Independence of the Auditor-General

The views set out in this paper were first presented in a speech by Mr A C Harris, New South Wales Auditor-General, given at the Australasian Council of Public Accounts Committees (ACPAC) Conference held in Sydney on 11 February, 1997.

The speech considers certain principles which ACPAC had put forward in a separate paper regarding the independence of the Auditor-General. In what follows, the ACPAC principles appear in bold italics and Mr Harris' responses appear in normal type.

Following ACPAC's consideration of this speech and their own paper, certain consequential changes were made to the ACPAC principles. A copy of the final version may be obtained from the ACPAC Secretariat at:

Public Accounts Committee
Legislative Assembly
Parliament House
Macquarie Street
Sydney 2000
Australia

INDEPENDENCE OF THE AUDITOR-GENERAL

In 1995 the Australasian Council of Auditors-General (ACAG) was invited to set out its thinking on issues relevant to the independence of Auditors-General for the Hobart biennial meeting of the Australasian Council of Public Accounts Committees (ACPAC).
Later in 1995 and again in 1996 ACAG made submissions to committees of the Commonwealth Parliament, principally the Joint Committee on Public Accounts (JCPA) on the same subject.

In 1997, ACAG made a submission to the Victorian inquiry into competition issues relating to the exercise of the Auditor-General's functions in that State.

To some extent it is surprising that a subject which has been discussed in Australia since the first Auditor-General was appointed in 1824 still deserves discussion. Perhaps, as Professor (now Justice) Finn alluded in Hobart in 1995, the subject reflects as much on the independence of Parliament as it does on Auditors-General.

This concept - that Auditors-General are to help Parliament hold the Government accountable and that Parliament has a right to know - is the foundation of ACAG's own thinking. Auditors-General do not discuss independence as a criterion justified in its own right, but as a quality that is necessary if Parliament's needs are to be met effectively.

It is entirely understandable that individuals, in looking at the principles advanced in the ACPAC paper, might wish to judge them in light of individuals' current circumstances in Parliament. If this were so, ACPAC participants on the Treasury benches might be more sceptical and circumspect than their Opposition colleagues about moves to strengthen accountability. Over time, this stance will surely so weaken Parliament that it will become increasingly ineffective. There are remedies for this - more accountability bodies such as the CJC and ICAC, minority governments, and general elections that distinguish between upper and lower houses, where they exist. But it would be rather better to judge the principles in their own right rather than on the basis of any temporary advantage being required for one side or the other. If the Parliament is weakened, it will not be able to identify and resolve Governmental corruption. We have seen this in the past, unfortunately.

With that foundation it is instructive to review ACPAC's position outlined in the paper which ACPAC is to consider at this Sydney biennial meeting.

1. Personal Independence

1.1 The Auditor-General should be an Officer of the Parliament.
The JCPA Report 346 recommended that the Auditor-General be an Independent Officer of the Parliament and it is reflected in the Auditor-General Bill 1996. This title reflects the importance given to the relationship between the Auditor-General and Parliament and also recognises that the auditor should not be subject to direction in the execution of audit responsibilities.

1.2 Parliament should select and recommend the Auditor-General for appointment by the Governor/Governor-General.
In New Zealand currently and in the United Kingdom the Auditor-General is appointed by the Crown on the recommendation of the Executive. The Executive in those countries, however, cannot/ do not select a nominee without some decisive Parliamentary input. (A similar process is employed in Queensland, NSW and the ACT. The Commonwealth's process as set out in the Auditor-General Bill 1996 similarly requires the Parliament or its committee effectively to approve the person's nomination to the Governor-General.) New Zealand is reviewing its legislation and may adopt the process whereby the Auditor-General is appointed by the Governor-General on the recommendation of Parliament.

1.3 Parliament should be responsible for the Auditor-General's termination of appointment.
It is generally the case that an Australasian Auditor-General's appointment can only be terminated by Parliament (or by resignation). In many jurisdictions (eg the Commonwealth, Victoria and I think New South Wales) due cause is required to justify termination.

1.4 The Auditor-General should be responsible administratively to the Parliament.
This might be seen as a consequence of 1.1 and 1.3 above. But even where the Auditor-General is an officer of the Crown, the Auditor-General might be required to submit administrative matters (eg leave applications) to one or more of the Presiding Officers. There may be a conflict between this principle and issues raised in 1.5.
In some jurisdictions, eg South Australia, there is self-executing law that deals with these administrative issues. In other jurisdictions, Parliament has not wished to take on these administrative issues (eg consenting to industrial agreements).

1.5 The Auditor-General should not be subject to direction by the Executive. However, if in any jurisdictions such directions are made, mechanisms should be established so that absolute transparency and reporting is ensured.
In many jurisdictions there are no provisions allowing (or there are provisions prohibiting) directions being issued to Auditors-General about their conduct of audits. In the Commonwealth Bill mentioned above the functional independence of the Auditor-General is made clear. In many jurisdictions, however, the Executive can direct the Auditor-General as a chief executive. ACAG has argued that, as in the United Kingdom at least, the Audit Office should not be subject to Executive control. (Many other Government agencies have been excised from such day-to-day controls.) Controls on salaries, Senior Executive Staff numbers, use of consultancies can affect the audit process. Removal of these controls in the United Kingdom and New Zealand has not, in practice, caused concerns to the Government.

1.6 Tenure should be a non-renewable fixed term of between 7 and 10 years.
This is consistent with modern practice. ACAG sees merit in the 10 year figure - recommended for and proposed by the Commonwealth. It might be necessary to consider a minimum term of say, 5 or 7 years if the Government could otherwise choose a lesser term.

1.7 The Auditor-General's remuneration should be determined by a remuneration tribunal.
Another feasible approach is to peg the salary legislatively against a specified level or against the remuneration of a specified group.

2. Operational Independence

2.1 The Auditor-General should have the sole power to carry out, or designate an auditor to carry out, the external audit on all public sector agencies over which the government has control, significant influence or to which it has financial exposure.
It appears necessary in setting the Auditor-General's mandate not to rely solely on the definition of "control" used in the private sector. In some jurisdictions arrangements established by statute - which are effectively under the jurisdiction of the State - have eluded this control definition. On the other hand, "significant influence" can be obtained through a Government exercising its regulatory responsibilities. And "financial exposure" is present with Government investments in deposit taking institutions. ACAG would like to see more research in this matter but sees merit in the USA approach which defines mandate in terms of the character of the entity and responsibility for its operations. This would include ownership and "control" but would be more extensive.
An associated issue is the extent to which the public auditor can "follow the dollar" (as the Tasmanian Parliament allows its Auditor-General). For example, does the public auditor have any mandate over publicly funded expenditure by charitable public hospitals (whose contracts have not been subject to a tender or a formula approach)?
ACAG also accepts that it is the Parliament that determines the audit mandate. It is entirely appropriate in principle that Parliament determine who is to prepare the advice to help Parliament execute its legislative and oversighting functions. Allowing agencies or the Government to appoint auditors might satisfy their needs but it should not be easily concluded that it would satisfy Parliament's needs.

2.2 The audit mandate should be extensive and include financial statements and controls; compliance with legislation; the efficiency and effectiveness of the use of public monies, as approved by the Parliament in each jurisdiction; performance indicators (the relevance of the indicators and/or the accuracy of performance indicator information).
This equates with current practice. The text does reflect the limitations which Parliament has allowed (these differ from jurisdiction to jurisdiction) in the exercise of performance audits. The important point is that the mandate is a matter for Parliament and is not merely the result of the Executive limiting its exposure to audit and accountability.

2.3 The Auditor-General should not be subject to any direction in how to carry out these audits; the Auditor-General will be free to determine the audit programme, including the bodies to be audited, the nature and scope of audits, who will carry out the audits and the priorities for audit.
As noted under 1.5, it is generally accepted that the responsible auditor should not be directed in the performance of the audit. Many jurisdictions do require, however, that the Auditor-General publish the standards to be used in the audit process. (Notwithstanding their deficiencies, the local Accounting Standards and Audit Standards applicable to the private sector and any authorised standards for the public sector are adopted for many jurisdictions. It is a reasonable principle that the executive not establish the accounting and auditing standards used in the audit process.)

2.4 The Auditor-General should have access to all information necessary to carry out audits. This access should be subject to strict confidentiality requirements to ensure that all information is used only for the purposes set out in the Auditor-General's legislation.
Restrictions by the Executive on access to information can so limit the audit scope as to render the audit ineffective. Importantly, such restrictions adversely affect Parliament's right to know.

2.5 The Audit Office should be either a statutory authority or established by separate legislation. The Auditor-General should be responsible for the resourcing decisions within the office.
The Auditor-General and The Audit Office are significantly interdependent and ACPAC's recognition of the importance of the Office in helping to effect the Auditor-General's role is welcomed.

2.6 In cases where the Audit Office does not raise revenue (through say audit fees), the resourcing of the Audit Office should be by means of a parliamentary allocation determined following consultation between the Executive and the Parliament (or its representative).
This requirement addresses the general principle that an auditee should not be able to limit an audit through resource restrictions. This principle is especially important in the public sector because the public sector auditor cannot resign individual audits. Ideally the entity commissioning the audit should ensure that the auditor has resources adequate for the audit. This has been recommended by the JCPA and is unambiguously in place in the United kingdom. There is concern expressed by some that Governments would thus not be "responsible" for all of the Budget, but that is not an issue in the United Kingdom. Nor is it an issue of great substance.

3. Parliamentary Oversight

Accountability of Auditor-General. The need for independence should not limit the accountability of the Auditor-General.

3.1 The Auditor-General should report annually to Parliament. The Audit Office's financial statements should be subject to independent external audit and included in the annual report. The external auditor should be appointed by the Parliament.

These requirements are either well established in many jurisdictions or reflect best practice. As the entity making the appointment of the external auditor, Parliament should ensure that the external auditor of the Audit Office also has resources adequate for the audit.

3.2 All Auditor-General reports should be tabled in Parliament. Legislation should set out the minimum reporting requirements and time limits for reporting.
The requirement that all Auditor-General's reports be tabled should exclude those reports done for other jurisdictions (eg peer reviews). The requirement otherwise reflects the principle that the Auditor-General's principal client is Parliament. It would generally limit the attractiveness to the Executive of requesting the Auditor-General to undertake "request" or "ad hoc" audit functions (eg as a probity auditor of contractual processes).

3.3 The performance of the Audit Office should be subject to periodic external review at an interval of between 3 and 5 years. The external reviewer should be nominated by the Parliament or Parliamentary Committee.
Again the Parliament or its Committee should ensure that the external reviewer can be compensated for the task. In those jurisdictions where reviews are undertaken at least every three years, it is a challenge to complete the review cycle and to institute any recommendations of Parliament before the next review is required. Given this and other review avenues (eg of individual reports) a five year cycle seems more appropriate.
Where the audit function is funded by appropriations which have been set or recommended by the Parliament, there is a consequential annual examination of the Auditor-General. In some jurisdictions (eg New Zealand) this annual examination occurs anyway and may relate to a range of performance indicators of the audit functions.

Where Auditors-General contract out audits in a contestable or quasi-contestable environment (to date New Zealand only) that practice can allow another "external" review. Benchmarking of audit functions can also be used by Parliaments to examine the efficiency of audit functions.

4. Transitional Arrangements

4.1 Consistent with precedent when amending core accountability provisions, transitional arrangements between old and new legislation should ensure that the independence of incumbent Auditors-General is not compromised.

ACAG has advanced this principle in its submissions.


Links Home About ACAG Directory of Members Statements of Principle Audit Legislation ACAG Equivalents Career Opportunities Contact Details Members Sign-in	Independence of the Auditor-General The views set out in this paper were first presented in a speech by Mr A C Harris, New South Wales Auditor-General, given at the Australasian Council of Public Accounts Committees (ACPAC) Conference held in Sydney on 11 February, 1997. The speech considers certain principles which ACPAC had put forward in a separate paper regarding the independence of the Auditor-General. In what follows, the ACPAC principles appear in bold italics and Mr Harris' responses appear in normal type. Following ACPAC's consideration of this speech and their own paper, certain consequential changes were made to the ACPAC principles. A copy of the final version may be obtained from the ACPAC Secretariat at: Public Accounts Committee Legislative Assembly Parliament House Macquarie Street Sydney 2000 Australia INDEPENDENCE OF THE AUDITOR-GENERAL In 1995 the Australasian Council of Auditors-General (ACAG) was invited to set out its thinking on issues relevant to the independence of Auditors-General for the Hobart biennial meeting of the Australasian Council of Public Accounts Committees (ACPAC). Later in 1995 and again in 1996 ACAG made submissions to committees of the Commonwealth Parliament, principally the Joint Committee on Public Accounts (JCPA) on the same subject. In 1997, ACAG made a submission to the Victorian inquiry into competition issues relating to the exercise of the Auditor-General's functions in that State. To some extent it is surprising that a subject which has been discussed in Australia since the first Auditor-General was appointed in 1824 still deserves discussion. Perhaps, as Professor (now Justice) Finn alluded in Hobart in 1995, the subject reflects as much on the independence of Parliament as it does on Auditors-General. This concept - that Auditors-General are to help Parliament hold the Government accountable and that Parliament has a right to know - is the foundation of ACAG's own thinking. Auditors-General do not discuss independence as a criterion justified in its own right, but as a quality that is necessary if Parliament's needs are to be met effectively. It is entirely understandable that individuals, in looking at the principles advanced in the ACPAC paper, might wish to judge them in light of individuals' current circumstances in Parliament. If this were so, ACPAC participants on the Treasury benches might be more sceptical and circumspect than their Opposition colleagues about moves to strengthen accountability. Over time, this stance will surely so weaken Parliament that it will become increasingly ineffective. There are remedies for this - more accountability bodies such as the CJC and ICAC, minority governments, and general elections that distinguish between upper and lower houses, where they exist. But it would be rather better to judge the principles in their own right rather than on the basis of any temporary advantage being required for one side or the other. If the Parliament is weakened, it will not be able to identify and resolve Governmental corruption. We have seen this in the past, unfortunately. With that foundation it is instructive to review ACPAC's position outlined in the paper which ACPAC is to consider at this Sydney biennial meeting. 1. Personal Independence *1.1 The Auditor-General should be an Officer of the Parliament.* The JCPA Report 346 recommended that the Auditor-General be an Independent Officer of the Parliament and it is reflected in the Auditor-General Bill 1996. This title reflects the importance given to the relationship between the Auditor-General and Parliament and also recognises that the auditor should not be subject to direction in the execution of audit responsibilities. *1.2 Parliament should select and recommend the Auditor-General for appointment by the Governor/Governor-General.* In New Zealand currently and in the United Kingdom the Auditor-General is appointed by the Crown on the recommendation of the Executive. The Executive in those countries, however, cannot/ do not select a nominee without some decisive Parliamentary input. (A similar process is employed in Queensland, NSW and the ACT. The Commonwealth's process as set out in the Auditor-General Bill 1996 similarly requires the Parliament or its committee effectively to approve the person's nomination to the Governor-General.) New Zealand is reviewing its legislation and may adopt the process whereby the Auditor-General is appointed by the Governor-General on the recommendation of Parliament. *1.3 Parliament should be responsible for the Auditor-General's termination of appointment.* It is generally the case that an Australasian Auditor-General's appointment can only be terminated by Parliament (or by resignation). In many jurisdictions (eg the Commonwealth, Victoria and I think New South Wales) due cause is required to justify termination. *1.4 The Auditor-General should be responsible administratively to the Parliament.* This might be seen as a consequence of 1.1 and 1.3 above. But even where the Auditor-General is an officer of the Crown, the Auditor-General might be required to submit administrative matters (eg leave applications) to one or more of the Presiding Officers. There may be a conflict between this principle and issues raised in 1.5. In some jurisdictions, eg South Australia, there is self-executing law that deals with these administrative issues. In other jurisdictions, Parliament has not wished to take on these administrative issues (eg consenting to industrial agreements). 1.5 The Auditor-General should not be subject to direction by the Executive. However, if in any jurisdictions such directions are made, mechanisms should be established so that absolute transparency and reporting is ensured. In many jurisdictions there are no provisions allowing (or there are provisions prohibiting) directions being issued to Auditors-General about their conduct of audits. In the Commonwealth Bill mentioned above the functional independence of the Auditor-General is made clear. In many jurisdictions, however, the Executive can direct the Auditor-General as a chief executive. ACAG has argued that, as in the United Kingdom at least, the Audit Office should not be subject to Executive control. (Many other Government agencies have been excised from such day-to-day controls.) Controls on salaries, Senior Executive Staff numbers, use of consultancies can affect the audit process. Removal of these controls in the United Kingdom and New Zealand has not, in practice, caused concerns to the Government. *1.6 Tenure should be a non-renewable fixed term of between 7 and 10 years. This is consistent with modern practice. ACAG sees merit in the 10 year figure - recommended for and proposed by the Commonwealth. It might be necessary to consider a minimum term of say, 5 or 7 years if the Government could otherwise choose a lesser term. 1.7 The Auditor-General's remuneration should be determined by a remuneration tribunal. Another feasible approach is to peg the salary legislatively against a specified level or against the remuneration of a specified group. 2. Operational Independence* 2.1 The Auditor-General should have the sole power to carry out, or designate an auditor to carry out, the external audit on all public sector agencies over which the government has control, significant influence or to which it has financial exposure. It appears necessary in setting the Auditor-General's mandate not to rely solely on the definition of "control" used in the private sector. In some jurisdictions arrangements established by statute - which are effectively under the jurisdiction of the State - have eluded this control definition. On the other hand, "significant influence" can be obtained through a Government exercising its regulatory responsibilities. And "financial exposure" is present with Government investments in deposit taking institutions. ACAG would like to see more research in this matter but sees merit in the USA approach which defines mandate in terms of the character of the entity and responsibility for its operations. This would include ownership and "control" but would be more extensive. An associated issue is the extent to which the public auditor can "follow the dollar" (as the Tasmanian Parliament allows its Auditor-General). For example, does the public auditor have any mandate over publicly funded expenditure by charitable public hospitals (whose contracts have not been subject to a tender or a formula approach)? ACAG also accepts that it is the Parliament that determines the audit mandate. It is entirely appropriate in principle that Parliament determine who is to prepare the advice to help Parliament execute its legislative and oversighting functions. Allowing agencies or the Government to appoint auditors might satisfy their needs but it should not be easily concluded that it would satisfy Parliament's needs. 2.2 The audit mandate should be extensive and include financial statements and controls; compliance with legislation; the efficiency and effectiveness of the use of public monies, as approved by the Parliament in each jurisdiction; performance indicators (the relevance of the indicators and/or the accuracy of performance indicator information). This equates with current practice. The text does reflect the limitations which Parliament has allowed (these differ from jurisdiction to jurisdiction) in the exercise of performance audits. The important point is that the mandate is a matter for Parliament and is not merely the result of the Executive limiting its exposure to audit and accountability. 2.3 The Auditor-General should not be subject to any direction in how to carry out these audits; the Auditor-General will be free to determine the audit programme, including the bodies to be audited, the nature and scope of audits, who will carry out the audits and the priorities for audit. As noted under 1.5, it is generally accepted that the responsible auditor should not be directed in the performance of the audit. Many jurisdictions do require, however, that the Auditor-General publish the standards to be used in the audit process. (Notwithstanding their deficiencies, the local Accounting Standards and Audit Standards applicable to the private sector and any authorised standards for the public sector are adopted for many jurisdictions. It is a reasonable principle that the executive not establish the accounting and auditing standards used in the audit process.) 2.4 The Auditor-General should have access to all information necessary to carry out audits. This access should be subject to strict confidentiality requirements to ensure that all information is used only for the purposes set out in the Auditor-General's legislation. Restrictions by the Executive on access to information can so limit the audit scope as to render the audit ineffective. Importantly, such restrictions adversely affect Parliament's right to know. *2.5 The Audit Office should be either a statutory authority or established by separate legislation. The Auditor-General should be responsible for the resourcing decisions within the office.* The Auditor-General and The Audit Office are significantly interdependent and ACPAC's recognition of the importance of the Office in helping to effect the Auditor-General's role is welcomed. 2.6 In cases where the Audit Office does not raise revenue (through say audit fees), the resourcing of the Audit Office should be by means of a parliamentary allocation determined following consultation between the Executive and the Parliament (or its representative). This requirement addresses the general principle that an auditee should not be able to limit an audit through resource restrictions. This principle is especially important in the public sector because the public sector auditor cannot resign individual audits. Ideally the entity commissioning the audit should ensure that the auditor has resources adequate for the audit. This has been recommended by the JCPA and is unambiguously in place in the United kingdom. There is concern expressed by some that Governments would thus not be "responsible" for all of the Budget, but that is not an issue in the United Kingdom. Nor is it an issue of great substance. 3. Parliamentary Oversight Accountability of Auditor-General. The need for independence should not limit the accountability of the Auditor-General. 3.1 The Auditor-General should report annually to Parliament. The Audit Office's financial statements should be subject to independent external audit and included in the annual report. The external auditor should be appointed by the Parliament. These requirements are either well established in many jurisdictions or reflect best practice. As the entity making the appointment of the external auditor, Parliament should ensure that the external auditor of the Audit Office also has resources adequate for the audit. *3.2 All Auditor-General reports should be tabled in Parliament. Legislation should set out the minimum reporting requirements and time limits for reporting.* The requirement that all Auditor-General's reports be tabled should exclude those reports done for other jurisdictions (eg peer reviews). The requirement otherwise reflects the principle that the Auditor-General's principal client is Parliament. It would generally limit the attractiveness to the Executive of requesting the Auditor-General to undertake "request" or "ad hoc" audit functions (eg as a probity auditor of contractual processes). 3.3 The performance of the Audit Office should be subject to periodic external review at an interval of between 3 and 5 years. The external reviewer should be nominated by the Parliament or Parliamentary Committee. Again the Parliament or its Committee should ensure that the external reviewer can be compensated for the task. In those jurisdictions where reviews are undertaken at least every three years, it is a challenge to complete the review cycle and to institute any recommendations of Parliament before the next review is required. Given this and other review avenues (eg of individual reports) a five year cycle seems more appropriate. Where the audit function is funded by appropriations which have been set or recommended by the Parliament, there is a consequential annual examination of the Auditor-General. In some jurisdictions (eg New Zealand) this annual examination occurs anyway and may relate to a range of performance indicators of the audit functions. Where Auditors-General contract out audits in a contestable or quasi-contestable environment (to date New Zealand only) that practice can allow another "external" review. Benchmarking of audit functions can also be used by Parliaments to examine the efficiency of audit functions. 4. Transitional Arrangements 4.1 Consistent with precedent when amending core accountability provisions, transitional arrangements between old and new legislation should ensure that the independence of incumbent Auditors-General is not compromised. ACAG has advanced this principle in its submissions.
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Independence of the Auditor-General