eleven radiologists involved in the negotiations were associated with
practices that allegedly ordered nine machines prior to the Budget. Whatever
the basis for this purchase activity, it would be reasonable to conclude
that, if this fact were known in the profession, it would also have had some
influence on other radiologists considering purchasing MRI
machines.</FONT></I><I><SUP><FONT face="Times New Roman"
size=4>19</FONT></SUP></I><FONT face="Times New Roman">
</FONT><BR></UL></UL><FONT face="Times New Roman" size=4>Agencies should have in
place processes for bringing to attention, and dealing with, any real or
potential conflict of interest by those involved in the negotiation process. All
parties should be asked about, and should declare voluntarily, any such
interests prior to taking part in negotiations or as they arise. The negotiating
group should have the opportunity to discuss all such declarations. These, and
any decisions relating to them, should be recorded.</FONT>
<UL>
<UL></UL></UL><FONT face="Times New Roman" size=4>In situations where potential
conflicts of interest cannot be avoided, agencies should engender an
appreciation across all relevant staff and stakeholders regarding the higher
risks likely to arise from the misuse of confidential information. Accordingly,
agencies should carefully consider suitable strategies to protect the
Commonwealth’s interests.</FONT><BR><BR><B><U><FONT face="Times New Roman"
size=4>Administration of the Federation Fund </FONT></U></B><BR><BR><FONT
face="Times New Roman" size=4>This performance audit</FONT><SUP><FONT
face="Times New Roman" size=4>20</FONT></SUP><FONT face="Times New Roman"
size=4> </FONT><FONT face="Times New Roman" size=4>focused on the major projects
of the Federation Fund using the better practice principles of rigor,
transparency and equity that are applicable to the selection of projects under
funding assistance programs. The Department of the Prime Minister and Cabinet
(PM&C) established a Federation Fund Taskforce of officials which assessed
the majority of Federation Fund proposals that were later considered by a
Committee of Ministers.</FONT><BR><BR><FONT face="Times New Roman" size=4>The
audit found that the initial assessment and short-listing process conducted by
the Taskforce lacked rigor and there was an uneven treatment demonstrated by the
absence of any clear relationship between proposals rated highly against the
selection criteria and those listed for ‘detailed assessment’. The quality of
the Taskforce’s detailed assessments, while more transparent, was not as
comprehensive as it could have been because of the:</FONT><BR><BR><FONT
face=Wingdings size=2>q </FONT><FONT face="Times New Roman" size=4>limited
proposal information from all proponents;</FONT><BR><BR><FONT face=Wingdings
size=2>q </FONT><FONT face="Times New Roman" size=4>limited documentation of
consultations with Commonwealth agencies;</FONT><BR><BR><FONT face=Wingdings
size=2>q </FONT><FONT face="Times New Roman" size=4>lack of examination of the
reliability of proponents’ statements, as was originally planned;
and</FONT><BR><BR><FONT face=Wingdings size=2>q </FONT><FONT
face="Times New Roman" size=4>lack of consultations on unsolicited proposals
with the states and territories, as originally planned.</FONT><BR><FONT
face="Times New Roman" size=4></FONT><BR><FONT face="Times New (W" size=4>(a)
Tension between standards for public administration and Cabinet conventions.
</FONT><BR><BR><FONT face="Times New Roman" size=4>While these transparency
issues are more or less ‘standard fare’, I included this report in my paper
because the Federation Fund Program is atypical in that it has elements of
administrative decision-making by a Committee of Ministers while at the same
time operating under normal Cabinet conventions. This report draws attention to
the tension between the standards of documentation normally expected with
administrative decision-making and conventions normally expected with Cabinet
deliberations. The Prime Minister advised that, although the Federation Fund
contained an element of administrative decision-making, the process also
involved considerations of the national interest that Ministers are best able to
determine. The Prime Minister also made the point that, unlike officials,
elected governments are accountable directly for their decisions to the
electorate.</FONT><BR><BR><FONT face="Times New Roman" size=4>For the purposes
of this audit, a distinction was made between the policy decisions of government
and administrative judgements made by government where projects are selected on
merit against pre-determined objectives and criteria. Given that projects were
to be selected on their merits, a more transparent process would have assisted
in demonstrating that the greatest benefit was being obtained for the
expenditure of public funds in excess of $900 million, as well as providing
greater confidence in the decision-making process. </FONT><BR><BR><FONT
face="Times New Roman" size=4>As you would be aware, the ANAO publishes a series
of Better Practice Guides as part of our role of improving public
administration. One of our most popular Guides has been </FONT><I><FONT
face="Times New Roman" size=4>Administration of Grants</FONT></I><FONT
face="Times New Roman" size=4>. As grants continue to be a significant feature
of public sector administration, the ANAO, in consultation with a number of
Commonwealth agencies involved in the administration of grant programs, has
updated the guide to the Administration of Grants.</FONT><BR><FONT
face="Times New Roman" size=4></FONT><BR><FONT face="Times New Roman" size=4>The
new edition, just released, is now more closely aligned to the current public
sector environment and incorporates lessons learned from audits of grant and
other related programs that have been conducted since 1997. The main focus of
the Guide is on the administration of discretionary grants to community
organisations selected on the basis of merit.</FONT><BR><FONT
face="Times New Roman" size=4></FONT><BR><B><FONT face="Times New Roman">Diagram
1 – Main Focus of the Guide</FONT></B>
<P><IMG height=617 alt=""
src="Speech - External Scrutiny of Government Decisions -- Trends and Lessons Learnt_files/314.gif"
width=684>
<P><B><FONT face="Times New Roman">Source: Administration of Grants - Better
Practice Guide, May 2002</FONT></B>
<P><B><FONT face="Times New Roman"></FONT></B><BR><FONT face="Times New Roman"
size=4>However, the principles outlined in the Guide also apply to other types
of grants made to individuals, private sector companies, or state, territory or
local governments. I commend the guide to you and to your staff who may be
engaged in administering grant programs.</FONT><BR><BR><B><U><FONT
face="Times New (W" size=4>Commonwealth Property
Sales</FONT></U></B><BR><BR><FONT face="Times New (W" size=4>The audit of
Commonwealth estate property sales</FONT><SUP><FONT
face="Times New Roman">21</FONT></SUP><FONT face="Times New (W" size=4>,
referred to earlier, involved reviewing the advice provided to Ministers that
established the property sales program and the administration of the sales
program, including consideration of whether it was in accordance with relevant
policies and represented value for money.</FONT><BR><BR><FONT
face="Times New (W" size=4>While I do not wish to track over ground covered
earlier, there are aspects of this audit that go to the heart of my remit – that
is, p</FONT><FONT face="Times New Roman" size=4>olicy advising as an output of
agencies and how effectively it is delivered is an issue that effects decisions
taken by governments. In this audit the following three matters are worthy of
discussion.</FONT><BR><BR><FONT face="Times New (W" size=4>(a) The Value for
Money Issue. </FONT><BR><BR><FONT face="Times New Roman" size=4>The ANAO
analyses of the whole-of-lease-term costs for sale and long-term leaseback of
property found that a potential negative financial return to the Commonwealth
within the lease period was likely. In the transactions reviewed by ANAO, it was
not apparent that a systematic process of inquiry, as required under the
Financial Management and Accountability Regulations and the </FONT><I><FONT
face="Times New Roman" size=4>Commonwealth Procurement
Guidelines</FONT></I><FONT face="Times New Roman" size=4>, was conducted by the
Department of Finance and Administration (Finance) prior to executing the sale
contract and leasing arrangements with the purchasers. ANAO’s legal advice is
that if there is a conflict between the efficient and effective use of public
money and the requirements of the Commonwealth Property Principles (CPPs) it
would be prudent to seek guidance or reconsideration of the policy. In
circumstances where a proposed sale of Commonwealth property does not appear to
represent value for money at the time of the final sale, it would be good
administrative practice to inform Minister(s) of the inquiries undertaken and
seek their consent before proceeding with the sale.</FONT><BR><BR><FONT
face="Times New (W" size=4>(b) The Hurdle Rate Issue. </FONT><BR><BR><FONT
face="Times New Roman" size=4>The ANAO queried the departmental advice,
</FONT><U><FONT face="Times New Roman" size=4>not</FONT></U><FONT
face="Times New Roman" size=4> the policy, concerning the hurdle rate of return
threshold of 15%, questioning its level which, in effect, would force the sale
of almost all Commonwealth properties that did not meet the public interest
test. This would result in a sub-optimal investment outcome and financial loss
to the Commonwealth when combined with long-term leaseback arrangements. Our
analysis indicated that, in contrast to applying the hurdle rate of
</FONT><U><FONT face="Times New Roman" size=4>15%</FONT></U><FONT
face="Times New Roman" size=4> resulting in divestment of virtually all of the
property holding, or some 99% by value ($1 038 million), the application of a
hurdle rate of:</FONT><BR><BR><FONT face=Wingdings size=2>q </FONT><U><FONT
face="Times New Roman" size=4>10%</FONT></U><FONT face="Times New Roman" size=4>
- only 8 of the 59 properties would have been scheduled for divestment, with a
book value of $232 million; or</FONT><BR><FONT face=Wingdings size=2>q
</FONT><U><FONT face="Times New Roman" size=4>12%</FONT></U><FONT
face="Times New Roman" size=4> - would have resulted in divestment of only 23
properties, with a book value of $326 million.</FONT><BR><BR><FONT
face="Times New Roman" size=4>The consulting firm engaged by Finance during 2000
suggested </FONT><I><FONT face="Times New Roman" size=4>‘a wide range for the
property hurdle return is appropriate, with the upper bound at approximately
11%.’</FONT></I><SUP><FONT face="Times New Roman">22</FONT></SUP><FONT
face="Times New Roman"> </FONT><FONT face="Times New Roman"></FONT><BR><BR><FONT
face="Times New Roman" size=4>In practice, all properties that exceeded the
hurdle rate were recommended for divestment, except one property in the
Parliamentary Triangle that was retained in the public interest. The
documentation made available to ANAO did not allow for an effective review of
the assumptions underpinning the rates of return identified by the Commonwealth
Property Committee (CPC) for the properties recommended for
divestment.</FONT><BR><BR><FONT face="Times New Roman" size=4>The risk
measurement approach adopted by the consulting firm that reported to Finance in
October 1999 and October 2000 is consistent with </FONT><U><FONT
face="Times New Roman" size=4>project specific</FONT></U><FONT
face="Times New Roman" size=4> risk rates for property. This approach accords
with that recommended by the then Department of Finance (Finance) in the 1991
</FONT><I><FONT face="Times New Roman" size=4>Handbook of Cost-Benefit Analysis
</FONT></I><FONT face="Times New Roman" size=4>for the setting of discount
rates. That publication advocated that the best option in choosing a discount
rate is to develop a </FONT><U><FONT face="Times New Roman"
size=4>project-specific</FONT></U><FONT face="Times New Roman" size=4> rate. A
property with security of tenure to the Commonwealth in the form of a
non-cancelable lease over a long period represents a low risk. Consequently, the
criteria used for the hold/sell decision should reflect that risk
profile.</FONT><BR><BR><FONT face="Times New (W" size=4>(c) Confusion of Roles.
</FONT><BR>
<P><FONT face="Times New Roman" size=4>Finance advised ANAO in April 2001 that
its role was to implement a property divestment program endorsed by Ministers
and that it was not charged with the role of protecting the overall interest of
the Commonwealth. ANAO considers that, given the administrative division of
responsibility and accountability, Finance is the only agency in a position to
ensure that property divestment is consistent with the CPPs and to make an
informed judgment as to whether a property sale and leaseback transaction
represents efficient and effective use of Commonwealth resources at the time of
the transaction.</FONT><BR><BR><B><U><FONT face="Times New (W" size=4>GP House
Grant</FONT></U></B><BR><BR><FONT face="Times New Roman" size=4>The recently
tabled Report</FONT><SUP><FONT face="Times New Roman"
size=4>23</FONT></SUP><FONT face="Times New Roman" size=4> </FONT><FONT
face="Times New Roman" size=4>into the allocation of grant funding for the
co-location of National General Practice organisations focussed on: whether due
process was followed in making the decision to transfer funds between Outcomes;
the procedures adopted by Health and Aged Care in developing the proposal; the
advisory role played by Finance ; and specific advice provided to
Ministers.</FONT><BR><BR><FONT face="Times New Roman" size=4>(a) Lack of
adequate documentation</FONT><BR><BR><FONT face="Times New Roman" size=4>For a
significant period, the documentary evidence relating to the development of the
proposal by Health and Aged Care was sketchy and this underscores the importance
of ensuring that adequate records are maintained during the development of
policy measures. The department is committed to bringing more discipline to
documenting information, with a particular focus on practices around the
creation of file notes and in formalising key advice to the Minister. This issue
was also raised in the MRI example above. </FONT><BR><BR><FONT
face="Times New Roman" size=4>(b) The Adequacy of advice to
Ministers</FONT><BR><BR><FONT face="Times New Roman" size=4>The ANAO took the
view that there was uncertainty in the Cabinet endorsed guidelines regarding
whether initiatives, proposed by the Minister for Health and Aged Care, should
have been treated as a reallocation of administered expenses between outcomes or
as a new policy measure. It is not unreasonable to come to a view that the issue
was not clear cut. While both departments considered their actions were
consistent with the guidelines, advice to Ministers did not address this
particular matter specifically. An alternative view would have been that,
because the ‘fortuitous’ nature of the savings offered as an offset and the
effect of the entirely new initiative, it would have been prudent to treat the
co-location proposal as a new policy measure. </FONT><BR><BR><FONT
face="Times New Roman" size=4>In its advice to the Minister, Health and Aged
Care did not give consideration to whether the proposal constituted a new policy
and therefore required additional approval. </FONT><BR><BR><FONT
face="Times New Roman" size=4>The Finance advice to its Minister did discuss the
question as to whether the funding source represented ‘fortuitous’ savings, the
proposal’s inconsistency with the Government’s rural and regional program, and
the outcomes involved, recommending that the proposal be opposed. However, given
its clear opposition to the proposal, the Finance advice did not address the
process by which approval for the measure should be sought. The department did
not normally consider that it was necessary to provide details of the process by
which approval for the process should be sought, stating that it does not
normally provide these details when advising against a
proposal.</FONT><SUP><FONT face="Times New Roman">24</FONT></SUP><FONT
face="Times New Roman"> </FONT><BR><BR><FONT face="Times New Roman" size=4>(c)
Clarifying budgetary guidance</FONT><BR><BR><FONT face="Times New Roman"
size=4>Given the uncertainly regarding the application of budgetary guidance in
this case, the ANAO suggested that consideration be given by Finance to
reviewing the relevant guidance and, as necessary, providing advice to Cabinet
to clarify current guidance. In the ANAO’s view, the areas that would benefit
from review include: the merits of guidance in determining whether a proposal is
consistent with previous Cabinet or Ministers’ decisions; and whether current
guidance on the reallocation of administered expenses which involve fortuitous
savings might desirably be strengthened. While Finance has advised that
operational guidelines have been consolidated for the 2002-03 Budget, the ANAO
considers that there would be merit in a further
review.</FONT><BR><BR><B><U><FONT face="Times New (W" size=4>Commonwealth IT
Outsourcing Initiative</FONT></U></B><BR><BR><FONT face="Times New Roman"
size=4>The outsourcing of IT arose from a government decision known as the IT
Initiative, which was to transfer around $A4 billion of IT in Federal agencies
to the private sector. The then Office of Asset Sales and Information Technology
Outsourcing (OASITO) managed the Initiative centrally for the government through
a series of tenders dealing with groupings of agencies (clusters). The
audit</FONT><SUP><FONT face="Times New Roman">25</FONT></SUP><FONT
face="Times New Roman"> </FONT><FONT face="Times New Roman" size=4>examined the
administrative and financial effectiveness of the implementation of the IT
Initiative and was conducted against the background of the Prime Minister’s
letter of December 1998, advising Portfolio Ministers that </FONT><I><FONT
face="Times New Roman" size=4>‘as a general Government policy, outsourcing of IT
infrastructure services should proceed unless there is a compelling business
case on a whole-of-government basis for not doing so.’</FONT></I><SUP><FONT
face="Times New Roman" size=4> </FONT></SUP><SUP><FONT face="Times New Roman"
size=4>26</FONT></SUP><SUP><FONT face="Times New Roman"> </FONT></SUP><FONT
face="Times New Roman"></FONT>
<P><FONT face="Times New (W" size=4>(a) Agencies’ Roles under the IT
Initiative</FONT>
<P><FONT face="Times New Roman" size=4>In examining the effectiveness of these
‘clusters’, experience suggests that, within the policy context, there were
areas where the structure of the agency groupings could have been enhanced to
better support agency business requirements (in terms of relative size, business
focus, funding arrangements and security requirements). The audit report
recommended an analysis of the existing groupings to identify opportunities to
cost effectively optimize their composition considering the appropriateness and
effectiveness of combining agencies of disparate size and business focus under a
single arrangement. Additionally, as the Humphry Review noted, </FONT><I><FONT
face="Times New Roman" size=4>‘the clustering of contracts is felt by some
members of the industry to limit their access to the government IT
market.’</FONT></I><SUP><FONT face="Times New Roman" size=4>27</FONT></SUP><FONT
face="Times New Roman" size=4> </FONT><FONT
face="Times New Roman"></FONT><BR><BR><FONT face="Times New Roman" size=4>There
was an uneven level of support for the way OASITO went about letting the
tenders. Several Chief Executives had significant doubts about the ability of
the Initiative to deliver the savings projected for it and/or to deliver the
quality of service required. Being responsible for the results, it is not
surprising that they wanted to assess the Initiative’s implementation carefully.
Unfortunately, this was later perceived as an unwillingness to
change.</FONT><BR><FONT face="Times New Roman" size=4></FONT><BR><FONT
face="Times New Roman" size=4>In particular, for those agencies where the IT
requirement was predominantly scientific (for example the Bureau of Meteorology
or the Commonwealth Scientific and Industrial Research Organisation) or
otherwise related to the core activities of a particular agency (for example,
the payment of pensions), the arrangement posed significant problems of
corporate governance for them. The approach taken by OASITO was designed to
implement the Government’s policy agenda under centralised direction (and
control) despite the perceived reluctance (buy-in) of some of the agency heads
because they did not have the degree of control necessary to best manage
transition risks, and because they were ultimately responsible for the agency
outputs and outcomes and the budgets involved.</FONT><SUP><FONT
face="Times New Roman" size=4>28</FONT></SUP><FONT face="Times New Roman">
</FONT><BR><FONT face="Times New Roman" size=4></FONT><BR><FONT
face="Times New (W" size=4>(b) The Savings Issue</FONT><BR><BR><FONT
face="Times New Roman" size=4>Preliminary studies identified significant savings
that would accrue from implementing the Initiative. Indeed, the projected
savings from the implementation of the IT Initiative were removed, upfront, from
the respective agency’s forward estimates. What is significant is that the
financial evaluation methodology applied in the tenders did not allow for two
key factors that were material to the assessment of savings arising from
outsourcing the services. The evaluations did not consider the service potential
associated with agency assets expected to be on hand at the end of the
evaluation period under the business-as-usual case, or the costs arising from
the Commonwealth’s guarantee of the external service provider’s (ESP) asset
values under the outsourcing case. Consequently, the financial savings realised
by the agencies from outsourcing, as quantified in the tender evaluations, were
overstated. This was disputed by OASITO and by the Minister
concerned.</FONT><BR><BR><FONT face="Times New Roman" size=4>The central issue
turned on interpretation of the accounting standard dealing with financial and
operational leases. The different interpretations extended into the private
sector that were later reviewed by the Joint Committee of Public Accounts and
Audit (JCPAA). The JCPAA concluded that the correct treatment of accounting
standards is fundamental to transparent reporting and budget honesty. Agencies
should adopt consistent accounting standards which are also consistent with the
proper management of risk to the Commonwealth.</FONT><SUP><FONT
face="Times New Roman" size=4>29</FONT></SUP><FONT face="Times New Roman">
</FONT><BR><BR><FONT face="Times New (W" size=4>(d) Management
Issues</FONT><BR><BR><FONT face="Times New Roman" size=4>The ANAO identified a
range of issues on which agencies should place particular focus in the
management of IT outsourcing arrangements as follows:</FONT><BR><BR><FONT
face=Wingdings size=2>q </FONT><FONT face="Times New Roman"
size=4>identification and management of ‘whole of contract’ issues including the
retention of corporate knowledge, succession planning, and industrial relations
and legal issues;</FONT><BR><FONT face=Wingdings size=2>q </FONT><FONT
face="Times New Roman" size=4>the preparation for and management of, including
expectations from, the initial transition to an outsourced arrangement,
particularly when a number of agencies are grouped together under a single
agreement; </FONT><BR><FONT face=Wingdings size=2>q </FONT><FONT
face="Times New Roman" size=4>putting in place a management regime and strategy
that encourages an effective long term working relationship with the ESP, while
maintaining a focus on contract deliverables and transparency in the exercise of
statutory accountability and resource management requirements;</FONT><BR><FONT
face=Wingdings size=2>q </FONT><FONT face="Times New Roman" size=4>defining the
service levels and other deliverables in the agreement so as to focus
unambiguously on the management effort of both the ESP and agencies on the
aspects of service delivery most relevant to agencies’ business requirements;
and</FONT><BR><FONT face=Wingdings size=2>q </FONT><FONT face="Times New Roman"
size=4>the ESP’s appreciation of, and ability to provide, the performance and
invoicing information required by agencies in order to support effective
contract management, as well as from both an agency performance and
accountability point of view.</FONT>
<UL></UL><FONT face="Times New (W" size=4>(d) The Humphry Review</FONT>
<UL></UL><FONT face="Times New Roman" size=4>As a response to the audit, the
Government commissioned a review of IT outsourcing conducted by Richard Humphry
AO (Managing Director, Australian Stock Exchange). This independent review
recognised the implicit management dilemma described above and recommended that,
because Chief Executive Officers (CEOs) of agencies had the statutory
responsibility, they should be responsible for the outsourcing decisions. In
particular, decisions that impacted upon the core business of the agency needed
to be taken at agency level. Mr Humphry remarked:</FONT><BR>
<UL>
<UL><I><FONT face="Times New Roman" size=4>Priority has been given to
executing outsourced contracts without adequate regard to the highly
sensitive risk and complex processes of transition and the ongoing
management of the outsourced business arrangement.</FONT></I><I><SUP><FONT
face="Times New Roman" size=4>30</FONT></SUP></I><FONT
face="Times New Roman"> </FONT></UL></UL><BR><FONT face="Times New Roman"
size=4>The review pointed out that there were several risk management lessons to
be learned as follows:</FONT>
<UL></UL><FONT face=Wingdings size=2>q </FONT><FONT face="Times New Roman"
size=4>the most significant risk factors were the unwillingness to change and
the failure to buy in the appropriate expertise;</FONT><BR><BR><FONT
face=Wingdings size=2>q </FONT><FONT face="Times New Roman" size=4>there was a
lack of focus on the operational aspects of implementation;</FONT><BR><BR><FONT
face=Wingdings size=2>q </FONT><FONT face="Times New Roman" size=4>there was
insufficient attention paid to the necessary process of understanding the
agencies’ business; and</FONT><BR><BR><FONT face=Wingdings size=2>q </FONT><FONT
face="Times New Roman" size=4>there was insufficient consultation with key
stakeholders.</FONT><SUP><FONT face="Times New Roman">31</FONT></SUP><FONT
face="Times New Roman"> </FONT>
<UL><BR></UL><FONT face="Times New Roman" size=4>The review drew heavily on the
Standards Australia publication HB 240:2000, </FONT><I><FONT
face="Times New Roman" size=4>Guidelines for Managing Risk in
Outsourcing</FONT></I><FONT face="Times New Roman"
size=4>.</FONT><BR><BR><BR><FONT face="Times New (W" size=4>(e) The
‘Wash-Up’</FONT><BR><BR><FONT face="Times New Roman" size=4>The Government
agreed with the ten recommendations made by the Review, some with
qualification.</FONT><SUP><FONT face="Times New Roman"
size=4>32</FONT></SUP><FONT face="Times New Roman"> </FONT><FONT
face="Times New Roman" size=4>This included that the responsibility for
implementation of the IT Initiative be devolved to Commonwealth agencies in
accordance with the culture of performance and accountability incorporated in
the relevant financial management legislation. Agencies are required to obtain
value for money (including savings) and maximise Australian industry development
outcomes. Agency heads will be held directly accountable for achieving these
objectives within a reasonable timeframe, as well as grouping with other
agencies at their discretion, wherever possible, to establish the economies of
scale required to maximise outcomes.</FONT><BR><BR><FONT face="Times New Roman"
size=4>Agencies will also be responsible for addressing implementation risks. A
separate body has been established within the Department of Finance and
Administration to advise agencies, at </FONT><U><FONT face="Times New Roman"
size=4>their</FONT></U><FONT face="Times New Roman" size=4> request and on a fee
for service basis, on managing their transition. Audit experience indicates that
the agency emphasis has to be on developing a robust analysis of business
requirements at the initial stage, which would be the basis of a strong business
case for whatever IT strategy is developed. Without OASITO’s involvement, the
industry can now deal directly, </FONT><U><FONT face="Times New Roman"
size=4>from the outset</FONT></U><FONT face="Times New Roman" size=4>, with the
people responsible for the function and related outputs and outcomes, as well as
with those who will be managing the contract. The inability to have this
relationship was the subject of criticism by the industry under the previous
arrangements managed by OASITO. This is a significant lesson for all future
outsourcing arrangements. </FONT><BR><BR><B><U><FONT face="Times New (W"
size=4>DEVELOPING POLICY ADVICE</FONT></U></B><BR><BR><FONT
face="Times New Roman" size=4>The ANAO undertook a performance audit to
determine whether departmental quality management systems for policy advising
were appropriate and whether the advice provided met expected standards for
policy outputs.</FONT><SUP><FONT face="Times New Roman"
size=4>33</FONT></SUP><FONT face="Times New Roman"> </FONT><FONT
face="Times New Roman" size=4>At the end of each chapter of the audit report, we
included a section on better practice principles to assist with the improvement
of management and quality assurance of policy advising across the APS.
</FONT><BR><BR><FONT face="Times New Roman" size=4>Drawing on this report, the
ANAO developed a Better Practice Guide –</FONT><I><FONT face="Times New Roman"
size=4> Some Better Practice Principles for developing Policy
Advice</FONT></I><SUP><FONT face="Times New Roman">34</FONT></SUP><FONT
face="Times New Roman"> </FONT><FONT face="Times New Roman" size=4>which I
recommend for your consideration when undertaking policy development. While
better practices and the checklist set out in the </FONT><I><FONT
face="Times New Roman" size=4>Guide</FONT></I><FONT face="Times New Roman"
size=4> are not exhaustive, nor applicable in every circumstance, they do
provide a useful reference for agencies and should result in better policy
advice that is both creditable and reliable.</FONT><BR><BR><BR><B><FONT
face="Times New (W" size=5>IV Some Common Themes</FONT></B><BR><BR><FONT
face="Times New Roman" size=4>Having provided some examples of our audit
coverage of the topic, I will now draw them together as management issues that
need to be addressed in many public sector organisations to improve both
decision-making and results being achieved.</FONT><BR><FONT
face="Times New Roman" size=4></FONT><BR><B><U><FONT face="Times New (W"
size=4>Performance Management</FONT></U></B><BR><BR><FONT face="Times New Roman"
size=4>Under the Government’s outcomes and outputs framework, all agencies are
required to specify their outcomes and outputs and identify relevant performance
measures. A sound corporate governance framework provides the means for ensuring
appropriate accountability for both performance and use of resources. This is
necessary for the confidence and assurance of both internal and external
stakeholders. </FONT><BR>
<UL>
<UL><I><FONT face="Times New Roman" size=4>For Australia…The feature [of the
development of its management framework] that mark it out include the
emphasis on outputs, devolution, performance</FONT></I><FONT
face="Times New Roman" size=4> </FONT><I><FONT face="Times New Roman"
size=4>management, accountability, evaluation and
values.</FONT></I><SUP><FONT face="Times New Roman">35</FONT></SUP><FONT
face="Times New Roman"> </FONT><BR><BR><FONT face="Times New Roman"
size=4>And</FONT></UL></UL>
<UL>
<UL><I><FONT face="Times New Roman" size=4>Managing through outcomes and
outputs helps improve decision making and performance… It can also help
improve the understanding and knowledge of those outside the agency who have
an interest in its performance, including ministers, parliament and external
accountability bodies such as the Auditor-General.</FONT></I><I><SUP><FONT
face="Times New Roman" size=4>36</FONT></SUP></I><I><FONT
face="Times New Roman" size=4> </FONT></I><FONT
face="Times New Roman"></FONT><BR></UL></UL><FONT face="Times New Roman"
size=4>However, even though the focus of public sector reform is very much on
results, it also matters how those results are achieved. Organisations that are
successful in achieving a credible, trusted performance management framework,
will earn the confidence and support of </FONT><U><FONT face="Times New Roman"
size=4>all</FONT></U><FONT face="Times New Roman" size=4> their stakeholders,
including those who work, and want to work, in the public sector. The following
observation by the Comptroller General of the United States strikes an
accord:</FONT><BR>
<UL>
<UL><I><FONT face="Times New Roman" size=4>Performance management ensures
accountability because it generates valid and reliable data on program
impact on the allocation of resources and on the economy, efficiency,
effectiveness and integrity with which the government’s finances are
run.</FONT></I><SUP><FONT face="Times New Roman" size=4>37</FONT></SUP><FONT
face="Times New Roman"> </FONT></UL></UL><BR><FONT face="Times New Roman"
size=4>The validity and reliability of performance information is a key
consideration in most ANAO performance audits and we have undertaken audits
specifically considering performance information. Examples include: Reports No
46, </FONT><I><FONT face="Times New Roman" size=4>ATO Performance Reporting
under the Outcomes and Outputs Framework, </FONT></I><FONT
face="Times New Roman" size=4>and</FONT><I><FONT face="Times New Roman" size=4>
</FONT></I><FONT face="Times New Roman" size=4>No. 43, </FONT><I><FONT
face="Times New Roman" size=4>Performance Information for Commonwealth Financial
Assistance under the Natural Heritage Trust</FONT></I><FONT
face="Times New Roman" size=4>, both tabled in June 2001. In addition, the ANAO
also conducted a cross-portfolio audit to assess performance information in the
PBSs 2000-2001 and Annual Reports for 1999-2000.</FONT><SUP><FONT
face="Times New Roman" size=4>38</FONT></SUP><FONT face="Times New Roman"
size=4> </FONT><FONT face="Times New Roman"></FONT><BR><BR><FONT
face="Times New Roman" size=4>The cross- portfolio Report concluded that,
overall, performance information in the PBS should be improved to enable
agencies to establish and demonstrate the links between outcomes, outputs and
performance indicators. </FONT>
<UL>
<UL><BR><I><FONT face="Times New Roman" size=4>A common limitation in the
performance information in all 10 audited agencies’ PBS and annual reports
related to effectiveness indicators which did not actually measure outcome
performance</FONT></I><FONT face="Times New Roman" size=4>.</FONT><SUP><FONT
face="Times New Roman" size=4>39</FONT></SUP><FONT face="Times New Roman"
size=4> </FONT><FONT face="Times New Roman"></FONT></UL></UL><BR><FONT
face="Times New Roman" size=4>And, overall, the Report also concluded that it
would be difficult for Parliament and other stakeholders to assess agency
performance with reasonable assurance as the performance information did not
always include targets, or that the targets that were provided were often vague
and or ambiguous. The requirement for an integrated approach was also emphasised
in a Management Advisory Committee’s Report late last year on performance
management.</FONT><SUP><FONT face="Times New Roman" size=4>40</FONT></SUP><FONT
face="Times New Roman"> </FONT><FONT face="Times New Roman" size=4>Nevertheless,
we should be aware of the so-called performance paradox which refers to a weak
correlation between performance indicators and performance
itself.</FONT><SUP><FONT face="Times New Roman">41</FONT></SUP><FONT
face="Times New Roman"> </FONT><FONT face="Times New Roman" size=4>The question
is what is the performance information really conveying about results being
achieved. On the other hand, ‘any significant experimentation with new forms of
performance indicators may lead to discontinuities and monitoring
issues.</FONT><SUP><FONT face="Times New Roman" size=4>42</FONT></SUP><FONT
face="Times New Roman"> </FONT><BR><BR><FONT face="Times New Roman" size=4>With
the increasing emphasis on performance/results, considerable attention has been
given to the audit of performance indicators, nationally and internationally.
The Western Australia Auditor-General was the first Office required to audit
such indicators by legislation. This practice has been followed in a number of
other State Audit Offices over time. The Victorian Auditor-General recently set
out some definitions for audit assessment of performance
indicators.</FONT><SUP><FONT face="Times New Roman" size=4>43</FONT></SUP><FONT
face="Times New Roman"> </FONT><FONT face="Times New Roman" size=4>He noted that
definitions are not used consistently across, and within, jurisdictions. While
Victorian departments have adequate arrangements in place, or are currently
developing such arrangements, to measure and report their performance in
relation to output measures for 2001-2002, there was an absence of agreed
performance indicators for departmental objectives. This is a common
shortcoming, often including a lack of adequately defined relationships between
outputs and outcomes, thus reducing the value of external
scrutiny.</FONT><BR><BR><B><U><FONT face="Times New (W" size=4>Risk
Management</FONT></U></B><BR><BR><FONT face="Times New Roman" size=4>Risk
management is a theme that runs through many ANAO’s audit reports. Recent ANAO
audits have highlighted the need for:</FONT><BR><BR><FONT face=Wingdings
size=2>q </FONT><FONT face="Times New Roman" size=4>a strategic direction in
setting the risk management focus and practices;</FONT><BR><BR><FONT
face=Wingdings size=2>q </FONT><FONT face="Times New Roman" size=4>transparency
in the process; and </FONT><BR><FONT face=Wingdings size=2>q </FONT><FONT
face="Times New Roman" size=4>effective management information systems.</FONT>
<P><FONT face="Times New Roman" size=4>Our goal over a number of years has been
to encourage the embedding of a culture of risk management in agencies and
Commonwealth organisations so that consideration of risks and risk mitigation
strategies becomes second nature to managers at all levels. Importantly, a
robust risk management framework is a useful means for management to able to
defend their decision-making publicly. </FONT><BR><BR><FONT
face="Times New Roman" size=4>The ANAO has continued to foster the view that
risk management is an essential element of corporate governance underlying many
of the reforms that are currently taking place in the public sector. To restate
my point, it is not a separate activity within management but an integral part
of good management process, particularly as an adjunct to the control
environment, when we have limited resources and competing priorities. Against
the background of the increasing use of a range of different service delivery
arrangements; greater involvement of the private sector in the provision of
public services; and with a more contestable/competitive market-oriented
imperative risk management can only become more critical. </FONT><BR><BR><FONT
face="Times New Roman" size=4>To be effective, the risk management process needs
to be rigorous and systematic.</FONT><SUP><FONT
face="Times New Roman">44</FONT></SUP><FONT face="Times New Roman"> </FONT><FONT
face="Times New Roman" size=4>If organisations do not take a comprehensive
approach to risk management, it is likely that directors and managers may not
adequately identify or analyse risks. Compounding the problem, inappropriate
treatment regimes may be designed which do not appropriately mitigate the actual
risks confronting their organisations and programs. </FONT><BR><BR><FONT
face="Times New Roman" size=4>James Deloach, a partner in Arthur Andersen,
highlights the criticality of managing business risk. His premise is that an
enterprise-wide approach to business risk management improves the linkage of
risk and opportunity and positions the business risk management as a competitive
advantage. He offers the view that current approaches are too firmly entrenched
in command and control and, thus rooted in the past. Such practices cannot
adequately deal with an entity’s continually evolving risks and opportunities.