Financial Management Compliance Framework (FMCF)

Financial Management Compliance

Framework (FMCF)

Financial Management Compliance

Framework (FMCF)

2

Agenda

• Welcome

• Overview of the Framework

• The new financial management rules

– Standing Directions of the Minister for Finance under the Financial Management Act 1994

• Likely implementation and compliance issues for entities

• Potential issues

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Overview of the framework

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Purpose of the FMCF

Provide a mechanism through which government can monitor and review compliance with financial management requirements ie: the Financial Management Package

Provide Portfolio Ministers, Minister for Finance (MfF) and Parliament with assurance that VPS entities have implemented appropriate systems to ensure effective, efficient and responsible financial management of public resources

Clarify responsibilities for ensuring financial management compliance and reporting on compliance (at WoG, Portfolio, Agency levels)

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Key stakeholders

Over 300 public sector agencies listed in the Annual Financial Report (AFR) for Vic government, their CEOs/Secretaries, management and employees

Board & Audit Committee members

Internal Auditors

Victorian Auditor-General

Portfolio Ministers and the Parliament

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Timelines

Phase 1

Framework development

Phase 2

Rules development

Phase 3

Roll out & communication

Phase 4

Compliance & reporting

Aug 01 July 02 Sep 02 Jun 03 1 July 03 16 July 03 July-Aug 03

Jan 04 Jun 04

Framework development commences

Framework endorsed

New rules issued as exposure draft for 3

month comment

period

Rules issued as

final for roll out from 1

July 03

New rules come into

effect

Official launch by Minister

for Finance

End of transition period for

Part 2

End of year 1 implementation

DTF communication across WOG

Entity and department certification

Aug/Sep 04

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Components of the FMCF

Fin

anci

al

Man

ag

emen

t C

om

pli

an

ce F

ram

ewo

rk AS3806 “Compliance Programs”

New financial management rules – Standing Directions of the Minister for

Finance

3 Tier compliance reporting structure

Web-based technology (Financial Management Knowledge Centre and

Monitoring System)

Certification checklist for reporting

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3-tier compliance reporting structure

DTF

Minister for Finance

Departments

Portfolio Ministers

VPS Entities

Whole-of-Government Level

Portfolio Level

Entity Level

Accountability rests with individual entities

Issue Rectification, Certification &

Reporting

Support & Monitoring

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Certification process

• Standard certification checklist

• Based on Directions

• Signed by Accountable Officer annually

• Rectification plan to include Audit Committee monitoring

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Ongoing Monitoring

• DTF will develop a monitoring regime

• Regime will include visits to selected entities to

– validate certification

– review supporting documentation

– assess progress of rectification programs

• Suggested pilot certification for selected entities in first 6 months of 2004

• Late 2004 DTF will commence assurance reviews

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FMCF and TCF web based tool

Financial Management Compliance Certification

Tax Compliance Certification

Library – FMP

What’s New?

Key events and dates

Issues management

Compliance -

Library

What’s New?

Key events and dates

Issues management

The FMKC will include updated GGPC requirements, training material, guidance

material, templates etc to assist with implementation)

DTF Web Site

Financial Management Knowledge Centre

(www.fmkc.dtf.vic.gov.au)

Tax Knowledge Centre (www.tkc.dtf.vic.gov.au)

Compliance Monitoring System

(www.cms.dtf.vic.gov.au)

G

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Guidance Material

• Guidance materials have been provided on the following areas:

- pro forma charters

- pro forma policy & procedures

- template letters

- pro forma financial code of practice

- exemption criteria

G

13

The new financial management rules

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The Directions

Standing Directions of the Minister for Finance

Three high level leading edge financial management principles

Financial Management Governance and

Oversight

Financial code of practice

Financial governance

Financial risk management

Delegations of authority

Internal audit

External audit

Financial Management Structure, Systems,

Policiesand Procedures

Financial management structure

Information technology systems

Education and training

Policies and procedures

Financial Management Reporting

Internal financial management reporting

Reporting requirements in terms of part 7 of the FMA

Other external reporting

Financial performance management and evaluation

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Overview of the Directions

• Directions outline high level requirements for financial management, not a detailed prescriptive approach

• Elements of the Directions are mandatory, under the headings:

– Directions

– Procedures

• Other elements are advisory and provide guidance in best practice

• Part 2 of the Directions are the significant new component, Parts 3 and 4 summarise previous detailed Directions

• Six month transition period for full compliance with Part 2 of the Directions

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The Directions




Oversight





Internal audit

External audit












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Financial Governance

• Establish robust and transparent financial governance policies and procedures directed to the oversight of its financial management

• Major elements include:

– review and monitor financial reports of entity, including budgets

– set strategic direction

– oversight of use of public funds and resources appropriately

– oversight of entity’s risk management and financial controls

• The Responsible Body can delegate some of its responsibilities, to an Audit Committee, Finance Committee or equivalent

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Financial Governance cont.

• Annually the Accountable Officer and CFAO need to formally state to the Responsible Body that:

– financial reports are presented fairly and in accordance with the FMA

– financial reports are founded on risk management and internal compliance and control which are operating efficiently and effectively

Annual Certification

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• Entities must establish an Audit Committee with at least 2 independent members unless exemption obtained

• Factors to consider:

– can be remunerated for their role as Director

– members should be drawn from the Board

– definition in the Directions is guidance but consistent with recent Australian guidance

• Where the Responsible Body is a board the Audit Committee must have at lest 3 non-executive directors and a majority of whom are independent

• Accountable Officer (AO) and CFAO are not to be members of the Committee

Audit Committees

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• Chairperson of the Audit Committee is to be an independent member and must not be the Chairperson of the Responsible Body

• The Committee should have a Charter which is approved by the Responsible Body and formally reviewed at least every three years

• Members of the Audit Committee must possess key qualifications

– basic financial literacy

– knowledge of entities risks and controls

– objectivity and independence of judgement

– industry knowledge and business experience

– adequate time to discharge responsibilities

Qualifications

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• Audit Committee must have direct access to internal and external auditors and be able to seek independent expert advice

• Direct access to management group and seek explanations and additional information as required

Liaison with management and other

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• Entities must ensure there is a financial risk management policy and internal control system in place

• Elements to be considered include:

– framework to identify, assess, monitor, manage and report on significant risks

– understanding of nature, impact and consequence of significant risks

– annually review and critical appraisal financial risk profile

• Framework must cover:

– identifying financial risks through objectives in strategic plan

– process to identify new risks or changed risks

– actions required to manage the risks

– appropriate mechanism to report outcomes

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• Entities are required to implement and maintain a financial code of practice

• Cohesive statement of the entity’s internal processes to ensure probity on financial management

• The Directions provide details on a financial code of practice (eg independence, tendering, procurement)

• Entity responsibilities include:

– communications of code to employees

– monitoring compliance with the code

– appropriate action for breaches of the code

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• Financial delegations of authority must be established and maintained

• Financial delegations must be maintained in a register which is reviewed and approved annually

• Appropriate level of detail must be included in the delegations to ensure clarity of responsibility

• Specimen signature for delegates should be available

• Records of out-of-date financial delegations must be maintained for record keeping

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Internal audit

• Entities must establish and maintain an adequately resourced independent internal audit function

• Exemptions may be obtained for this requirement

• Internal Audit Charter must be developed and approved by the Audit Committee

• Annual plan to be based on the entity’s risk profile and be approved by the Audit Committee

• Audit Committee will review internal auditor performance and focus of work

• Entity should have mechanisms to monitor actions taken to resolve issues raised by internal audit

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External Audit

• Entities must establish and maintain a constructive, open working relationship with the Auditor General

• Audit Committee and the Auditor General must meet throughout the year to discuss the proposed audit objectives, a briefing of the audit process and discuss the outcomes of the audit

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The Directions




Oversight





Internal audit

External audit












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• Entities must establish an effective internal control system which should:

– support the effectiveness and efficiency of operations

– deliver reliable internal and external reporting

– achieve compliance with laws and regulations

• The internal control system will be underpinned by:

– financial management team structure

– Chief Financial and Accounting Officer (CFAO)

– appropriate policies and procedures

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Financial Management Structure cont.

• Entity must select a CFAO with the necessary prerequisite skills, qualifications and experience

• The key impacts of the new Directions on the CFAO’s will be:

– first year gap analysis to assess entity’s compliance

– annual certification to the Responsible Body on the financial reports, the entity’s risk profile and the internal control system

– sufficient supporting documentation to support certification

– ongoing monitoring of entity’s compliance with the Directions

CFAO

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• IT systems must be appropriate to support sound financial management

• IT should be adequately resourced by appropriately skilled staff

• IT in relation to financial management should be reviewed at least annually

• Entity must develop and maintain formally documented disaster recovery plans and business continuity plans

• IT development in financial systems must be approved and adequately managed

• Entities must ensure there are sufficient physical and IT security controls in place

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• Policies and procedures must be developed for all key business processes

• For smaller entities it would be expected that policies and procedures are documented for all business processes which are critical to their operation

• Specific issues to note:

– list in the Directions may not be exhaustive

– in relation to 3.4.5 Procurement, entities not required to comply with this rule should consider using the Victorian Government Purchasing Board guidelines as a basis for good practice

– guidance material available to assist in development or improvement of policies and procedures G

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The Directions




Oversight





Internal audit

External audit












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• Entities must implement and maintain timely, accurate, appropriate and effective reporting on financial matters for use in management decision making

• Management financial reports should include budget v actual analysis

• Reports should be reconciled with the general ledger and reviewed by the CFAO or appropriate senior finance staff

• Feedback on adequacy of financial reports should be sought from relevant management

• Reports should be presented on a timely basis both for internal and external purposes

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• Entities must develop procedures to ensure timely and accurate preparation of all reports required under Part 7 of the FMA

• The primary reports required are:

– Statement of financial performance

– Statement of financial position

– Statement of cash flows

– Notes to the financial statements

– Report of Operations

• Financial statements must be certified by AO and CFAO and member of the Responsible Body

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• Entities must develop procedures to ensure that it meets all other external reporting requirements in a timely and accurate manner

• The requirements may include those contained in:

– “Calender of Central Agencies Information Requests to Government Departments”

– “Calender of Central Agencies Information requests to Non-Budget Sector Agencies”, and

– Integrated Management Cycle (IMC)

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• Entities must develop appropriate financial management performance indicators and monitor performance against these to identify key statistics and trends for use in management decision making

• Financial Key Performance Indicators (KPI’s) must be developed by the CFAO and Accountable Officer as appropriate for the entity

• KPI’s must be measured, monitored and reported on a regular basis to the Responsible Body

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Likely implementation and compliance issues

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Expected areas of non compliance

Understanding the Responsible Body roles and responsibilities

Audit Committee arrangements

Internal audit functions

“Formal” financial risk management

Review and use of information technology for financial management

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Potential Issues

Audit Committee

• Adequate non executive and independent directors to sit on the Audit Committee

• If entity has no Board, securing the services of appropriate independent members

• Ensuring the Audit Committee Charter reflects the work performed by the Committee

• Ensuring Audit Committee members have appropriate skills to discharge their responsibilities

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Potential Issues

Financial Risk Management

• What do entities need to consider when assessing their financial risk management profile

– Facilitating a risk management workshop amongst suitable and key members in the team to identify significant risks

– Assess controls around significant risks and the actions that management are required to take to address each risk

– Maintaining a risk register with appropriate information

– Developing an ongoing process to ensure the financial risk management profile remains current and relevant

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Potential Issues

Applying for Exemptions

• Exemptions may be requested for following areas of the Directions

- Establishing an Audit Committee

- Internal Audit function

- Independent Chair

- Chair of Board/Chair of Audit Committee

• Criteria for applying for an exemption will be available on website

• Exemptions considered on a case by case basis based on the evidence provided by the entity

• Meeting the criteria does not automatically mean exemption will be provided, other factors will be considered

• Exemptions must be reviewed and reconfirmed annually with DTF

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Questions ?

Documents

Financial Management Compliance Framework (FMCF)