Lib costings debacle - "auditors" fined

Amateur hour all round.

The two Perth accountants who costed the Coalition’s 2010 election policies breached professional standards and will be fined, a disciplinary tribunal has ruled.

The ruling is an embarrassment to the Coalition which claimed during the campaign the costing was “as good as you could get anywhere in the country, including in Treasury." In recent months it has threatened to use private accountants once again.

Geoffrey Phillip Kid and Cyrus Patell, both of the Perth office of WHK Horwath produced a one-page report for the Coalition two days before the election which Shadow Treasurer Joe Hockey tendered as an audit, saying the pair had certified “in law that our numbers are accurate".

“If the fifth-biggest accounting firm in Australia signs off on our numbers it is a brave person to start saying there are accounting tricks,” he told ABC radio. “I tell you it is audited. This is an audited statement.’’

In fact the document was the result of a carefully-worded agreement between the accountants and the Coalition to produce work primarily "not of an audit nature".

An audit would examine the assumptions used by the Coalition and whether they were reasonable.

Kidd and Patell’s unpublished agreement with the Coalition explicity required them to make no inquires about “the reasonableness of otherwise of the assumptions used"...

A professional conduct tribunal established by the Institute of Chartered Accountants ruled in July that Kidd and Patel were liable to face disciplinary action because their one-page report failed to contain “a statement that the procedures performed do not constitute either an audit or a review” and so failed to properly describe the limited nature of the agreed upon procedures.

Kidd and Patel appealed. The November judgement upholds the original finding stating that in view of the nature of the assignment and public interest in the matter Kidd and Patell had “a professional obligation to understand” the type of service they were providing and to comply with the applicable standards.

The initial decision that they be “severely reprimanded” was downgraded on appeal to “reprimanded”. Each will be fined $5000 and will will have to make a contribution toward the cost of the hearing and the appeal.

Treasurer Wayne Swan said yesterday the judgement was “the final nail in the coffin for the Liberals’ economic credibility”.

“It has been laid to rest at the bottom of a $70 billion budget crater. It shows exactly why Mr Hockey is so desperate to avoid independent, professional scrutiny of his budget debacle by the Treasury and now by the newly legislated Parliamentary Budget Office,” he said.

Contacted by The Age last night Mr Hockey said it was a matter between the Institute and the two accountants.

Asked whether he had been wise to refer to their work as an audit he said: “I’m not getting into it mate”.

A Treasury examination of the Coalition’s 2010 costings found errors including double counting and questionable assumptions amounting to $11 billion.

Mr Hockey said he would use the new $25 million Parliamentary Budget Office for costing his policies up until the campaign began. “After that we are looking at a range of options,” he told The Age.

“It might not be a private accounting firm, it might be a panel of eminent Australians.”

Sydney University accountancy professor Bob Walker whose complaint sparked the investigation said he was disappointed in the judgement which did not directly address the “overriding responsibility of members of the accounting profession to act in the public interest”.

Published in today's Age


The letter:





Coaltiion Costings Document August 18 2010



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Read more >>

Human Guinea Pigs. How the ATO used us to test its computer

The Tax Office decided to turn on its new income tax processing system over the Australia Day long weekend in 2010 knowing it was “virtually certain that significant errors will emerge as processing ramps up”.

The internal advice, detailed in the Inspector General of Taxation report released yesterday was that many of the defects could only be fixed when the system was live, meaning taxpayers would effectively used as guinea pigs to bed down the system.

Aware that if they didn’t take the system live in January 2010 they would have to wait until January 2011 after the 2010 tax year to try again, the Tax Office went ahead in part because of the high risk of losing key staff if they waited another year.

Two years late and $300 million over the $445 million budget the Tax Office felt that if it waited the new system would cost them an extra $200 million. It also wasn’t sure it would be any better prepared.

An external investigation had found morale low, the development team “somewhat dysfunctional” and the quality assurance process promised by the contractor Accenture “not being followed in practice.”

Over the Australia Day long weekend 27 million taxpayer records were transferred to the new system. On February 2 it was impossible to go back...

By May 5 Tax Office staff had applied 395 e-fixes or workarounds, an average of 30 per week.

Some were as simple as manually turning on and off parts of the system.

Negative taxable income figures sent to Centrelink were being read as positive and Centrelink was demanding repayment of benefits. Refund letters were being set out without refund cheques and as many as one million tax returns were held up.

The ATO diverted 1200 staff from other duties to answer phones and process forms.

The number of staff manually processing urgent hardship payments swelled form the usual four to 200. Tax officers had to manually input information into the old computer system, email the result to other parts of the government to check whether there was an outstanding debt, and then type the assessment into a Microsoft Word document which was then double checked by another officer. If a refund was due the case was referred to another officer for approval and a hardcopy cheque manually prepared on different computer system.

Taxation Inspector General Ali Noroozi believes the Tax Office probably had little choice but to bring the imperfect system on line in January 2010 and saves his criticism for its approach to communication and compensation.

An update on the Tax Office website on March 2 referred to the problems holding up returns as “minor” when it was likely they would have been classified as Severity 1 defects were it not the presence of a “safety net” that withheld returns from processing.

Mr Noroozi recommended the Office communicate more openly with taxpayers and its staff and improve the process for offering compensation. Tax Commissioner Michael D'Ascenzo has accepted the recommendations about communication but has not agreed to reassess the rules for compensation. As of November it had received only 94 claims for compensation.

The Inspector General’s report has been with the government since December. His chief recommendation is that in future such projects the government avoid over-reliance on one contractor and introduce the new system in modules rather than in one hit.

Published in today's SMH and Age


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Hockey: "It was an audit" Auditing firm: "We are not responsible for what he says"

The firm the Coalition says audited its election costings has been accused of breaching both auditing and ethical standards in a complaint to be lodged with the Institute of Chartered Accountants.

Professor Bob Walker of Sydney University, a 40-year member of the Institute, will lodge a private complaint because he says it is "in the public interest that auditing standards be respected".

"If they had produced a report like this on a prospectus, they would be in trouble because it would be an offence under the Corporations Act not to comply with relevant standards," Professor Walker said.

"But as this does not fall under the Corporations Act, it is a matter for the profession."

Geoff Kidd, one of the principals of WHK Horwath who signed the letter endorsing the Coalition's costings is a former Western Australian chairman of the Institute.

Australian Auditing Standard 804 requires an auditor to "obtain sufficient appropriate audit evidence as to whether management's best-estimate assumptions on which the prospective financial information is based are reasonable".

The one-page letter from WHK Horwath attached to the Coalition's costings released Wednesday explicitly states it relied "on the assumptions provided".

The standard requires auditors to instead investigate whether "all material assumptions are adequately disclosed, including a clear indication as to whether they are best-estimate assumptions or hypothetical assumptions."

The costings document discloses no assumptions...

The firm did not assert that it had in fact conducted an audit in the one-page letter released Wednesday. Instead it said it had been engaged "to review the costings estimates prepared by the Coalition".

However in spruiking the document on radio and television yesterday Coalition Treasury spokesman Joe Hockey repeatedly described it as an audit.

"We have the fifth biggest accounting firm in Australia auditing our books and certifying in law that our numbers are accurate," he told ABC TV. "They have certified our numbers based on all the information we have provided them, they have legal obligations and legal risks," he added.

Speaking to ABC radio he said the analysis was "signed off by the fifth-biggest auditor in Australia".

"I tell you, it is an audit. This is an audited statement," he said.

The code of ethics requires accountants to endeavour to make sure clients and others do not misinterpret their work.

Asked by The Age yesterday whether Mr Hockey had been correct to describe the work as an audit Mr Kidd said he was "not responsible for what Mr Hockey says".

"We are well aware of our obligations. We provided one document and we believe it speaks for itself."

Professor Walker said big firms had "backed away from sprinkling holy water over political forecasts" precisely because of the danger their work would be misused.

Institute general manager Lee White said it took seriously the requirement that members ensure their work was not misrepresented, but "in some ways you can only do so much".

Dr Christine Jubb of the ANU's National Centre for Audit and Assurance Research said it was clear the document was not an audit.

"Audit and review have very distinct meanings. Joe Hockey is playing fast and loose, there's no doubt," she said.

An economist who has previously costed policies for oppositions told the The Age he was surprised by the work presented Wednesday.

"Anyone doing costings has to do an assessment of assumptions," said. "Otherwise it is just 10 plus 10 equals 20, and you say, yes we agree it equals 20."

Published in today's SMH and Age

Auditing Standard 804

Section .02: In an engagement to audit prospective financial information, the auditor should obtain sufficient appropriate audit evidence as to whether:

. management's best-estimate assumptions on which the prospective financial information is based are reasonable for the preparation of the prospective financial information;

. the prospective financial information is properly prepared on the basis of the assumptions;

. the prospective financial information is properly presented and all material assumptions are adequately disclosed, including a clear indication as to whether they are best-estimate assumptions or hypothetical assumptions; and

. the prospective financial information is prepared on a consistent basis with historical financial reports, using appropriate accounting principles.


APES 110 Code of Ethics for Professional Accountants

Section 130.6: Where appropriate, a Member should make Clients, employers or other users of their services aware of limitations inherent in the services to avoid the misinterpretation of an expression of opinion as an assertion of fact.



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Expect a visit, with a locksmith, if you're hiding something from the Tax Office

The Tax Office has been given a "tick of approval" for continuing to break into homes, cars and workplaces where it believes documents are at risk of being destroyed.

The visits, which involve locksmiths and do not need court-issued warrants have received the all-clear from the Ombudsman after an investigation which his staff accompanied 100 tax officers on a coordinated raid on homes, cars and workplaces in four states.

Ombudsman John McMillan said at each site the officers flashed "wallet authorities" and provided provided the people they met with signed approvals and a brochure about tax law.

The officers were armed with lists of names, phone numbers and phrases to help identify documents and electronic records on computers and mobile phones...

"The ATO officers advised the building occupiers that they were under no obligation to answer any questions other than those regarding the location of the documents. The building occupiers elected to answer all questions freely," the report says.

Professor McMillan said the Tax Office took the use of its powers seriously and had established sound guidelines and manuals to assist its staff to apply the powers.

"This is the second Ombudsman investigation into the ATO’s access without notice powers in the past 10 years and it confirms that taxpayers can feel confident that the ATO is exercising these powers in the manner in which it should."

The Tax Office was unable to tell Professor McMillan how many raids it conducted each year saying it had kept "no central register of records in relation to the use of access powers".

It has undertaken to start collecting the information and publish it in its annual report.

An earlier Senate report found the ATO conducted as many as 280,000 raids without warrants yearly.

"This volume of monitoring activity could not be conducted under a warrant based system without a very large increase in resources or a substantial reduction in monitoring," it said. "This in turn would lead to losses in revenue."

Published in today's SMH and Age


UPDATE: 280,000 sounds far too high, but that's what the reports say.


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The Godwin Grech finding, from the Audit Office

It's here:

Representations to the Department of the Treasury in Relation to Motor Dealer Financing Arrangements

And it looks bad for the Treasury.

From the Auditor General:

"Treasury’s response to the various representations varied markedly,
from not responding to the representation to providing extensive,
ongoing assistance to aid the dealer secure ongoing wholesale floorplan
finance."

"The under‐resourcing of the implementation phase of the policy placed
at risk the anticipated policy outcomes. It also placed a considerable workload
on Mr Godwin Grech, the Treasury official primarily responsible for the
development and implementation of the policy measure, particularly in light
of his medical condition."

From Goodwin Grech, in comments:

"I did raise resourcing issues with Treasury Deputy
Secretary, Mr Jim Murphy on a number of occasions – both in mid to late
December 2008 and again in early January 2009. I was told that options would
be explored – but nothing happened. Indeed, the overall resource effort
diminished especially after the 5 December 2008 public launch of OzCar by the
Prime Minister and Treasurer in Sydney.

"In addition to the very significant work load pressures
that were placed on me, it was well known to senior Treasury management,
including Dr Ken Henry, the relevant Deputy Secretary, Mr Jim Murphy, and
the relevant immediate supervisor, Mr David Martine, that I was physically
impaired and suffered from a complex array of serious medical conditions.
This included the loss of my colon, advanced dysmotility and malrotation of
my small bowel that resulted in 7 small bowel obstructions since March 2005.
Treasury management were aware that I had a near fatal episode in late 2006
when a blockage resulted in an intestinal haemorrhage which led to
septicaemia and acute renal failure. I never fully recovered from this episode
having since developed stage 3 chronic kidney disease and metabolic bone
disease including osteoporosis. I have suffered a further 3 small bowel
obstructions since the near fatal 2006 episode – the most recent in February
2009. Treasury is aware of all of this and was at the time.

Unbeknown to Treasury management – or to me – I was also suffering from
chronic clinical depression which doctors believe has been present and
untreated for some years.

Given this complex medical condition, and the stark reminder of my
vulnerability following my hospitalisation in both February and March 2009,
senior Treasury management could – and I say should‐ have taken action to
ensure that I got the support that I needed. This did not happen...

"The dealer would ring me, 3, 4 or more times a day as Treasury phone records
and my personal assistant Ms Rose Moulis and my supervisor, Mr David
Martine should confirm. The dealer would be highly emotional and
threatened suicide on more than one occasion. I reported this to my
supervisors and the Treasurer’s Office, but got no help.

The dealer’s [parent] also spoke with me pleading with me to save [their child],
the grandchildren and the family. I also reported this to Mr Martine and Mr
Murphy. Again, I received no assistance.

"I was in an impossible situation, and undertook to both the dealer and [the
dealer principal’s] [parent] that I would explore all options as long as they
assured him of their safety.

I lacked any training in handling human crisis situations of this type. I used
whatever leverage I could think of so as to avoid the possible loss of life. This
was not normal Treasury policy work...

Read more >>

Surprise: The Deputy PM suggests muzzling the Audit Office during election campaigns

Deputy Prime Minister Mark Vaile today:

"I mean, you know, to have an unelected individual who is a statutory office holder, making a decision on the release of a report like this and the timing like that, maybe that shouldn’t, that needs to be looked at. And maybe that’s something that the next Government of Australia should have a look at."

Read more >>

Productivity, Coalition style

Approving grants, some at 3.26pm, one at 3.27pm, one at 3.28pm... in the last desperate minutes before the issuing of writs for the 2004 election.

Read more >>

Whiteboard Two: "Venal, lazy, and verging on unlawful"

The Prime Minister says the election is about competence, taking the “right decisions” in the interests of Australia.

The Australian National Audit Office has examined the competence of his ministers in taking the right decisions and found it wanting.

Over 1,200 pages the Office paints a picture of ministers keen to approve projects in Coalition electorates regardless of the advice of their officials and so sloppy in the way they went about it that they often didn’t even bother to record the basis of their decisions.

It paints their behaviour as venal, lazy, and verging on unlawful...

It takes the trouble to remind Howard ministers including his deputy Mark Vaile and his former deputy John Anderson that when they are approving grants “they are approving the expenditure of public money”.

John Howard’s anointed successor Peter Costello made his name in the early 1990’s destroying the parliamentary career of the Labor Member for Canberra Ros Kelly after she was implicated by the Audit Office in the whiteboard affair. Her crime had been to use a whiteboard (which she later erased) to “shovel funds to marginal Labor electorates prior to the March 1993 election”.

She dished out $60 million.

The Regional Partnership Program directed by Peter Costello’s colleagues didn’t even use a whiteboard. The Audit Office finds that many of the reasons for its grants weren’t documented at all.

It shelled out $350 million.

The culture that allowed it to happen appears to pervade the Howard government.

Early this year when the Prime Minister allocated $10 billion to a water package without consulting his cabinet the Finance Minister Nick Minchin defended his behaviour saying it was only “one billion a year, which is less than half a per cent of Commonwealth government expenditure, let’s keep it in perspective”.

And as the Coalition’s spending promises in the current election have grown so big that on Treasury forecasts they threaten to deny it the budget surplus it has promised to maintain the Prime Minister hinted this week that it didn’t matter.

“What a lot of people have overlooked is the projected surplus in future fiscal years is likely to be higher than what's projected,” he told the Australian Financial Review.

The Coalition looks poorly placed to win an election about competence.


NEWS

Government figures including the Deputy Prime Minister have become embroiled in a reprise of the so-called "sports rorts" affair that helped bring down the Keating Labor government in the mid-1990s.

In a damning three-volume report of an investigation into the government's $350 million Regional Partnership grants program released yesterday the Audit Office found that government ministers and parliamentary secretaries including Mark Vaile, De-Anne Kelly and John Anderson

. regularly overturned recommendations from departmental officials to reject grants;

. approved funding for projects for which no application had been made;

. frequently recorded no reasons for their decisions;

. demanded that officials present them with lists of grant applications arranged by electorate;

. demanded that officials fast-track the processing of applications in the lead-up to the 2004 election resulting in projects gaining a tick without “the usual level of scrutiny”; and

. in an extraordinary burst of activity between 3.25pm and 4.16pm on the day the government went into caretaker mode in 2004 approved 16 grant applications, two of which their officials had knocked back.

The Audit Office examined around 278 of the 1,372 grant applications considered by the ministers during the first three years of the scheme from July 2003 to June 2006.

Among the projects that it found had been fully funded by the ministers against the expressed wishes of their officials were a synthetic bowling green in the marginal Tasmanian Liberal Party seat of Bass and an ethanol refinery in NSW National Party seat of Parkes that received $1 million three years ago but has yet to be built.

The Audit Office found that the ministers were more likely to overturn recommendations to reject applications “in electorates held by the Liberal and National Parties”.

Conversely the government ministers were more likely to overturn recommendations to approve applications “in electorates held by the Labor Party”.

The report reminded ministers that they were “expected to discharge their responsibilities in accordance with wide considerations of public interest and without regard to considerations of a party political nature”.

It stressed that ministers, like officials, were required to make decisions on sound grounds, after making proper inquiries and to document the reasons for their decisions.

It found that the program had “fallen short of an acceptable standard of public administration”.

Campaign in Mackay in Queensland the Labor leader Kevin Rudd said the report was “an indictment of a government which has become arrogant and out of touch in its use and abuse of taxpayer funds”.

The Prime Minister Mr Howard said he had not seen the report, an advanced copy of which was delivered to the Department of Transport and Regional Services in September.

You are imputing a knowledge that I don’t have,” he told reporters in Cairns. “It came out only a short time ago and I’ve been engaged on other matters”.

However he said that as “a gentle point without claiming any great knowledge of the auditor general’s report” the overwhelming bulk of regional seats were held by the Coalition.

“Now as a matter of ordinary logic if you have a regional partnerships scheme you are going to expect that the great bulk of the grants under the regional partnership scheme will go to Coalition seats.”

The Deputy Prime Minister and National Party Leader Mark Vaile, one of the Ministers named in the report, is due to announce a grant under the scheme in Queensland today.

He said yesterday that his former department, Transport and Regional Services had accepted all of the 19 recommendations in the report.

But he said he “would not apologise for the success of the program in leveraging investment outside the major capital cities”.

Read more >>