Australia: New governance rules make audit committees a priority for Commonwealth entities

Clayton Utz Insights

Key Points:

Commonwealth entities should prepare for the 1 July 2015 deadline to appoint independent audit committee members.

The Public Governance, Performance and Accountability Act 2013 (PGPA Act) contains a number of significant changes in the governance of Commonwealth entities.

The accountable authority (secretary/board) of a Commonwealth entity must govern the entity in a way that promotes:

  • the proper use and management of public resources for which it is responsible;
  • the entity achieving its purposes; and
  • the entity's financial sustainability.

To reinforce these new governance objectives Commonwealth entities (including both non-corporate and corporate Commonwealth entities) and wholly-owned Commonwealth companies must establish an audit committee from 1 July 2015 – and the majority of its members must be independent.

New PGPA requirements for audit committee independence

The PGPA Act and the Public Governance, Performance and Accountability Rules 2014 (PGPA Rules) have introduced changes to the membership, composition and function of audit committees to make them more effective.

One focus of the changes has been to ensure there's a degree of independence between audit committee members on the one hand, and senior leadership and management roles in the Commonwealth entity on the other. Under the PGPA Rules, the following persons cannot be a member of an audit committee:

  • the accountable authority, or, if the accountable authority has more than one member, the head of the accountable authority; or
  • the chief financial officer of the entity, or the chief executive officer of the entity, however these persons are described.

In addition the Department of Finance recommends that the COO, CIO, head of corporate services and internal audit not be a member of the audit committee.

This echoes the views of the ANAO which has previously recognised that a distinguishing feature of an audit committee is its independence. This ensures that the committee acts in an objective, impartial manner free from any conflict of interest or undue external influence.1

While independence is not defined it is to be assumed that the person cannot be an official or employee of the entity. Policies to identify committee member relationships with the entity should be introduced and consideration should also be given to member rotation to ensure new experience is introduced to the committee.

A further important change introduced with the PGPA Act is the emphasis on the need for a Commonwealth entity's accountable authority (e.g. board or secretary) to establish and maintain an appropriate system of risk oversight and management and appropriate systems for internal controls (section 16 PGPA Act). Unless a separate risk committee exits, risk management will be a key concern for audit committees. However entities should not assume that having an audit committee displaces or changes the management accountability of the entity, including in relation to risk oversight. Rather, the entity should work to enhance its existing governance framework, risk management practices and control environment by providing independent assurance on the key elements of its operations.2

Who can be part of the audit committee?

The audit committee must consist of at least three persons who have appropriate qualifications, knowledge, skills or experience to assist the committee to perform its functions.

Collectively, the audit committee should possess broad business, project management, financial management and/or public sector experience, and at a minimum each member should be financially literate (that is, able to read and understand financial statements). Further it is recommended by Finance that at least one member of the committee should have accounting or related financial management experience and/or qualifications, to assist in the interpretation and application of relevant accounting and auditing standards.

Functions of the audit committee

Under the PGPA Rules, the accountable authority determines the functions of an audit committee in a written charter, yet there are still minimum functions that an audit committee must perform. These include providing review and guidance on:

  • Financial reporting: this may include activities such as advising on the entity's preparation and review of its annual financial statements, the adequacy of the entity's internal budgeting and reporting, and the entity's obligations under the PGPA Act and other relevant Acts.
  • Performance reporting: this may include reviewing the framework of key performance indicators and other performance measures, or the entity's annual performance statement; or making recommendations on concerns or opportunities identified by internal or external audits.
  • System of risk oversight and management: This may include advising the entity about internal audit plans; advising about professional standards to be used by internal auditors in the course of carrying out audits; reviewing the entity's response to internal and external audits and reviewing the entities risk management framework which may include review of the entity's risk management plan and business continuity plan.
  • System of internal control: This may include reviewing the entity's compliance framework, governance arrangements and internal control environment.

In addition the audit committee might consider insurance needs management, compliance with ethical requirements and managing special investigations, for instance in relation to fraud.

Next steps and key considerations for Commonwealth entities

Commonwealth entities should prepare for the 1 July 2015 deadline to appoint independent audit committee members.

Audit committees provide accountable authorities with a valuable resource to discharge their obligations under the PGPA Act. Accordingly getting the audit committee membership right is obviously a priority, and entities might be wondering where they can source enough members, given the requirements and the size of the talent pool.

Importantly, neither the PGPA Act nor the PGPA Rules prohibit the appointment of non-executive Board members, other than the chair, to an audit committee of a corporate Commonwealth entity or wholly-owned Commonwealth company. Further neither the Act or the Rules prohibit the same audit committee being established for multiple Commonwealth entities or companies. This will obviously allow for efficiencies, but entities should not see this as an excuse to ignore their audit committee.

Further as the ANAO has previously warned, each public sector entity is different and each has its own governance framework, risk and control structures.3 Accordingly the precise role that each audit committee undertakes should be determined within the context of each entity's governance framework . It could turn out to be a risky move if the same members or committees make a mistake that is then repeated across multiple entities.

Finally in addition to establishing an appropriately appointed committee, Commonwealth entities need to establish appropriate risk identification and management frameworks that can be observed and scrutinised by the audit committee.

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1ANAO Better Practice Guide – Public Sector Audit Committees: Independent Assurance and Advice for Chief Executives and Boards (August 2011)

2ANAO Better Practice Guide – Public Sector Audit Committees: Independent Assurance and Advice for Chief Executives and Boards (August 2011)

3ANAO Better Practice Guide – Public Sector Audit Committees: Independent Assurance and Advice for Chief Executives and Boards (August 2011)

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

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