November 12, 2013

Horse 1568 - Why The So-Called "Commission of Audit" Is Not Anything Of The Sort

The so-called "National Commission of Audit" announced by Treasurer Joe Hockey formally opened today. I say "so-called" specifically because this is a direct lie from the Federal Government on only the first day that Parliament has resumed.

Never mind the fact that the 'budget emergency' has never shown its face and the fact that Mr Hockey when comparing his first Budget next May for the 2014/15 year will instantly look $8.8 billion better off thanks to him 'spending' that money by giving it to the Reserve Bank as part of its reserve fund¹. That $8.8 billion will never enter the economy, doesn't change aggregate demand in the same way that building a railway, motorway or other piece of infrastructure would; not does it affect real inflation because the money never enters physical circulation. It does however count as expenditure in the budget which affects the bottom line, making it look worse, which is the intended aim. Start out with a worse figure, do nothing and improve without having actually achieved anything. Top marks for that.

So then, that as an aside, why do I suggest that the National Commission of Audit is a direct lie. That depends on your definition of 'Audit'.

Being a word vulture I looked up the definition of 'Audit' in the OED3 and came up with this:

audit n. & v.
1. an official examination of accounts
2. a systematic review (as in a safety audit etc.)

One of the first things we learn as part of any basic Law 101 class is that a word in a piece of legislation should either be read according to the normal definition of the word or the word as it is used in context.
The OED3 definition here makes perfect sense to me because as an accountant, both definitions 1 and 2 are done when we send off accounts to be audited. They are examined, spot tested and reviewed according to a set of standards. It would make sense to me then, if a National Commission of Audit was a comprehensive view of the budget of the Commonwealth according to a set of well defined standards.

This is where the game gets a little tricky. Auditing government accounts might not be done in the same way as say the audit for a major corporation or a proprietary company because ostensibly the government isn't a for-profit organisation, though the way that Abbott and Hockey keep on yammering about surpluses as though any government which didn't achieve them, has failed (excluding themselves of course).

So then, I thought I'd visit the Australian Accounting Standards Board to find an appropriate definition. Guess what? There isn't one².

The third place I checked was the Corporations Act 2001. Okay, yes I admit that the government is not a corporation, though it is a body corporate and it makes sense to me that seeing as though it has an elected executive, that in many respects it acts like a corporation; so subjecting the government to the definitions contained in the act, seems logical to me. (If there is a parallel act, please message me in the comment doobly-doo below)

From Section 9 of the Corporations Act 2001:
"audit" means an audit conducted for the purposes of this Act and includes a review of a financial report for a financial year or a half-year conducted for the purposes of this Act.

"Audit" means an audit? That sounds daft until you realise that as I have mentioned that reading a word in a word in a piece of legislation means that it should be read according to the normal definition of the word or the word as it is used in context. Again I repeat myself here - sorry about that.

Section 307 is far more stringent about what it expects to see in an audit. Basically it looks for "an opinion about whether the financial report is in accordance with this Act", if it provides a "true and fair view", if "the inclusion of that additional information was necessary to give the true and fair view" and "whether the auditor has been given all information, explanation and assistance necessary for the conduct of the audit"

Now all of that seems perfectly self-explanatory to me. Reading the Act in plain English suggests to me that the Auditor must be satisfied that the accounts are in order and that proper information was used to produce the accounts. Basically an auditor wants to check and see if the accounts are true and that they haven't been Graham Gumbied-Up.

Now that we've got an idea of what an audit should look like, why do I think that the National Commission of Audit is straight out lying to us? Because I don't think that it's an audit.

If we look at their website:
The National Commission of Audit was announced by the Treasurer, the Hon Joe Hockey MP, and the Minister for Finance, Senator the Hon Mathias Cormann, on 22 October 2013.
The Commission has been established by the Australian Government as an independent body to review and report on the performance, functions and roles of the Commonwealth government.

This fails under the first OED definition because no-one has suggested at looking at the accounts. But does it fail under the second OED definition? To see that we need to look at the Terms of Reference:
The Commission should also be guided in its work by the principles that: 
 – government should have respect for taxpayers in the care with which it spends 
every dollar of revenue; 
– government should do for people what they cannot do, or cannot do efficiently, for 
themselves, but no more; and 
– government should live within its means. 

Efficiency and effectiveness of government expenditure 
The Commission is asked to report on efficiencies and savings to improve the effectiveness of, and value-for-money from, all Commonwealth expenditure across the forward estimates and in the medium term, including: 

Is this a a systematic review? NO.

Not once does the Terms of Reference suggest looking at government receipts, improving the efficiencies of collection of those receipts; nor does it suggest looking at the accuracy of the existing accounts, the reliability of the reporting systems which produced the accounts; it also I think quite categorically rules out the possibility that government could be spending more if current regimes are inadequate.
The Terms of Reference make it blatantly obvious that this is a review to look into how expenditure can be reduced; with the possibility of selling of assets and infrastructure.

That is NOT an audit.
It fails the OED3 test, and it fails a standard test laid out in what could be a parallel piece of legislation.
This National Commission of "Audit" is completely impartial in the same way as railway trains are impartial. Once you lay down the guidelines for them to run on, then that's the way they go.

Day one of the new Parliament and we've already been lied to. Well done.

Relevant links:

¹See the ABC link from 23rd October:

²Australian Accounting Standards Board - Glossary of Defined Terms

³ Sections 9 and 307 of the Corporations Act 2001

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