Executive summary

 

 

 

Variations between an agency’s budget and the actual outcome are inevitable and may arise from a number of sources including changes in government policy, unexpected service delivery pressures, industrial determinations and accrual accounting adjustments.  Some of these variations may require supplementary funding from the Consolidated Fund.

 

 

 

However, effective budget monitoring requires variations to be identified and acted on quickly.  This in turn requires effective communication between the agency and Treasury.  If not, there is potential for significant impact on the State’s budget result.

 

 

 

We reviewed budget monitoring practices in the budget dependent agencies NSW Health, Department of Education and Training (DET), NSW Police, Roads and Traffic Authority (RTA) and Department of Ageing, Disability and Home Care (DADHC), as well as NSW Treasury.  The audit focused on agency budget variations for 2002-03 and 2003-04.

 

 

 

Our audit addressed the question:  Is the monitoring of budget variations effective in identifying budget variations early?

 

 

 

Opinion

 

Budget monitoring has been improving, including increased focus on accrual based financial information by Treasury and agencies.  It is not yet as effective as it needs to be, but it is reasonable.  Some aspects are quite good, particularly those monitoring the level of funding appropriated by Parliament to agencies.  This is a legacy of the traditional focus on cash accounting.  The move to accrual accounting, and a timely focus on overall expenditure and revenues is not yet fully embraced by NSW budget dependent agencies and in Parliamentary budget processes.  This is reflected in the continuing emphasis on cash in the appropriation process and the large adjustments to agency accrual-based results being identified only close to the end of the financial year. 

 

On the positive side, budget monitoring of appropriation funding in the five agencies and Treasury was timely.  In particular:

·         the number of significant funding variations was small, and

·         most significant agency funding variations were for increases outside agencies’ control. 

 

We also found budget monitoring practices supported by:

·         well established processes, including extensive monthly analysis and reporting of budget trends, and

·         businesslike relationships between agencies and Treasury. 

 

The main problems we identified were:

·         large adjustments and accelerated spending patterns by agencies at year-end

·         Treasury-agency relationships, while businesslike, are not sharing information in the most effective ways

·         a focus in Treasury and agencies on year-end budget result and limited focus on monthly targets, and

·         Parliamentary budget controls still focusing largely on a cash basis, despite the adoption of accrual accounting a decade ago.

 

Summary of recommendations

 

 

 

Net cost of services focus by Parliament

 

We recommend that net cost of services, rather than the cash based Consolidated Fund appropriations, become the prime focus of Parliamentary control and that each agency’s net cost of services be set by Parliament as part of the Budget approval process. 

 

Net cost of services (total cost of services less any revenue retained by agencies) is a more relevant measure of the level of agency activity and spending.  It also correlates more closely with the overall State Budget result. (page 28)

 

 

 

Monthly budget targets

 

We recommend that budget monitoring of large agencies should have a greater focus on monthly expenditure and revenue patterns.  Treasury should make any necessary modifications to systems to cause agencies to report monthly budgets and forecasts. (page 27)  And further, those agencies provide supporting narrative as part of their monthly reports on significant variations to budgets as soon as they are identified.  (page 24)

 

 

 

Managing capital acquisition budgets

 

We recommend that Treasury modify monthly returns from the largest agencies to include capital expenditure against monthly budgeted expenditure patterns.  And further, those agencies provide supporting narrative as part of their monthly reports on significant variations to capital budgets as soon as they are identified.  (pages 26, 27)

 

 

 

Refining Treasury–agency relationships

 

We recommend that Treasury extend the principles of it’s Working with agencies: Our Code of Good Practice into a charter that considers roles and responsibilities between Treasury analysts and agencies.  (pages 37, 38)

 

 

 

Developing information exchange

 

We recommend that Treasury consider the following options for improving information flow with agencies: 

 

·           developing its Financial Information System to provide for benchmarking of agencies’ budget performance and practices 

 

·           extending protocols to allow Treasury analysts greater access to agency financial information reporting. (page 36)

 

 

 

We also recommend that agencies give a high priority to upgrading their information systems and business intelligence tools to assist budget monitoring and reporting. (pages 25, 26)

 

 

 

Strengthening rewards and sanctions

 

We recommend that:

 

·         more definitive measures of budget performance be introduced into all CEO performance agreements 

 

·         Treasury undertake an annual scorecard to indicate how agencies are performing budget monitoring. (page 39)

Key Findings 

 

 

Chapter 1 - Introduction

Chapter 1 outlines the importance of budget monitoring in managing funding from Parliament and achieving bottom line budget results. 

 

 

 

Budget monitoring must ensure that variations are identified in a timely manner and their implications clearly communicated and understood. Poor budget monitoring in agencies can have a big impact on both the agencies and State’s budget results, and the delivery of government services. 

 

 

 

Budget variations are influenced by government policies, demand for agency services and poor financial management.  Each of them has particular implications for budget monitoring. 

 

 

Chapter 2 –
Is budget monitoring a concern?

Chapter 2 examines budget variations at the State level and the implications for budget monitoring.

 

An analysis of 2003-04 budget variations identified at mid-year, late-year and final budget positions indicates that budget monitoring could still be improved.  Analysis of State operating revenues, expenses, capital acquisition and budget result trends indicates that some variations, often large, are not identified until close to year-end. 

 

 

 

The chapter sets the stage for further analysis of budget monitoring practices underlying these variations. 

 

 

 

Chapter 3 –
Do accounting practices support effective budget monitoring?

Chapter 3 discusses budget management practices that are contributing to untimely variations and their reporting.  It finds that these issues are of relevance to all agencies and suggests changes to government-wide practices.

 

 

Treasury’s focus is, appropriately, on early, accurate estimation of the year-end budget position.  However, this could be improved by greater monitoring of actual year-to-date results against estimated expenditure and revenue patterns.  This is particularly the case for large agencies whose budgets comprise the bulk of the State Budget. 

 

 

 

 

 

Since 2001, agencies have had an obligation to focus budget control on their net cost of services.  This puts increased emphasis on accrual accounting for agency’s overall expenses and retained revenues.

 

 

 

 

 

However the current Parliamentary budget approval process remains focused on cash appropriations.  This tends to promote a view that accrual based-based information is of lesser importance. 

 

 

 

 

 

Some agencies are not managing their finances on an accrual basis and are leaving major transactions that impact on their budget result until late in the financial year.

 

 

 

 

 

In addition, computer systems currently in use are impeding budget information flows within agencies.

 

 

 

 

 

These factors are contributing to agencies exceeding their budgets.

 

 

Chapter 4 –
Is agency funding effectively monitored?

There are well established monitoring processes within all the agencies we reviewed.  Analysis of monthly budget trends is extensive.  This supports the trend observed in Chapter 2 that budget discipline appears to be improving.

 

 

 

We also found improvements in budget monitoring in Health, RTA, DADHC and DET.  At the same time we note that Police and Treasury had problems in agreeing on estimates of Police salaries. 

 

 

 

In addition:

 

·         most significant variations to agency budgets are for increases outside their control, for example, government negotiated salary increases

 

·         agencies have received only a small number of substantial budget supplementations during recent years.

 

 

Chapter 5 –
Can Treasury and agencies improve their communication?

Effective budget monitoring requires good communication between agencies and Treasury.  While relationships are business-like we found some areas in need of further improvement.

 

Monthly reporting between agencies and Treasury and within Treasury is timely and questioning is vigorous.  The Treasury Financial Information System that stores the monthly financial data provided by agencies via the Treasury On-line Entry System supports the process adequately.

 

 

 

We note however that the format of the monthly data collection does not align with many agencies’ internal reporting and systems.  Agency focus is more on program expenditure than the budget line item reporting required by Treasury. 

 

 

 

We also note that not all agencies provide narrative to Treasury each month on budget trends and variations. 

 

 

 

The quality of relationships between agencies and Treasury analysts, although generally good, varies.  The relationships can vary during the course of the year from collegiate to adversarial.  If they become too adversarial there is a risk that effective budget monitoring may be impaired.  We acknowledge that Treasury is currently conducting a review into how the overall quality of relationships may be improved.

 

 

 

At present there are no effective rewards or sanctions for agencies’ budget monitoring results. 

 

 

 

Co-ordinated response from Treasury

 

 

 

Thank you for your letter of 1 July 2005 providing the final draft report of the performance audit – In Year Monitoring of the State Budget.

 

 

 

I am pleased to note the generally positive views expressed on both the operations of agencies and Treasury in quickly recognising likely budget variations. The recommendations made in the report are useful and, in some cases, already being implemented.

 

 

 

It is also encouraging that the review concludes that most significant variations between agency budgets and actual outcomes are due to factors outside the control of agencies, such as industrial determinations, actuarial adjustments and changes in government policy. This conclusion demonstrates that variations between budgeted and actual expenses do not indicate any failure in agency and Treasury monitoring.

 

 

 

A principal focus of both the audit opinion and recommendations is the need to focus even more on accrual based financial information.

 

 

 

The principal recommendation is that net cost of services, rather than the cash based Consolidated Fund appropriations, become the prime focus of Parliamentary control and that each agency’s net cost of services be set by Parliament as part of the Budget approval process.

 

 

 

It is relevant to note that Treasury’s monitoring and reporting processes are entirely accrual based. For example:

 

§         Treasury’s control of agencies’ budgets is based on the accrual-based controlled net cost of services;

§         All budget-dependent general government agencies provide accrual based financial statements each month, which are closely monitored by Treasury analysts; and

§         The Budget Result and other key Budget aggregates are accrual based.

 

 

 

In relation to Parliamentary control, Treasury is conducting a review of the appropriation system, with a view to recommending options for change to the Government. The appropriation process is a complex area. There are potential legal and constitutional constraints that need to be addressed in moving from a cash to accrual based appropriation system.

 

 

 

I would like to thank the Audit Office for the cooperative manner in which the performance audit was conducted.

 

 

 

(signed)

 

John Pierce

Secretary

 

Dated: 21 July 2005