$27m accounting error at Communities

A $27 million misstatement of the Department of Communities’ cash reserves is the latest example of “sloppy” financial management in the public sector, the Auditor General has warned.

Auditor General Caroline Spencer gave the department a red mark for its 2022 annual report, tabled in parliament today.

The red flags included weaknesses in payroll controls and cash management controls, and an IT system potentially at risk of unauthorised access.

The numbers indicated the department had used restricted funds intended for disability services and housing to cover shortfalls in its operational cash, Ms Spencer said in her audit opinion.

But Ms Spencer said she had been unable to determine the extent to which that had occurred.

The department had breached the state’s Financial Management Act 2006, the report said.

Communities reported restricted cash reserves which were understated by $27.2 million, while unrestricted reserves were "equally overstated" at $24.9 million.

The error represented outstanding balances which were owed to the Disability Services Commission and Housing Authority, the audit said.

The department is the state’s key body for service delivery to vulnerable Western Australians, including child protection and disability services.

But it was rocked by the arrest of former executive Paul Whyte in 2019, who was sentenced to 12 years in prison for a fraud of more than $20 million.

Earlier this year, it was reported there had been concerns of endemic racism in the department.

It’s not the first time the Auditor General has raised a red flag in the department’s audit.

In the 2021 annual report, significant payroll weaknesses were identified, while in the 2020 financial year payroll and procurement controls were highlighted.

Growing concern

Ms Spencer told Business News weakening financial controls in the public sector were “really concerning”.

“Quite simply, we’re just seeing too much sloppy financial management in the public sector,” Ms Spencer said.

Qualified audit opinions were given to a record number of departments in the 2021 financial year, indicating issues uncovered during audits.

“The standard of financial management we expect to see wasn’t there,” Ms Spencer said.

Tightening financial management would reduce the risk of another Paul Whyte-style fraud, she said.

With regard to the Department of Communities, she said continued issues with IT systems and payroll controls were concerning.

But she said she was pleased that procurement controls had been improved.

This was only the second time a department had been pulled up for weaknesses in controls over restricted cash accounts.

Ms Spencer said the issue was not likely to represent a risk of fraud, but a risk of funds not meeting the purpose publicly stated or approved by parliament.

Action

A spokesperson for the Department of Communities said it had introduced improvements to remote access authentication and would work with Treasury on the cash management problems.

The plan would be to consolidate separate appropriations to simplify the adverse cash management finding.

On payroll issues, the spokesperson said the department had undertaken corrective measures since last year’s audit.

The Office of the Auditor General had lifted the qualification for procurement from 2021, the spokesperson said.

“Communities’ Payroll Remediation Project will continue into 2022-23, with further improvements implemented and progressed,” the department said.

“For the new qualifications, Communities has already introduced improvements to remote access authentication, addressing the computer controls finding, and will continue to work with the Department of Treasury to consolidate Communities’ separate appropriations, which will simplify and address the cash management finding.”

Operational changes had included increased funding for the professional standards directorate, a corruption prevention and education business unit, enhanced analytical tools and proactive intelligence.

“Communities is continuing to expand its integrity capability with an increased focus on corruption prevention and education activity, timely assessment of matters and an enhanced investigation function,” the spokesperson said.