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FEDERAL GOVERNMENT FRAUD

13/12/2011 4:34:54 PM

No government is immune to the barbs of public criticism. But for the current Federal Government, accusations of misconduct and maladministration have been nothing short of rampant.

The latest assault has come from an investigative journalist who turned fire on a string of Commonwealth Government departments.

By successfully gaining access to dozens of departmental internal audit reports under Freedom of Information legislation, the reporter exposed fraud, misuse of taxpayer funds, credit card abuse and procurement irregularities at several of the largest Federal government departments.

The reporter’s solution on unveiling these irregularities, was that the Australian Public Service needed to be overseen by an independent corruption watchdog, the likes of the Independent Commission Against Corruption in NSW and the Crime & Misconduct Commission in Queensland. He observed that although internal audit teams had done their job of uncovering the trouble spots, ultimately ‘follow-through’ by management was weak with the result that the cases were not properly resolved.

As the professional body for internal auditors, the Institute of Internal Auditors – Australia) welcomes a vigorous debate on this issue. As agents of sound governance we completely agree there is scope for much greater transparency and accountability in the Australian Public Service.

But while there’s merit in establishing an external watchdog, we believe the real solution lies much closer to home. We believe it lies in comprehensively reforming the internal governance framework of our federal agencies so it follows best practice currently applied by Australian listed companies and indeed many forward-thinking State Governments like NSW and Queensland.

Granted, governance reform is not a flashy solution that will necessarily make sensational news. Sensible processes designed to get your house in order almost never do. Yet good governance is the bedrock of any organisation in the private or public sector, that is funded and therefore accountable to anyone other than those who run it: be they taxpayers, shareholders or the community.

So what would it take for our Federal agencies to get their house in order?

In essence, they need a robust system of checks and balances. That means those in charge - from the department Chief Executive at the top of the tree to the entire management team – need to have their powers and activities overseen by a body within the organisation that is independent of management. In companies, this function is fulfilled by the board of directors. In government agencies it is carried out by an audit committee which should comprise a majority of independent members, external to the agency, to ensure management’s activities receive genuine scrutiny.

Other fundamental elements include a strong internal audit function that is also independent of management. Internal audit’s role is to report objectively to the audit committee about the state of the department’s risks and control processes. Internal auditors are the eyes and ears on what’s really going right and wrong in the agency. Without them, no audit committee can carry out its oversight duties effectively.

The cases exposed in the media showed that while internal auditors were fulfilling their role of uncovering suspect activity, this intelligence was largely going nowhere. Critical audit findings appeared to have gone unaddressed. There were no signs of effective remedial action taken by the agency.

Why? In any company or agency with robust checks and balances, what typically happens when the audit committee receives a damning internal audit report, is the committee advises the Chief Executive or Department Secretary to set things right. Management would be made responsible for putting in place a plan to address the problems and to ensure they do not recur. The audit committee, supported by internal audit, would be reviewing those remediation programs to ensure they are working.

The value of this process of checks, balances, redress and follow-up, is that it creates a system where the organisation effectively self-regulates. Indeed, many of our best performing corporations and public sector agencies remain sustainable and successful because of their impeccable governance.

But in our Federal departments, many of these fundamentals are missing. Moreover, I would venture to suggest that while plenty of lip service is paid to good governance by the Department of Finance with whom this responsibility lies, there needs to be more evidence of real commitment to the kind of wholesale change needed to insulate the federal sector from recurring episodes of serious maladministration.

Just this year, the Department of Finance quietly introduced amendments to the Financial Management and Accountability (FMA) regulations. These amendments were supposed to implement the Finance Minister’s Better Government Agenda – a plan to ensure a government shaken by embarrassing scandals like the failed home insulation program, the green loans affair and school building cost blow-outs was seen to be doing something to prevent similar policy and program delivery failures in the future.

The FMA regulations claim to achieve ‘better government’ through enhanced audit committees to oversee department activity. But scratch the surface and it’s quickly apparent there are so many gaps that some might see this as an exercise in window-dressing rather than genuine governance reform.

A glaring flaw in the regulations is that Chief Executives possess too much power over the appointment, composition and functions of the audit committee. In particular, the Chief Executive need not appoint any external, independent, members to the committee. He or she can also unilaterally determine what skills committee members should have. And while the regulations set out a list of recommended functions for the audit committee, the Chief Executive can, with the stroke of a pen, decide that any or all of them are not appropriate.

As a result, there is no guarantee any audit committee created under the FMA regulations will be the robust, skilled, probing and, above all, fiercely independent check against management excess that best practice requires.

Any government serious about improving governance, performance and in rebuilding public confidence would have insisted on higher standards. Without strong audit committees to act as the department’s ‘conscience’ there’s every chance, management and operational staff will be tempted to ‘cover tracks’ rather than stamp out the root of the problem.

Under the lax FMA and Commonwealth Authorities and Companies (CAC) Act frameworks, fraud, misconduct, waste and incompetence will continue to rock our federal departments. In fact, there are signs it may already be ingrained: a recent independent evaluation of the Department of Agriculture, Fisheries & Forestry’s now concluded $56 million grants scheme under the Tasmanian Community Forest Agreement Industry Development program revealed widespread financial irregularities, with significant funds allocated without proper authority and paid out to ineligible businesses.

The Department of Finance must understand that Australia’s long term interests in better government cannot be served by platitudes and ineffective governance standards. The FMA and CAC regulations must be amended if they are to live up to their promise of delivering better government.

November 2011
Canberra Times, 6 December 2011