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From accounting, to accountability, to accommodation: economic rationalism, audit quality and the Victorian Audit Office 1992 - 1999 Judy Nagy University of Wollongong
Nagy, Judy, From accounting, to accountability, to accommodation: economic ratio- nalism, audit quality and the Victorian Audit Office 1992 - 1999, Doctor of Philosophy thesis, School of Accounting and Finance, Faculty of Commerce, University of Wollongong, 2002. http://ro.uow.edu.au/theses/1910
This paper is posted at Research Online.
From Accounting, to Accountability^ to Accommodation: Economic rationalism, audit quality and the Victorian Audit Office 1992 -1999.
A thesis submitted in fulfilment of the requirements for the award of the degree
DOCTOR OF PHILOSOPHY
From
UNIVERSITY OF WOLLONGONG
By
Judy Nagy B.Com.
Department of Accounting and Finance
2002 Certification
I, Judy Nagy, declare that this thesis, submitted in fulfilment of the requirements for the award of Doctor of Philosophy, in the Department of Accounting and Finance, University of Wollongong, is wholly my own work unless otherwise referenced or acknowledged. The document has not been submitted for qualifications at any other academic institution.
Please see print copy for image
Judy Nagy
1/ 'r'UaZ HI
Acknowledgements
Endeavours of this type require that sacrifices are made over a long period of time. Those that are required to be understanding and above all forgiving of the continuous distraction and mental absences are usually closest to home. I wish to thank my family and friends for their tolerance, patience with my work habits and for their unfailing support to ensure that the time needed was available. In particular my guys, Spencer, Christopher, Robert and Tony together with my parents Violet and John, to whom this thesis must have seemed to be an endless task.
Thanks are also due to my supervisor, Professor Warwick Funnell, for his patience, support and advice (above and beyond) that allowed me to grow, explore and learn as 1 was ready. I wish also to thank Professor Michael Gaffikin for his encouragement and interest as well as the staff at the Department of Accounting and Finance, in particular Helen Irvine, for their thoughtful suggestions and hospitality on my numerous visits to New South Wales. IV
ABSTRACT
Economic pressures over the last three decades have encouraged governments in western style capitalist countries to change the ways in which governance is provided. The adoption of public choice theories has encouraged governments to divest themselves of many activities to concentrate resources on policy formation and implementation. The application of economics principles, that suggest efficient resource allocation is best attained by competitive markets, has meant that management tools derived from the private sector have been presumed to be equally appropriate for use in government. This presumed market superiority has created a conflict between the underlying public interest motivation of government and the profit motivation of private sector providers of goods and services.
Using largely a historical perspective, the thesis examines economic, political, social and administrative factors in the commtmity and government that provided impetus for public sector reforms in Australia in the 1980's and 1990's. That the concern for the public interest is constantly challenged by political expediency, power struggles and the persuasive forces of profit seeking interest groups is analysed using an institutional theory perspective.
This thesis is concerned with the implications of government reforms in Australia for government accountability mechanisms, in particular, public sector audit. The increasing use of private sector modes of accotmting and auditing in the public sector has resulted in public sector audit moving away from the role it has traditionally served. In Victoria, this movement has affected the ability of the auditor-general to provide a quality audit function to ensure the accountability of government to the people.
The damage to public sector audit quality is shown to be a progressive process. Quality continues to be eroded as procedures and practices of auditing become more generic. The radical government reforms introduced into the Australian State of Victoria, between 1992-1999 imder the Keimett Government, are critically reviewed to demonstrate the extent to which a dominant executive govenmient can undermine government accountability mechanisms, in particular audit. Despite attempts to legitimise the corporatisation (and planned privatisation) of the public audit function, the moves to undermine the role of public sector audit in Victoria were met with condemnation by the public, academics, government and business. Although the reputation of private sector auditing continues to suffer from an 'expectations gap', primarily as a consequence of impaired audit independence, the continued hegemony of private sector business practices continues unabated. The Victorian experiment to radically alter the public audit function, now partially reinstated, provides insights into how the role of public audit may yet evolve should the governments in Australia continue down the current path of economic rationalism. TABLE OF CONTENTS
CERTIFICATION ii ACKNOWLEDGEMENTS iii ABSTRACT iv ABBREVIATIONS USED ix
CHAPTER ONE - INTRODUCTION LI INTRODUCTION 1 L2 THE MAIN THEMES 2
L2.1 MARKET FORCES AS A REFORM TOOL IN GOVERNMENT 2
L2.2 WHAT IS THE PUBLIC INTEREST? 4
L2.3 THE RELATIONSHIP BETWEEN AUDIT AND GOVERNMENT 10
1.2.4 THE EFFECT OF GOVERNMENT REFORMS ON PUBLIC SECTOR AUDIT: A CASE STUDY OF
THE VICTORIAN AUDIT OFFICE 12 1.3 METHODS OF ANALYSIS 14 1.4 THESIS PLAN 20
CHAPTER TWO - THE NATURE OF GOVERNMENT 2.1 INTRODUCTION 22 2.2 ECONOMICS AND PUBLIC CHOICE THEORY 23 2.3 AGENCY THEORY AND EsfTEREST GROUPS 28 2.4 CAPTURE THEORY 31 2.5 n^STITUTIONAL THEORY 34
2.5.1 CAUSES OF ORGANISATIONAL CHANGE 36 2.6 ECONOMIC RATIONALISM AND LEGITIMATED REFORM 41 2.7 ECONOMY, EFFICIENCY AND EFFECTIVENESS 43
2.7.1 ECONOMY AND EFFICIENCY 44 2.7.1.1 Efficiency and the Public Interest 47
2.7.2 EFFECTIVENESS 52
2.7.3 THE AUDIT OF ECONOMY, EFFICIENCY AND EFFECTFVENESS 53 2.8 A NEW ORDER AND BETTER GOVERNANCE? 55 2.9 CONCLUSIONS 59
CHAPTER THREE - ACCOUNTABILITY AND THE ROLE OF AUDIT 3.1 ESTTRODUCTION 61 3.2 THE NATURE OF ACCOUNTABILITY 62 3.3 TRUST, ACCOUNTING, AND ACCOUNTABILITY 63 3.4 ACCOUNTABILITY AND AUDITING IN THE CONTEXT OF THE PRIVATE VI
SECTOR 67
3.4.1 THE UNDERLYING MOTIVATION OF COMMERCL^LL AUDITING 76 3.5 ACCOUNTABILITY AND AUDITING IN THE CONTEXT OF GOVERNMENT 77 3.6 THE SOCIALLY CONSTRUCTED ROLE OF GOVERNMENT 82 3.7 FORMS OF ACCOUNTABILITY IN THE PUBLIC SECTOR AND THE CONTRIBUTION OF AUDIT 86
3.7.1 ACCOUNTABILITY TO THE PUBLIC 86
3.7.2 FiNANCL\L ACCOUNTABILITY 90
3.7.3 MANAGEMENT ACCOUNTABILITY 94
3.7.4 ETHICAL ACCOUNTABILITY 97 3.8 TERGIVERSATION 103 3.9 CONCLUSIONS 107
CHAPTER FOUR- AUDIT QUALITY AND ECONOMIC IMPERATIVES 4.1 ESITRODUCTION 108 4.2 QUALITY AS CONFORMANCE WITH SPECIFICATIONS Ill
4.2.1 SPECIFICATION AND STANDARDISATION 113
4.2.2 CONFORMANCE/COMPLL«LNCE 120 4.3 QUALITY AS MEETING CUSTOMERS' EXPECTATIONS 127
4.3.1 PRIVATE SECTOR AUDIT EXPECTATIONS 127 4.3.1.1 Independence in the private sector 135
4.3.2 PUBLIC SECTOR AUDIT EXPECTATIONS 143 4.3.2.1 Independence in the public sector 146 4.4 QUALITY AS EXCELLENCE AND VALUE 149 4.5 AUDIT RESPONSES TO ECONOMIC IMPERATIVES 152
4.5.1 RESPONSES TO ECONOMIC IMPERATIVES: THE PRIVATE SECTOR 153
4.5.2 RESPONSES TO ECONOMIC IMPERATIVES: THE PUBLIC SECTOR 156 4.6 CONCLUSIONS: THE INCREASINGLY GENERIC NATURE OF AUDITING 160
4.6.1 THE EFFECT OF GENERIC AUDITING ON PUBLIC SECTOR AUDIT QUALITY 163 4.6.1.1 Stage One- Prior to the 197 O's: Auditing and Accounting 164 4.6.1.2 Stage Two-From the 1970's - 1980's: Auditing and Accountability 164 4.6.1.3 Stage Three- The 1990's: Auditing and Accommmodation 165
4.6.2 FURTHER EVOLUTION? 167
CHAPTER FIVE - THE TRANSFORMATION OF GOVERNMENT: ANTECEDENTS AND OUTCOMES 5.1 INTRODUCTION 168 5.2 HISTORICAL ANTECEDENTS 170 5.3 THE REFORM ERA OF THE 1980'S AND 1990'S 178 vu
5.3.1 THE ECONOMIC AND SocL\L CONTEXTS 178
5.3.2 THE POLITICAL AND ADMINISTRATIVE CONTEXTS 182 5.4 ECONOMIC RATIONALISM IMPLEMENTED 188
5.4.1 MANAGERL*LLISM 190 5.4.2 CONTRACTUALISM 192
5.4.3 GoVERNMENTBUSESIESS ENTERPRISES (GBE's) AND PRIVATISATION 195
5.4.4 GOVERNMENT REFORM IN THE UNITED KINGDOM 198
5.4.5 THE NEW ZEALAND EXPERIENCE WITH ECONOMIC RATIONALISM 202
5.4.6 COMMON THEMES IN THE UK, NEW ZEALAND AND AUSTRALIA 206
5.4.7 AUSTRALIAN NATIONAL COMPETITION POLICY 208 5.5 THE OUTCOMES OF ECONOMIC REFORM 211 5.6 CONCLUSIONS 215
CHAPTER SIX - VICTORIAN PUBLIC SECTOR REFORMS 6.1 INTRODUCTION 217 6.2 THE HISTORICAL CONTEXT FOR VICTORL\ BEFORE THE KENNETT REFORMS 219
6.2.1 THE ECONOMIC CONTEXT FOR VICTORIAN REFORMS 220
6.2.2 THE SocLAL CONTEXT FOR VICTORIAN REFORMS 226
6.2.3 THE POLITICAL CONTEXT FOR VICTORLALN REFORMS 229
6.4.4 THE ADMINISTRATIVE CONTEXT FOR VicTORLMvj REFORMS 232 6.3 THE VICTORIAN KENNETT GOVERNMENT REFORMS 236
6.3.1 THE NEW LEADER-JEFF KENNETT 238
6.3.2 THE ECONOMIC CONTEXT FOR THE KENNETT GOVERNMENT REFORMS 241
6.3.3 THE SOCIAL CONTEXT FOR THE KENNETT GOVERNMENT REFORMS 250
6.3.4 THE ADMINISTRATIVE CONTEXT FOR THE KENNETT GOVERNMENT REFORMS 263 6.4 CONCLUSIONS ABOUT VICTORIA 265
CHAPTER SEVEN- THE TRANSFORMATION OF ACCOUNTABILITY AND PUBLIC SECTOR AUDIT IN VICTORIA 1992-99. 7.1 INTRODUCTION 267 7.2 AGENTS AND MECHANISMS OF TRANSPARENCY AND ACCOUNTABILITY 270
7.2.1 ACCOUNTABILITY UNDERMINED 274
7.2.2 TRANSPARENCY AND COMMERCIAL SECRECY 278 7.3 THREATS TO THE VICTOIUAN AUDITOR-GENERAL 280 7.4 THE KENNETT GOVERNMENT'S REFORM OF PUBLIC SECTOR AUDIT 287
7.4.1 THE OUTCOMES OF THE REVIEW PROCESS 290 7.5 THE IMPLICATIONS OF THE REFORM PRESCRIPTIONS FOR ACCOUNTABILITY AND AUDIT QUALITY 294
7.5.1 COMPETITION POLICY AS THE JUSTIFICATION FOR CHANGE 298 Vlll
7.5.1.1 The Public Audit Monopoly and Independence 302 7.5.1.2 Costs, Efficiency and the Public Interest. 306 7.6 THE AWAKENING OF THE ELECTORATE 311 7.7 CONCLUSIONS 317
CHAPTER EIGHT - THE PUBLIC SECTOR REDEFINED 8.1 NEW PUBLIC SECTOR PARADIGMS RECONSIDERED 321 8.2 THE EFFECT OF ECONOMIC REFORMS ON ACCOUNTABILITY AND AUDIT 324 8.3 THE WAY AHEAD 328 8.4 FUTURE RESEARCH 333
REFERENCES 334 IX
Abbreviations Used
AARF Australian Accounting Research Foundation AAS Australian Accounting Standard AASB Australian Accounting Standards Board ABC Australian Broadcasting Corporation ACAG Australasian Council of Auditors-General ACCC Ausfralian Competition and Consumer Commission ACTU Australian Council of Trade Unions AFR Australian Financial Review AICPA American Institute of Certified Public Accountants AISB Auditor Independence Standards Board ALP Australian Labor Party ANAO Ausfralian National Audit Office APC Audit Practices Commission APS Ausfralian Public Sector ASCPA Australian Society of Certified Practicing Accountants ATSIC Aboriginal and Torres Sfrait Islander Commission AUP Auditing Practice Statement AUS Auditing Standard AuSB Auditing Standards Board BRW Business Review Weekly CCT Compulsory Competitive Tendering CEO Chief Executive Officer CGC Commonwealth Grants Commission COAG Council of Ausfralian Governments CPA Competition Principles Agreement DEETYA Department of Employment, Education, Training and Youth Affairs DPP Director of Public Prosecutions EEC European Economic Community ERA Employee Relations Act 1992 FMI Financial Management Initiative FMIP Financial Management Improvement Program FOI Freedom of Information GAAP Generally Accepted Accounting Procedures GAAT General Agreement on Tariffs and Trade GBE Government Business Enterprise GDP Gross Domestic Product GPFR General Purpose Financial Reports lASC International Accounting Standards Committee ICCA Institute of Chartered Accountants in Ausfralia ISB Independence Standards Board JCPA Joint Committee of Public Accounts JCPAA Joint Committee of Public Accounts and Audit MAB/MIAC Management Advisory Board/Management Improvement Advisory Committee MAS Mefropolitan Ambulance Service MP Member of Parliament NCP National Competition Policy NPM New Public Management NSW New South Wales OECD Organisation for Economic Cooperation and Development PAEC Public Accounts and Estimates Committee PBRC Parliamentary Bodies Review Committee PFA Public Finance Act 1989 - New Zealand PFI Private Finance Initiative PSASB Public Sector Accounting Standards Board PSM Public Sector Management Act 1992 PSMPC Public Service and Merit Protection Commission RCAGA Royal Commission On Ausfralian Government Adminisfration SAC Statement of Accounting Concepts SB V State Bank of Victoria SMH Sydney Morning Herald SOE State Owned Enterprises Act 1992 TAB Totalisator Agency Board TPA Trade Practices Act 1974 UIG Urgent Issues Group UK United Kingdom VAO Victorian Auditor-General's Office VCA Victorian Commission of Audit VEDC Victorian Economic Development Corporation VFM Value For Money CHAPTER ONE
INTRODUCTION
From Accountings
to Accountability,
to Accommodation'^^
* Accommodation is "an adjustment or adaptation to suit a ... different purpose" (The Ausfrahan Concise Oxford Dictionary 1997, p. 9).
1.1 Introduction
The role of the auditor-general in Westminster style democracies has fraditionally been to hold the executive accountable for its actions to the people through the parliament. The effectiveness of this role relies upon the auditor-general being independent of both the executive and those being audited. Satisfying these conditions has constituted the essence of a high quality public sector audit function. Thus, any changes that undermine the effectiveness of the audit function have the capacity to alter constitutional relationships and impact upon the public interest. This thesis will show, primarily in the Ausfralian state of Victoria, that the traditional relationship between the auditor-general and parliament has been gradually undermined as a consequence of the wave of public sector reforms that commenced during the 1970's.
Over the past two decades governments have implemented reforms aimed at enhancing the efficiency and effectiveness of public sector management. The audit
' Public audit in Australia has moved from a concern for accounting records to a conceptually broader responsibility for government accountability. The title is derived from a book that commemorates the centenary history of the Ausfralian National Audit office, From Accounting to Accountability 2001, by Wanna et al. This thesis will demonsfrate that the original purpose of public audit, in a traditional Westminster sense, has acconmiodated government reform mechanisms at a cost to audit quality. function has evolved to meet the challenges of institutional and organisational change generated by these reforms. This evolution of the public audit function has allowed the quality of auditing, as defined above, to diminish. The deterioration has resulted from insufficient recognition that the public sector operates within a fundamentally different accountability envirormient from that of the private sector. In the rush to make govenmients more commercially focused and efficient it will be argued that the consequences of reform have moved auditing away from a role that places prime importance on independence and accountability to a model that understates these unique aspects of public audit. This will be illusfrated by an examination of public sector audit reforms in Victoria during the late 1990's. The case study will provide evidence of the linkage between public sector reforms and audit quality, with the Victorian experience potentially being a harbinger of a further evolutionary stage of public sector audit development. In response to the economic rationalist motivations of government reforms the public audit function has acconmiodated new responsibilities, processes and methods that steer the audit purpose away from the fraditional Westminster role. This has occurred in an incremental way over several decades with the more recent attempt by Victoria at a dramatic, revolutionary change to the audit function clearly being unacceptable to the public.
1.2 The Main Themes
1.2.1 Market Forces as a Reform Tool in Government
In common with other Western nations in the 1970's, Australia experienced a period of stagflation followed by slowed economic growth, rising unemployment and government budget deficits. When the fraditional mechanisms of government did not provide solutions to these economic crises the virtues of private sector business practices were considered as alternatives to encourage economy and efficiency in government operations. As a consequence, the rising influence of neo-classical market economics in the 1970's spawned a climate of government reform around the world that promoted smaller and more efficient government. In most Conmionwealth countries, in particular the United Kingdom, New Zealand and Ausfralia, governments embarked upon a program of economic rationalisation that saw government relinquishing involvement in the provision of goods and services by a combination of corporatisation, privatisation and confracting with private sector providers. There was a presumption that services relinquished by government could be provided by the market with at least the same quality, consistency and economy as previously provided by the government. Indeed, the rhetoric supporting contestability promises improvements in these aspects of service provision.
Economic threats in an increasingly global economy which have created an overwhelming tide of change have left little time for reflection on whether outcomes of the processes for change are desired. It is not the purpose of this thesis to deny the importance of efficient resource allocation in relation to government operations. Initiatives by govenmient to ensure greater accountability by devolving responsibility and management authority have in many circumstances led to improvements in resource allocation, thereby ensuring value for the expenditure of public funds. Initiatives such as the Commonwealth Government Financial Management Improvement Program, infroduced in 1983, and the Commonwealth Public Sector Reform Act (1984) have provided the framework for skilled public servants to be appointed, motivated and monitored to ensure efficient adminisfrative practises. These, and other, responses to economic pressures are intended to make government more efficient.
The issues of consequence to this thesis are the justifications offered for proposed changes in government operations to support a competitive rationale. The relevance of public choice theor)^ as a model of neo-classical economics, concerned with the self-seeking behaviour of individuals, to the broader social and economic objectives of government is questionable. There is a presumption that imitating private sector business practices will generate increased efficiencies that are necessary to improve the quality of management practices and information in the public sector. This is yet to be clearly demonsfrated (Chua 1995). Those who desfre to implement any form of
^ The governments of the United Kingdom, New Zealand and Ausfralia, all, to varying degrees, have placed significant reliance on perspectives from public choice theory to inform government reform initiatives. change to government practice have realised that to invoke the mantie of the public interest is a powerful legitimisation tool. It is difficult to argue against a desire for change that is claimed to increase quality and efficiency in support of the public interest. The rhetorical concern for the public interest is used as justification for change, often by both advocates of change and those who oppose change to gain the support of the electorate. However, outcomes for the public interest in any context cannot be clearly defined, proven or easily refuted. An uncontentious and reliable means of adjudicating between competing claims ex-post has not been possible. Significantly, changes once made, even if evaluation were possible, caimot be easily undone.
1.2.2 What is the Public Interest?
The dominant political ideology in western nations is that of capitalism. Capitalism generally involves the desire for a positive economic outcome for an individual as the motivation behind economic decision making. This self-interested position is then placed in a broader community environment where civil society has community values and goals that are based upon shared, rather than specific, interests. The role of government is to manage this environment by creating an appropriate balance between the competing needs of groups within society (see Locke 1884 and Hobbs, in Solomon and Murphy 2000). Politics can thus be regarded as necessarily involving a contest between public interest and self or private interests. Government policy is not the product of a spontaneous harmony of individual interests. Democratic politics involves the articulation and reconciliation of group interests within an overall concept of national interest.
In the Ausfralian democratic system of government, parliaments are composed of the elected representatives of the public who are appointed to act as agents for the pursuit of the public interest. Once elected, governments have the responsibility for determining what is in the 'public interest'. The interpretation will differ between political parties with government retaining legitimacy when the electorate perceives that the public interest is being safeguarded. Although politicians in successive governments have some latitude with interpretation, the values of western societies have traditionally reflected notions of fairness and equity with the provision of basic services for all citizens. Public philosophies are inevitably contestable as circumstances evolve to impact upon values. Values can only be generally articulated as a shared set of beliefs and standards that together will produce the envfronment a particular society regards as desirable.
Individuals can identify themselves with one or more communities of interests. Local members of parliament have often succeeded in being elected with support from particular interest groups. The politician is then expected to obtain advantages for vested interests ahead of others in the community in order to preserve his or her power base. Personal interest becomes confused with group interests. Different ethnic groups, professions, unions, farmers and environmentalists, all have privately held interests, group interests and community interests. Promoting group interests may at times involve behaviour that is confrary to community interest. For example, it may be that those opposed to logging in state forests (supporting commtmity interests) make use of violent forms of protest. An opposing view by interests that have conducted logging for generations and are concerned for their fraditional and future livelihoods (private interests) establishes a contested realm. While both parties are entitled to be members of groups with a shared commitment to a cause, the use of violence is against shared community values. Self (1993, p. 238) points out that "group interests are a necessary response to the political limitations of individual action". The differing views of groups within society need to somehow be coordinated into government policy.
Self (1993) has suggested that the usage of the term public interest has had a variety of coimotations. Public interest has been used as a way of saying that the interests of the nation justify exfreme measures that would otherwise be unpalatable. It has also been used from a 'social good' viewpoint, where reforms are claimed to remedy some form of injustice based on a socially shared moral principle or belief Mitnick (1980) also has considered public interest as a balancing concept in which selected aspects of several interests are satisfied at the same time. In this sense, the public interest is a way of promoting compromise where concessions are made in the overall interests of the community. Public interest is a sufficiently vague but emotively appealing concept that can be, and has been, used by politicians from all philosophical persuasions for its rhetorical appeal. Unfortunately, the rhetorical 'social good' viewpoint has many times proved to be an illusion.
Once elected, governments are not given carte blanche to do whatever they please in the name of public interest. Instead, any democratic system is made up of a complex combination of institutions, rules and conventions. "The concept of 'public philosophy' refers to the beliefs which inform our understanding of the desirable role of politics and government in a democracy and of the relationships which should exist between the public and private realms" (Self 1993, p. 232). Numerous inquiries into Ausfralian adminisfrative practices have provided ample evidence that limitations on the scope and power of public officials are needed to ensure that community interests are not subordinated to self-interest. Public servants have many competing accountability dimensions to their roles. Therefore, the maintenance of the public interest is an elusive concept that requires an attitude on the part of public servants that considers the community above personal interests. Niskanen (1971, p. 193) suggests that "there is nothing inherent in honest civil subservience to rules and regulations that would cause a bureaucrat either to know or seek out the public interest or act in the public interesf. An affinity for the public interest is made more difficult when the role of the public servant is becoming increasingly politicised with each elected government replacing senior public servants with their own preferred individuals. Public servants are in an environment in which they no longer have security of employment, thus exposing them to a conflict of interest where they perceive that advice will not be favoured, and they are often rewarded on a performance basis. To place the public interest ahead of personal interest could come with significant cost to the individual.
An alternative perspective on public interest is offered by Hindess (1997) who considers that a shared set of community based beliefs can be articulated by reference to a social contract. The use of the term confract in this context implies that
^ Some of inquiries included: the Bland Inquiry of 1973-75 in Victoria, the Corbett Inquiry of 1973-75 in South Ausfralia, the Coombs Inquiry of 1976 in relation to the Commonwealth government, the Wilenski Inquiry of 1977 in New South Wales, the Fitzgerald Inquiry of 1989 in Queensland and the WAlnc. Inquiry of 1992. the government is one party to the confract and the public is the other. Hindess believes that
(i)n effect, the contract gives the sovereign (i.e. the government) the right to call on its subjects to obey the law and other legitimate instructions, while the presumption that those subjects can normally be relied on to perform their contractual obligations also appears to give the sovereign the capacity to regulate their behaviour (Hindess, 1997, p. 15).
This type of social confract"^ is concerned with securing foundations for society in a macro sense. The behaviour expected of citizens is supported by a system of law that the citizens have endorsed, either implicitly or explicitly. The key assumption of this proposition is that participation in the social confract results in corresponding obligations considered by the majority of citizens^ as necessary to secure their rights as citizens. The internalising of obligations provides citizens with motivation for action that will support the public good. The idea of a social confract also acknowledges that the maintenance of civil society involves two-way obligations. The government is given the power to makes laws that support the public interest and the public expect that the regulation of their behaviour will generate the type of civil society they have endorsed. When the outcomes of governance are not considered appropriate by citizens, the citizens can withdraw their support for government, something enthusiastically advocated by John Locke (1884).
According to Hindess (1997) the distinction between a social confract and the new frend towards commercial confracts in government lies with the way in which individuals are freated. The social confract refers to individuals without being specific, whereas commercial confracts are explicitly framed around the specific rights and obligations of the parties to the confract. Confracts in the commercial economic sense are a formal mechanism for the regulation of promises made to individual parties without any obvious connection to the common good. The use by governments of economic confracts has the effect of infroducing private interests into
'* The 'social confract' is mostly associated with Rousseau (1954) whose book "The Social Confract" was heavily influenced by the work of John Locke (1884). ^ Citizens are those in society who satisfy the qualifications determined by the government to qualify for citizenship. "In return for the privileges which citizenship may confer, individuals must be prepared to assume corresponding responsibilities, upon which the continued existence of their rights depend" (Funnell, 2001, p.98). the governance environment. The obligations are no longer circular with benefits flowing to those outside the government/citizen relationship. Confracting with the private sector causes the need to be economically responsible with government resources to be pitted against the needs of private interest groups to protect their competitive position. In the public domain, the need for fransparency and accountability in decisions that commit community resources ensures that the government acts in accordance with established rules and principles.
The practice of government outsourcing has seen a rising incidence of commercial confidentiality clauses included in confracts that prevent public scrutiny of confract documents (Zifcak 1997; Frieberg 1997). histead of a chain of authority from the policy maker to the product or service provision, there is now instead a negotiated document that separates the policy maker from policy output (Kettl 1993). This does not absolve public sector agencies from an obligation to enable public scrutiny of the terms of confracts. Without the necessary information, the public will be tmable to assess the wisdom of government's decisions or monitor its actions (Firm 1995). Commercial confidentially clauses have the ability to conceal aspects of confracts that may not be in the public interest (Finn 1995; Fimnell 1997b; Furmell 2001; Alford and O'Neill 1994; Costar and Economou 1999).
Another aspect of government outsourcing that has a significant bearing on public interest is the nature of the persons who have been confracted to supply goods and services on behalf of government. Confracted personnel are not government employees. They conduct themselves according to their own perception of moral and ethical standards within a profit-seeking framework. In confrast, public servants are required to meet certain standards of conduct and follow ethical guidelines such as contained in the statement of APS Values & Standards of Conduct issued by the Public Service and Merit Protection Commission (PSMPC) for Commonwealth public servants. These values include: a responsiveness to government, a close focus on results, the highest possible standards of integrity and a sfrong commitment to accountability (PSMPC March 1997). Where there is no abihty to enforce these same principles in the private sector the possibility of deficient service delivery has implications for the public interest. The difficulties government has in directly managing private-public confractual relations in a market environment was also observed by Osborne and Gaebler (1992), albeit from a different perspective. Although they are best remembered for thefr sfrong advocacy of a provider/purchaser split in government, where the government does not have to provide the service for which it pays, they consider that government should not accept that competitive markets can accomplish most tasks better than public adminisfrators. The need to retain confrol and responsibility for outsourced activities is considered to be of greater benefit to the public interest than any desire to shift the burden of responsibility to private interests. Osborne and Gaebler refer to Peter Drucker's book of 1968, The Age of Uncertainty, where Drucker considers that even though governments contract with private business, the responsibility for the confracted good or services remains with the government. Drucker advocated "a government that can and does govern. This is not a government that 'does'; it is not a government that 'administers'; it is a government that governs" (Osborne and Gaebler 1992, p. 48). To have confrol over the quality and quantity of goods and services provided together with the obligation to answer for tmtimely, ineffective or inappropriate delivery allows the government flexibility to meet community needs. The rigid confines of specifications in confracts and the responsiveness of service providers to the community are governed by economic concerns rather than any support for social equity and justice. Thus, the maintenance or promotion of the public interest can be more effectively achieved where governments retain active responsibility for service provision in all modes of delivery.
Whatever the motives of politicians, the role of the public audit function is to scrutinise government processes, methods and outcomes to ensure that the public interest is being safeguarded. The auditor-general provides the primordial avenue for critical review of the behaviour of those entiiisted with the responsibilities of public office. This responsibility does not rely on irregular confroversies to stimulate audit as is the case with royal commissions and parliamentary inquiries. The audit function provides a constant deterrent to ensure that where political expediency has resulted in shortcomings in due process, the deficiencies are highlighted for public scrutiny. 10
1.2.3 The Relationship Between Audit and Government
The form of democratic governance in Westminster style governments is defined in terms of the close nexus between government accountability and public interest. One informs the other. The public need to be assured that those whom they have elected as their representatives conduct governance in a manner that supports the civil society endorsed by the community. At the heart of this relationship is the oversight function of public audit. Government audit has fraditionally been conducted by public servants that are independent of political parties, providing objective information about the operations of government to the public. With the advent of competitive mechanisms for service delivery in government operations there have been some innovative proposals for making public audit operate in a more competitive environment. In order to appreciate the implications that these proposals have for democratic government the differences between the public and private sector audit functions are examined.
The private sector audit function fulfils a need in business relations for reinforcement of accountability relationships to support an environment of trust. The need for reinforcement of trust in the private sector is derived from both agency relationships and from a need for the business community to have confidence about the accuracy of financial reports for the purposes of resource allocation decisions (a public interest perspective). Agency relationships stem from confractual obligations where the principals (the shareholders) wish to ensure that their agents (the management) are pursuing the profit maximisation interests of the owners. Private sector trust reinforcement agents (auditors) have their own profit maximisation objectives that compete with their confracted trust reinforcement role. Competitive pressures that encourage cost effective methods have resulted in changes to auditing methods and standards for auditing performance. Unfortimately these changes to private audit practice have apparentiy contributed to the persistence of an 'expectations gap' in private audit. The historical role of providing financial report credibility in the name 11 of the public interest remains a contested proposition in view of the continuous criticism of private sector auditors at times of corporate failure^.
In government, trust relationships are based on an underlying philosophy that differs in significant ways to that of the private sector. The responsibility of agents (elected and non-elected public servants) is to ensure that pubhc (the principal) mterests are safeguarded. In conjunction with financial and management accountabilities, concerns for due process, efficient resource allocation, social equity and ethical accountabilities are all responsibilities that are owed by those who are engaged in public office. As governance mechanisms have evolved in liberal democratic countries, so too has the need for public sector auditors to have new skills and procedures to effectively discharge their role. The need to ensure government policies are achieved with appropriate economy, efficiency and effectiveness meant that the public audit function has had to adapt to the new expectations of government. This has also exposed auditors-general to new forms of scrutiny and criticism. In particular, the development of performance auditing in the 1970's necessitated the application of subjective criteria in the evaluation of government performance and an appreciation of broad-based policy objectives to assess whether specific elements of government policy were in accordance with government objectives. While the concerns of performance auditing are unique to the public sector, the increasing adoption by government of commercial financial reporting practices and audit methodologies has served to make financial audit practices between sectors more generic. It is not surprising that, in keeping with other public sector reforms, the commercial sector was viewed as a fertile source to meet the needs of the new managerial environment of the public sector. However, the presumption that the audit function serves identical needs within the private and public sectors ignores the underlying public interest motivation of government. If the presumption of compatibility between private and public audit practices and philosophies is relevant, it is appropriate to question whether the new procedures generate a positive outcome for public sector audit quality. Justifications based on economic criteria cannot be readily franslated into an assessment of effects upon the
This is particularly true of the collapse of the HIH insurance group in Ausfralia and the Enron Corporation in the USA.
3 0009 03290820 9 12 public interest. The availability of evidence to suggest that auditors-general would be in a better position to fiilfil their public accountability role relies on theoretical propositions rather than substantive evidence.
1.2.4 The Effect of Government Reforms on Public Sector Audit: A Case Study of the Victorian Audit Office
Public sector reforms have been a continuing process since the early 1970's, with the early initiatives of the Commonwealth Government in Ausfralia being overtaken by enthusiastic state governments. The State of Victoria has pursued a determined application of economic rationalism using a manfra derived from the Commonwealth National Competition Policy. King and Maddock (1996, p. 17) suggested that the significance of Victoria as a leader in the application of reform initiatives was "as a social laboratory for the rest of Ausfralia. If reforms work well in that state then other governments are likely to follow." A case study of the reforms infroduced into the Ausfralian State of Victoria between 1992 - 99, when Premier Jeff Kennett pursued a radical policy of public sector reform, will illusfrate the considerations and concerns that arise from applying competition as a blanket prescription to all government operations. The public dissatisfaction with economic mismanagement of the outgoing Labor Government in the period prior to 1992 provided Premier Kennett with a large electoral majority that allowed policies to be passed through parliament with little need for consultation or consensus with the community or parliament.
One of the most contentious reforms, which led to the demise of the Keimett Government (1992-99), was the reform of the public audit function that, after numerous previous efforts by the government to undermine public accountability, caused a concerted public outcry. The Kennett Government determined that public sector audit could fulfil its intended function, with improved outcomes in terms of efficiency and quality, by infroducing greater contestability in the provision of audit services. Accordingly, it subjected the public sector audit fimction to a review in 1997 under national competition criteria. The motives behind the review were not clear, however it is generally accepted that some of the auditor-general's reports had 13 been politically damaging to the Kennett Government^ and that critical audit reports were not favourable to future re-election prospects. The maintenance of political power and the open dislike by the Kennett Government of any form of criticism were significant factors in the proposed reform initiative. Thus it would have been to the government's advantage to have a less critical public audit function. The Kennett Government justified its desire for contestability in the public audit function by suggesting that audit quality would improve as a consequence of the auditor-general concenfrating on policy direction and allowing all government audit assignments to be confracted to private sector audit providers. Yet, there was no substantive evidence to suggest that inefficiencies existed in the operation of Audit Victoria. On the contrary, independent performance reports, as required by the Audit Act 1994, of Audit Victoria conducted by representatives of "big 5" accounting firms in 1992 and 1995 had been complimentary about operational criteria and progressive audit practices. The conclusions of the Audit Act review committee^ established in 1996 to review the Audit Act 1994 for inconsistencies with National Competition Policy guidelines, suggested that contestability would improve audit 'quality' {Audit Act Review Report, 1997, 4.7.3). The Committee's report, however, failed to provide any means to assess or justify how the proposed changes would achieve this outcome, or what audit quality meant in the context of government.
The review committee recommended that the government audit function be divided so that there would be separation between the purchaser and the provider of audit services. The operational elements of the existing audit fimction were to be moved into a corporate body, known as Audit Victoria, established to conduct audits in competition with private sector firms. Remaining as part of government was to be an executive team headed by the auditor-general that would deal with policy issues and act as the purchaser of government audit services. As the purchaser, the auditor- general was to be responsible for the specification of the terms and conditions for all confracts and the quality of the audit reports.
' Audit reports that were critical of the govenunent then in office commenced in 1993. Prior to this time the reports were generally related to the outcomes achieved by the previous govenmient in office Examples of media commentary on audit reports with unfavourable findings include The Australian 14/09/93; Herald Sun 18/05/94, 14/01/95, 26/06/96; Editorial-The Age 1/06/96, 21/06/96; Herald Sun 18/06/96. ^ Named after its chairman. Rod Maddock. 14
The change of provider, from the public sector to contracted private sector auditors, for performance (efficiency) auditing had the greatest potential to significantly change accountability relationships in the public sector. The progressive inclusion of efficiency auditing within the mandate of auditors-general as part of their discretionary powers since the 1970's has seen auditing in the public interest take on a new meaning, with successive Commonwealth and state auditors-general interpreting this part of the mandate in different ways (Guthrie and Parker 1997; Hamburger 1989; Hardman 1996). A willingness to pursue efficiency audit activities where no consensus of measurability exists and political consequences may follow, has seen unprecedented criticism levelled at the function of public sector auditing (Funnell 1996b; Hardman 1996; Taylor 1996). Victoria was the first Westminster style government to make delivery of this contentious aspect of the audit fimction contestable. Irrespective of the proposed economic advantages of private sector performance auditing, public expectations of the independent role of the auditor- general should be the defining influence determining how those expectations can be best achieved. Without any evidence to support a move away from the fraditional operation of public sector auditing, any reform proposals can be viewed with great scepticism no matter how well the proposals are 'window dressed'.
The Victorian auditor-general, as the primary agent of public sector accountability, was placed in a position where he became, according to Osborne and Gaebler's (1992) prescription for reinventing government, 'a steerer with no rowing capacity'. In Victoria, the public found 'voice' (Hirschman, 1970) on a matter that they considered detrimental to public interest with public audit becoming one of the main issues contributing to the removal of Kennett Government from office in October 1999. This outcome provides evidence that the public have expectations of the role of audit as an agent of accountability and that major reform initiatives that damage this perception will be met with condemnation.
1.3 Methods of Analysis
To achieve its aims this thesis will make a distinction between audit quality in terms of the technical processes of auditing (micro) and the role the audit function is 15 intended to serve by providing independent oversight for accountability relationships in a Westminster system of government (macro). Justifications for public sector reforms have been preoccupied with the effects of a competitive regime on the micro aspects of auditing. However, it is the effect of public sector reforms on the macro aspects of audit quality that have the greatest potential to damage the constitutional protection historically provided to and by auditors-general. The different contexts and accountability regimes that apply m the public and private sectors do not provide for a marriage of ideals supporting a common interest. Rather, the power dimensions and vested interests of the key players in public sector audit reforms make use of competitive rationale in a rhetorical marriage of convenience.
Auditing has developed as a profession in its own right, although, essentially it is a sub-set of the discipline of accounting. Although auditing in the private and public sectors has a common set of techniques, the two sectors approach accotmting information from a different imderlying philosophical perspective. This also applies to the function or intentions of audit. The frend in government towards a managerialist economic focus has made the way accotmting information is provided and audit activities are undertaken more homogenous with the private sector. The apparent differences in ideology are becoming less pronounced even though public sector accountability obligations to the electorate remain the same. In order to understand the changes in relationships and ideological shifts within and between both sectors, a starting point is required to establish a basis of comparison. Thus, the establishment of historical relationships between audit, business enterprises and government will provide the means to analyse critically the effect of the continued hegemony of market ideology on measures of audit quality in the public sector and to illuminate the circumstances leading up to the issues raised in the case study of Victorian audit reform.
Research with historical foundations may utilise a variety of methods depending upon the preferences of the researcher. Parker (1997, p. 30) has suggested that
(t)he responsibility of accounting and management historians is to provide an historical perspective that can bring new insights into our understanding of the past 16
and inform debate rather than producing historical interpretations simply aimed at servicing or supporting a particular predetermined ideology or strategy.
There has been much discussion about the relative merits of the 'new' accoimting history as opposed to 'traditional' accounting history (Napier 1998; Funnell 1996a; 1998; Gaffikin 1996; Hoskin and Macve 1986; Parker 1997). The term 'fraditional' has generally been applied to narrative research with a chronologically descriptive form. It has been characterised as concerned primarily with a presentation of facts and has often been criticised for providing insufficient context to assess the interpretation or importance of the facts as derived from archival research. Accounting was seen by fraditional historians as a technical practice that evolved and improved gradually over time (Napier 1998). In confrast, the 'new' accoimting history with its preference for sociological interpretations portrays the accounting profession as evolving as a response to social and political forces. Miller et al{\99\, p. 396) have suggested that
(r)ather than viewing the history of accounting as a natural evolution of administrative technologies, it is coming increasingly to be viewed as the formation of one particular complex of rationalities and modes of intervention among many, a complex that has itself been formed out of diverse materials and in relation to a heterogenous range of issues and events.
Historians have tended to place significant emphasis on the reliability of evidence and the credibility of the source in order to lay claim to objective factual data which 'speak for themselves'. However, the interpretation of facts is likely to differ widely despite a common chronology of narrative material (Carnegie and Napier 1996, p.30). Thus, considerable debate has cenfred on whether objective facts can be ascertained when historical data is generally a selective record of the past made by those according to a particular world view by the writer of the historical record and the researcher selecting data considered relevant. The 'new' history perspectives are more likely to place "emphasis on interpretations being tested with the facts instead of being derived from them" (Miller et al, 1991, p.397).
While the imderlying sociological perspective of this thesis is more representative of the 'new' form of accounting history, the context is informed by, and derived from, the 'fraditional'. The sequence of events depicted in a descriptive chronological 17
format will provide the basis for analysis and interpretation of current developments. The intention is not to enter the debate on the merits or failings of the new and fraditional schools of historical analysis. Rather to highlight, as suggested by Parker (1997), that caution should be exercised by researchers to ensure that they are not preoccupied with a single-minded set of technical issues that may serve to mislead rather than inform the reader. It is thus appropriate that, "(a)ny subject of historical research must be approached by emplojdng research method(s) considered appropriate to the facts being sought and the issues being investigated" (Previts et al, 1990b, p. 144). Reliance upon both the 'fraditional' and the 'new' accounting history methods, is considered to have the greatest potential to inform the debate concerning effective audit scrutiny in the public sector.^ The approach taken will be a critical perspective to "emphasize the relationship between accounting and its organisational, social, and political content. These perspectives cause us to recognise the ability of accounting to shape its own environment rather than merely to reflect it" (Previts et «/, 1990b,p. 143).
Consistent with its historical foundations, this study is a qualitative critical analysis focusing on primary documentation and secondary literature sources. These incorporate periodicals, official reports, speeches, addresses at conferences, representations to committees, Hansard, books and an extensive collection of press articles and editorial opinions, all of which are publicly available. When using official publications. Tosh (1991) has warned that these contain material that was deemed fit for public consumption and, therefore often the results of political compromise. Thus, parliamentary speeches and government papers presented at conferences are directed to a particular audience with a specific purpose. Official records and reports are thus acknowledged as potentially being biased in the favour of the provider.
Detailed searches of elecfronic databases for resources on public audit in periodicals and newspapers concenfrated primarily on the United Kingdom, Ausfralia and New
The common ground or compatibility of the 'old' (fraditional) and the 'new' accounting history was proposed by Miller et al{\99\) and later by Fimnell (1996a), to illusfrate that each has something to offer historical studies and that a myopic preoccupation with either would 'blind' us to the benefits of the alternative. 18
Zealand^" during the 1980's and the 1990's. Searches were conducted in all major national newspapers which included the Australian Financial Review, Sydney Morning Herald, Canberra Times and The Age. Periodicals consulted included both professional auditing and accounting journals as well as academic and government journals in the countries nominated. The subject areas researched included government reform, accountability, audit quality, public audit, performance auditing outsourcing and economic rationalism. All articles presented as elecfronic search outcomes were reviewed with the researcher determining the usefulness of information highlighted. Material chosen concenfrated on Ausfralian government reform with an emphasis on audit developments in Victoria. The list of references includes only those works cited in this thesis with many others providing backgroimd information to support analytical review. Despite English and Guthrie (1991) calling for more research that is contextually grounded in the area of public audit it was only in the later part of the 1990's that public sector audit began to atfract increasing numbers of researchers. Consequently, apart from official publications sourced from Commonwealth and Victorian auditor-general's offices, public accounts committees, standing committees, select committees, boards of review, Hansard and royal commissions, when compared with the private sector the fund of resources is not extensive.
As a consequence of a unique series of circumstances in Victoria, this thesis places considerable reliance on evidence from one of the daily newspapers in Victoria, The Age. The pervasiveness of government censorship under Premier Kennett meant that newspaper reportage at the time assumed a greater importance for this thesis than otherwise might be expected. However, in this environment which precluded public servants from making commentary critical of the government in office, and where media interests were polarised in their view of government. The Age newspaper had much to offer as a means by which the public and the opposition were provided a forum for information and debate. It is, however, recognised that the motivations of journalists should also be questioned as their underlying political motives may
'" The USA was also included but to a lesser extant. Although professional journals were relevant to developments in private sector auditing, the system of government in the USA is different from the Westminster style of govenmient common to Ausfralia, New Zealand and the United Kingdom. This has produced a very different form of government audit in the USA. 19
influence the content of articles with a view to dfrecting public opinion. In this study, political influences and consequences have significant bearings on the issues raised. ^^
Interviews were conducted with a retired senior staff member of the Victorian Audit Office during the Kennett years, who transferred to Audit Victoria and remained with that office until the corporate entity was repealed and reabsorbed mto the public audit function, and interviews with Ches Baragwanath, former Auditor-General of Victoria 1989-99. Given the extent of his involvement in the events which are the concern of this thesis, Auditor-General Baragwanath's views were thought to be particularly relevant. When, Auditor-General Baragwanath was originally approached for this work in 1997, he claimed that changes to the Audit Act 1994 (as amended in 1997) prevented him from making any public comment on "information acquired during the course of his official duties" (personal letter from Victorian Auditor-General 29/07/97). However, two years after retirement, he agreed to be interviewed. Interviews were limited mainly because the methodology employed for this thesis relied upon published material. The views of politicians from both sides of parliament as well as other public officials were copiously reported and documented in various sources providing resources which were both contemporary and not affected by the problems of hindsight. Thus, given the rich boimty of public documents available and difficulties in gaining the attributable cooperation of politicians, there was no intention to source substantial original material on the basis of interviews. The interviews with the two key actors occurred near the end of the thesis as a confirmatory, triangulated procedure for the more contentious events. Interviews could figure more prominently in future studies employing other forms of qualitative research.
Examination of the government reforms in Victoria, in particular the changes to the public audit function, demonsfrates that rationalised economic theory can be used to
" Previts et al (1990b) also makes the point that the credibility of the evidence needs to be evaluated and its assessment considered in the context of the time frame to which it relates. In relation to the turbulent Victorian political scene between 1992 -1999, it is conceivable that the power base of the auditor-general and the government could have been different if not for the state of the economy at that time. 20 legitimise organisational change and conceal the desire to protect vested interests. Hoskins and Macve (1986) observe accounting (auditing) knowledge as being a source of power in itself The outcomes of audit can provide information to the public that is not available via any other means. The ability of political adversaries, the media and the public to use this information to question government actions is the basis of audit power. The power dimensions of reform related in this thesis are more concerned with audit providing accountability information that has significant consequences for the maintenance of power, rather than the information itself
1.4 The Thesis Plan
The thesis is comprised of eight chapters. Comparisons between the private and public sectors permeate the body of the thesis. As the government continues on a path of making the public sector a clone of the private sector, the ways in which operations are undertaken are moving away from a fraditional view of government to a new economic business-orientated model. The differences in underlying philosophy, accountability, auditing procedures, audit objectives and perceptions of the public interest provide the background for tmderstanding the different bases from which the public and private sector are moving.
Chapter two discusses the underpinnings used during the period of government reform with particular regard to the insights from public choice and institutional theories. Chapter three examines concepts of accoimtability and the need for auditors as tiiist reinforcement agents in society. The differences in accountability obligations that exist between the public and private sectors are highlighted, together with the distinctive philosophical bases for the provision of accountability and audit responsibilities. The different accountability obligations are then considered in relation to the increasingly generic nature of accotmting and auditmg practice as a consequence of public sector reforms. Chapter four critically examines the process of auditing to determine the imderlying factors that provide the users of audited information with a measure of confidence about the audit process. The factors that contribute to perceptions of audit quality within the public and private sectors are analysed to determine differences and similarities. These are then considered in the 21 light of the need for both sectors to be more economic and efficient in the provision of audit services and the increasmg incursion of private practices into the government sector.
Chapter five examines the outcomes of economic rationalism by reviewing changes made to the public sector by the Ausfralian Commonwealth Government. This provides valuable insights into reforms that were infroduced mto Victoria in chapter six. The reforms of the Victorian Government between 1992-99, the years of the Kennett Government, are examined in some detail. The government was able to infroduce into the state of Victoria a program of radical reform as a consequence of a powerful electoral majority that effectively ignored fraditional democratic government procedures common to the Ausfralian political environment.
Chapter seven provides a detailed examination of the way in which the Kennett Government proceeded to undermine accountability agencies in Victoria culminating in the restructure of the public audit office. The rhetorical use of national competition policies as a justification for audit reform is critically assessed in recognition of sfrategic manoeuvres by the Kennett Government to maintain political power. The potential for the proposed reform prescription to damage the fraditional function of public sector audit is considered in the light of a clear preference by the community for retaining the fraditional public audit relationships.
Chapter eight concludes by highlighting the consequences for public sector audit of a paradigm shift in the operation of government as a consequence of economic rationalism. The progressive move towards more private sector methods of business practice in government accounting, and consequently into public auditing, has diminished the capacity of the auditor-general to provide a quality audit function in accordance with fraditional Westminster principles. The implications of the radical public audit reforms in Victoria, rescinded by the Steve Bracks Government in 1999, are considered in relation to 'a different purpose' for public sector audit The chapter concludes that the changes to public sector audit in Victoria constitute further evidence of the emergence of a new audit paradigm. 22
CHAPTER TWO
THE NATURE OF GOVERNMENT
Whenever there is great enthusiasm for a particular line of inquiry or conceptual framework, other approaches can easily be dismissed or forgotten. It would be unfortunate if the current excitement with the new economics of organisations and the new managerialism blinded policy makers to the insights of earlier political philosophies, administrative traditions, and organisational theories, or led them to ignore the way public agencies have been shaped by the forces of culture and history (Boston et al 1991, p. 23).
2.1 Introduction
The process of governing necessarily involves an interaction between economic, political and social forces. As the role of government changes over time, any stage of development needs to be explained in the context of the prevailing forces of that time together with an appreciation of circumstances that may be interpreted as contributing to change. As a means of generating a clearer understanding of the interrelationships between interests Roberts and Scapens (1985) have called for accounting and systems of accountability to be understood in their organisational contexts. Systems of accountability necessarily embody a moral order with a complex system of reciprocal rights and obligations. Miller (1994) broadened the context further by recognising that organisations do not exist in a vacuum. They are linked to a municipality of interests, some of which are located inside the organisation and some that are part of the environment that sustains the organisation. Relationships are constructed by a variety of agents and agencies that contribute to the institutional forces that shape actions and outcomes. Similarly, fransformations in accounting knowledge have been regarded as "mechanisms around which interests 23 are negotiated, counter claims articulated and political processes explicated" (Burchell et al 1980, p. 17).
In Ausfralia the democratic system of government essentially follows an English Westminster style of government incorporating a set of values derived from our colonial past. The progressive convergence between public practices and private sector business practices promoted by government reforms have produced a different blend of economic, constitutional, philosophical and political theories from those that have fraditionally served Ausfralia (Funnell 2001). The effect of this new cocktail upon accountability will have consequences for the welfare of Ausfralia's citizens.
The Constitution of the Commonwealth of Ausfralia provides the basis for political power structures with government acting on behalf of the people to safeguard and promote the public interest. How the public interest is defined, interpreted and executed in government processes has changed over time. Interpretations arise from the use of particular theoretical tools to promote particular interests. Davis et al (1993, p. 12) have pointed out that in politics while 'theories of and 'theories within' "illuminate particular subjects embraced by the field, they are unlikely to sum to a coherent set of propositions about public policy" because they are not able to embrace all aspects of governance. This chapter will identify political theories which have been especially influential in government reform, the shifting significance and influences of various interest groups to the political process and the emergence of financial efficiency over recent decades as the new priority of government economic management.
2.2 Economics and Public Choice Theory
Over the last two decades public choice theory has been enthusiastically embraced by the United States, Britain, Ausfralia, New Zealand and Western Europe. Dunleavy (1991, p. 5) attiibuted the rising significance of pubHc choice theory to the
fiision of positive theory and empirical work on the one hand, and of prescriptive theory and policy on the other. Long-running right-wing suspicions of liberal democracy have been rephrased in intellectually attractive terms, considerably extending their social appeal and mass media plausibility. 24
Public choice theory applies classical economic methods of analysis to political and adminisfrative systems with a view to identifying underlymg patterns of behaviour. This behaviour is then used to prescribe policies that will achieve the objectives of government. There is an underlying assumption that individuals have no preference for either public or private provision of resources, but desire the alternative that will maximise net gains. This, together with the presumed ability of individuals to have equal rights and capacities to negotiate thefr relationship within society, provides a questionable basis for the formation of policy. Despite the limitations of empirical analysis, the statistical evidence produced by public choice advocates (Quiggin 1987b) provides an intellectual form of rationality that can be convincingly used to support deductively derived policy choices (see Buchanan and TuUock 1962).
In a detailed analysis of public choice theory. Self (1993) has noted that ideologies are an important factor in politics as a consequence of the need to rationalize or legitimise a course of action. The use of a plausible tool to convince different interest groups of a sound basis for making decisions becomes especially important when attempting to win support for elections. Public choice theory is one such tool that has been used by political interests to further their causes. "Advocates of public choice theory have been utilised to build up the ideology of 'government by the market'" (Self 1993, p. x). Public choice theory is firmly anchored to the neo-classical economic fradition incorporating the following basic tenets (Meiselman 1992).
Public choice can be defined as the economic study of non-market decision-making, or simply the application of economics to political science. The subject matter of public choice is the same as that of political science: the theory of the state, voting rules, voting behaviour, party politics, the bureaucracy and so on. The methodology of public choice is that of economics, however. The basic behavioural postulate of public choice, as for economics, is that man is an egotistic, rational utility maximiser (MuellerinSelf, 1993,p. 2).
This definition recognises that public choice theory ignores the basic differences between the market for public and private goods and services. Public choice theory assumes that the principles of economics can be applied to the public sector as though efficiently operating markets exist for government goods and services. For a citizen to be able to engage in utility maximisation there needs to be a choice 25 between alternative suppliers, with differentiation made possible by variations in the price and quality of the goods or services desired. As these characteristics are not present for many public goods ^ the validity of the application of economic principles to government operations is questionable. Despite the lack of obvious affinity between private and public markets, this did not provoke any major resistance to the acceptance of public choice theory (Quiggan 1987b). Self (1993, p. 58) suggests that
(p)ublic choice theorists themselves often present their propositions as 'ideal models' or constructs rather than literal descriptions. Still the construction of an ideology does not deal in refinements but in general images and concepts. The self interest assumption, for example, may be much too narrow yet it has enough plausibility in common experience to pass muster without close examination.
Public choice theorists gained a foothold in social policy thinking by first undermining the dominant Keynesian view of government policy. Keynesian ideology highlighted the deficiencies of market mechanisms and extolled the abilities of government to promote social welfare and economic prosperity. When economic prosperity declined in the 1970's, rational choice theorists advocated an opposite role for government. The merits of market choice and the intrinsic inability of political processes to induce efficient resource allocation were advocated as reasons for change (Dixon and Kouzmin 1994). "In a very real sense, public choice theory offers a theory of governmental-political failure that emerged from the theoretical welfare economics of the 1950's" (Buchanan, in Self 1993, p. 56). While fraditional political theory concenfrated on the premise that citizens entrusted their various interests to different political organisations in a belief that interests would be sifted and reconciled, public choice theorists viewed the political process as being far less responsive to individual wants. Self (1993, p. 57) noted that advocates of public choice characterised the role of citizens as follows:
1. As a voter he has a negligible capacity to affect political outcomes. 2. Because of this situation he has little incentive to acquire the information needed to make informed judgements. 3. In any case problems of preference aggregation distorts the resuhs of elections.
' Funnell 2001 (p.66) defines pure public goods (or services) as those for which there is no ability to exclude others from its use and where use by one citizen does not diminish the capacity of another from use. Examples include defence and police protection. These services are available to all residents of a nation whether the citizens are taxpayers or not. In confrast, private goods are available only to those who pay for them. 26
4. The 'free rider' problem deters the citizen from more active forms of political participation. 5. He has much less incentive to think or act rationally or constructively about public affairs compared with his own interests. 6. Insofar as he does participate, he will be primarily concerned with his ovra material self-interest.
Public choice theorists portrayed politicians as self-seeking manipulators of political processes for personal gain. Politicians were considered responsive to pressure groups, ignoring the disproportionate use of taxation revenue for one group in order to earn political favour and promotion prospects. This means that politicians have no principled commitment to policies or ideologies that give the political party a negligible role in politics. "Any suggestion that politicians are significantly concerned with societal well-being or the common good, or that their advisers are guided by fundamental ethical precepts is generally dismissed" (Boston et al 1991, p. 3). While these viewpoints were exfreme, it was the undermining of the old, rather than the 'ideal solution' proposed by the new, that was successful in spreading public choice ideology (Kettl 1993; Osborne and Gaebler 1992; Davis et al 1993).
The consistent use in public choice theory of rational egotism represented a break from previous forms of political philosophy that differentiated public from private and assumed that actions within the public sector would be in the public interest rather than to fiirther individual self-interest. Public choice theorists moved away from the powerless individual (or mindless economic man that neo-classical economics regards as being reactive to market stimuli), and explained the outcome of democratic decision-making as the result of interactions between interest groups (Quiggin 1996). Interest groups act collectively to secure allocations of scarce resources from government. The assumption that individuals in the same situation will share similar preferences or interests which are sufficient to override individual preferences is an underlying premise behind the importance of mterests groups to public choice theory. Public choice theorists believe that mterest groups, bureaucrats and politicians can, and do, manipulate the political process for personal gain at the expense of other groups in the community. Quiggin (1987a, p. 20) believes that the power of interest groups is linked to their ability to friisfrate government. 27
In my view, the lobbying efforts of interest groups are much less important than the independent power they represent. Governments at both state and federal levels are forced to make concessions to certain interest groups, not because of the political or monetary assistance they can provide or withhold but because they have it in their power to promote or frustrate the achievement of government objectives.
While individual motivation is complex and uncertain, the behaviour of organised groups is usually more observable. It is this ability to predict the potential outcomes on effected population groups that provides information for the assessment of policy alternatives.
Key economic interest groups such as frade unions, big business frade associations and the professions play a disproportionate role in social development for a number of reasons. Most importantly, these groups exercise collective power over resources that are vital for overall economic activity. Trade unions have power over labour, business corporations have power over the timing, location and scale of capital movements and professions control access to knowledge. Unions also identify with distinctive ideologies that influence members' social attitudes and behaviour (Dunleavy 1991). This is beneficial for the development of political policies because those who hold roles in ah interest group are conditioned in how to interpret their own interests and those of other social groups. As a consequence, members of major interest groups tend to behave and respond cohesively in the political system.
Ausfralia's past has numerous examples of powerful interest groups that have had a significant effect on political policies. The Ausfralian Council of Trade Unions was closely aligned with the Labor Government during the 1980's, thereby providing a platform for wage resfraint. The involvement of business and community groups in Labor Party's Tax Summit in 1985 allowed for each group to identify with one of three options the government was considering for tax reform. Government was then able to gauge the level of support or dissent for each proposal and predict the electoral success or failure of the proposed policies. The progressive expansion of
^ Quiggin (1996) has pointed out that the predictive ability of public choice theory is questionable. However, it is not the robustness of the theory itself that is the subject of discussion. Rather, public choice theory is considered from the point of view of highlighting the importance of interest groups and vested interests to political processes, as a means of understanding changes that have occurred in Ausfralian public sector governance mechanisms. 28 competitive mechanisms has also provided an avenue for the accounting profession and management consulting firms to expand their field of influence as the need for technical expertise has emerged in the public sector.
Quiggin (1996) has also suggested that state governments could be regarded as interest groups in their own right. Their ability to exfract concessions and to promote or thwart the policies of the Commonwealth Government gives them considerable bargaining power. State governments also engage in activity that attempts to entice big businesses to locate within state boundaries. A recent example of state governments lobbying big business interests was the location of the head office for Virgin Airlines in early 2000. The states of Victoria, New South Wales and Queensland, the eventual winner, were all involved in trying to secure the flow of investment and employment to their state by offering concessions to Virgin Airlines.
To overcome the inability of the political system to satisfy all individual wants, public choice theory advocates that individuals be provided with greater choice. The appeal of free choice satisfied the capitalist ideal. The inability of government to satisfy all competing resource needs also gave persuasive appeal to the idea that resources would be more effectively managed (Wettenhall 1988). Market forces would ensure that only those suppliers that were efficient would remain competitive and, therefore, resource allocation would also be efficient. When answers were being sought for new problems in the public sector, the ability to link a possible solution with a familiar private sector capitalist model gave contestable markets a degree of legitimacy (Quiggin 1996).
2.3 Agency Theory and Interest Groups
Agency theory is closely aligned to public choice theory in the shared assumption of self-interest. Agency theory is concerned with relationships between principals and agents. Principals engage agents to act on their behalf and then specify the terms of the engagement. Principal-agent relationships can exist in the context of buyer and seller, employer and employee, voters and politicians and politicians and public servants. Agents are typically motivated by their own interests within the maxims of 29 classical economics. This requires principals to take care with the specifications of confracts to ensure that the chances for opportunistic behaviour by agents are minimised.
The need to ensure that agents are acting to maxunise the principal's welfare involves agency costs. These costs can take the form of incentives, such as bonuses or profit sharing, monitoring and auditing. The agency costs may increase to levels that are economically unsustainable where there are significant problems associated with adverse selection and moral hazard. Boston etal (1991) describe these problems using as an illustration of agency costs is the provision of policing services. Prior to hiring persons for confracted policing services, the true nature of an applicant's ability and character are unobservable making an adverse selection a possibility because all information about the applicant is not available to the employer. After an agent has been confracted a moral hazard can arise when the principal is not able to reliably ascertain or measure the performance of an individual in their appointed role. The significance of agency theory to public policy lies in its ability to provide useful analysis of alternative institutional arrangements. In the example of police services, the problems of adverse selection and moral hazard, combined with the high costs of monitoring, would indicate that "it is likely to be more efficient for the government to establish (keep) its own agency than to rely on external confracting" (Boston et al 1991, p.7). Barton (1999b) agrees that the role of government is based on the existence of significant externalities, indicating market failure, that make it undesirable for certain activities to be provided by the private sector.
Agency theory has a number of shortcomings that limits the usefulness of its application to government policy making. Most importantly, the recognition of the often unequal distribution of power within organisations and society is generally ignored. It is assumed that parties to confractual relations have equal rights and capacities. In the example of employer/employees relations this is often not the case with the employer having a sfronger bargaining position than the provider of labour. Agency theory also presumes that it is only the agent that will act opportunistically. The actions of principals in maintaining the terms of the confract are not subjected to the same scrutiny for adverse selection and moral hazard. The ability of employers to 30 exploit labour by their ability to withdraw employment can have a powerful influence on confractual relations. As an illusfration, the employment of senior government department personnel on a confract basis places the public servant in a position where advice given may be tempered by concerns for fiiture employment prospects. Consequently, the use of confractual means^ to secure outcomes that will be in the public interest may be less effective than more fraditional hierarchically determined public service controls.
Other shortcomings of agency theory can be found in its reliance on utility maximisation theories that ignore other motivations that may affect human behaviour. Using the employment of senior public servants as an example again, contracts attempt to prevent conflict of interest between the principal (the executive) and agent (public servant) in accordance with the public choice maxims of self interest. Public servants can be influenced by principles of integrity, ethics, professional standards and a host of other attitudes and beliefs. Utility maximisation infers an individual with little sense of moral purpose or conscience, apart from maximising their own well-being. The contention that self interest governs all behaviour, however, is at odds with a notion of shared community values forming the basis for civil society (Quiggin 1996; Pusey 1991, 1993; Dunleavy 1991).
The essentially one-dimensional character of agency theory, further, does not easily accommodate complex constitutional relationships. Politics embodies opportunistic behaviour in the form of corruption, pafronage, favouritism and the abuse of power. In addition accountability relationships often require public servants to have multiple principals. Public servants can be responsible to a minister, to cabinet, to parliament, to the public and to their employing agency (Boston et al 1991)."^ Also complicating the insights of agency theory, public policies often attempt to achieve a number of
Confracts can act as a management tool with quality standards defined by political rather than managerial processes (Mc Guire 1994, p.l 11). ^ The questioning of accountability relationships between the public service and government has been explored by Management Advisory Board/Management Information Advisory Committee (MAB/MIAC) in the report The Australian Public Sector Reformed. An Evaluation of a Decade of Management Reform 1992 (p. 503-9). For example, a distinction between public servants as policy makers and public servants as administrators assumes that adminisfration is value neutral. Decision making processes (particularly in the area of social welfare) have highlighted that this is an imrealistic proposition providing evidence that accountability has many variable dimensions. 31 conflicting objectives, such as economical service delivery while ensuring responsiveness to citizen needs, hi such an environment, the assessment of performance in an agency relationship is problematical.
2.4 Capture Theory
The fraditional role of government is to intervene where market miperfections cause behaviour detrimental to the public interest. Where lobbing by interest groups is successful, it is not the public interest^ that motivates the desire for market intervention. Whether regulation that benefits specific vested interests amounts to 'capture' remains to be seen.
The competitive struggle for political influence over government generates inequalities between interest groups as successful large groups secure concenfrated benefits in the form of regulation or funding (Dunleavy 1991). Circumstances may arise which result in government mechanisms being captured by sectional interests as a consequence of shifts in power and vote frade-offs. The ability for those that are the object of regulation to have a significant influence on the regulator has been referred to as regulatory capture. Quiggin (1996, p.73) describes the process of capture as the result of a
long association between regulators and the indusfries they controlled, and the need for cooperation in the exchange of information, would lead to a commonality of interest, so that the regulation benefited the industry it controlled rather than the public it supposedly protected.
Interest groups generally compete for favourable government outcomes. However, history has shown that certain groups have been more successful than others in promoting their interests through regulatory capture, usually in association with particular governments. Mitnick (1980, p. 95) describes the ways in which capture can occur as follows:
The motivations of certain 'green' or environmental groups are ostensibly to conserve or protect resources for the wider community. However, the desire to prevent access to certain resources may protect the vested interests of others. For example, the allocation of fishing quotas has the effect of preserving fish stocks and also maintaining sales pricing structures by limiting supply. 32
> if the regulated interest controls the regulation and the regulatory agency;
> if the regulated party succeeds in coordinating the regulatory body's activities so that their private interests are satisfied;
> if the regulated party succeeds in somehow neutralising or ensuring poor or nonperformance of the regulating body;
> if the regulated party succeeds (intentionally or unintentionally) in co-opting the regulators into seeing things from their point of view and thus giving them the regulation they desire.
Where governments are concenfrating on 'steering' and making extensive use of confracted agencies to enforce or regulate certain activities, the opportunities for capture to occur, increase. Senior public servant appointments and appointments to regulatory boards may be politically motivated rather than based on the expertise and impartiality of candidates. Departments and regulatory agencies may also have their financial resources limited making it difficult to effectively discharge their responsibilities. An example of a government department having their effectiveness limited is offered by Funnell (1996b) in his review of the Ausfralian Audit Office. He suggested that the government executive intentionally refused to grant increased financial resources to the audit office at a time when additional skilled staff and resources were required to effectively conduct performance audit responsibilities. Hamburger (1989) has also suggested governments consider whether a candidate for the appointment of auditor-general is likely to be acquiescent and sympathetic to the government in office. This implies that the selection of a potential office bearer is not based on what is considered to be the best for the public interest, but what is best for the prevailing government.
Capture theory recognises that regulations that have economic consequences for the regulated induce them to invest considerable time and money to ensure that their interests are protected. Although there appears little similarity between capture and public choice theory, it could also be said capture theory assigns roles to private interests as part of the governments planning and confrol functions. Regulation of the accounting profession is a particularly prominent example of capture. Richardson and McConomy (1992) argue that the government allows the accounting profession to be self-regulated because it is an efficient way of aligning private interest groups 33 with the governments need to maintain social order. Accounting information plays a significant role in the economy. Although there has been criticism (Hunt and Hogler 1993) of the dominance of accountants in the standard setting processes, the government continues to allow self-regulation of the accounting profession. This could be interpreted as the accounting profession having captured the standards setting process from government. However, it is clear the government has allowed this to occur and the aftermath of Enron-type corporate collapses has generated calls for standard setting to be more independent of the profession (The Age 17/06/02).
The monopoly granted to auditors by corporations law is a further illusfration of accountants 'capturing' the benefits of regulation to promote self interests. Criticism of self-regulation in auditing leads to 'closing of the ranks' and symbolic changes to defend a monopoly position. With the increasing incidence of business failures, some more recent examples include Enron in the USA and HIH Insurances and One-Tel in Ausfralia, has come mounting criticism and the demand for extended audit liability (The Age 22/04/02; Ramsey 2001). The accounting and auditing profession have invested considerable energy into moves to limit liability rather than address the issues of inadequate audit performance. This is particularly true of the disparity of expectations between the public and auditors in relation to responsibility for fraud detection (refer to chapter four section 4.3.1 for a more detailed discussion). In Ausfralia, fraud detection is regarded as being incidental to corporate auditing engagements, whereas the expectations of the public are much more onerous. Commentators have found it difficult to understand why self-regulation continues when the report card is not complimentary (Mitchell et al 1991).
Public policy is the interaction of values, interests and resources, guided through institutions and mediated by politics. The interactions and ascendancy of one group of interests over another can be interpreted through a variety of techniques. The contested nature of the changes to the Victorian Government audit fimction between 1992-99 provides an opportunity to examine change in its organisational and social context (Hopwood 1983; Burchell et al 1985; Laughlm 1987; Napier 1998). fri particular, English and Guthrie (1991) have called for research that is more contextually grounded in the area of public sector audit. The three main players in 34 this scenario, the government in office. Audit Victoria and the accounting profession, have different resources and abilities to influence institutionalised structure, policies and procedures. Each of the players has vested interests and future positions of power at stake. The positions which each party advance are unlikely to be benign and change will offer little scope for a return to previous relative positions.
2.5 Institutional Theory
Institutional theory, as proposed by DiMaggio and Powell (1991), is suggested as a useful tool for providing insights into the processes of organisational change. Institutional theory enables an appreciation of the problems of competition and efficiency without overlooking the fact that politics, power and conflict are potent variables affecting institutional development. Institutional theory has relevance at both the societal level in a macro sense and also at the micro level for particular sectors of society. Organisations do not operate in a vacuum. Interactions with other groups in society will at times necessitate defensive measures if power relationships are to be maintained. It is important to consider that the laudable objectives of economy and efficiency are often the excuse rather than the reason for institutional change.
Instittitionalism is concerned with the way in which procedures and rules are regarded by groups in society as normal (Pollitt 2001). histitutions are socially constiiicted as an organised, established procedure. People in different societies at different times hold varying assumptions about the interests that motivate action and the forms of action that are appropriate. Organisational forms, stiiictural components and rules can be institutionalised at an industry or societal level.
Institutionalisation involves the processes by which social processes, obligations, or actualities come to take on a rule-like status in social thought and action. So, for example, the social status of a doctor is a highly institutionalised role for managing illness as well as a social role made up of particular behaviours, relations and expectations (Meyer and Rowan, in DiMaggio and Powell, 1991, p. 42).
fristitutionalised processes shape organisational stincture and action. The formal structure encompasses the goals and objectives of an organisation within a clearly 35 defined bureaucratic design of departments, positions and activities. Institutional elements are easily fransmitted to newcomers, can be maintained over long periods of time and are resistant to change. The resistance to change comes from a vested interest in the current power structure where incumbents will expend considerable effort to maintain their dominance. Governments are good examples of highly structured institutions where activities have been historically coordinated and confrolled within a rigid framework of enfrenched mstitutional norms. Another illusfration of an institutionalised practice is that of auditing. The role of auditing in society since the mid-nineteenth century has been that of a trust reinforcement agent to provide credibility to the financial reports. The enhancement of the status of auditing and accounting in general has seen organisational structures of the accounting profession change considerably over time from a loose association of practitioners to a tightly confrolled professional environment.
The Australian political climate represents a mixture of democracy combined with an elaborate system of unelected institutions to ensure law and order in society. The courts, arbifration commissions, judges and ombudsman all have their own degree of legitimacy derived from custom rather than an electoral process (Jackson 1988). The relationship between elected and unelected institutions can change as a consequence of power redistributions. Changes in institutional structures have repercussions for the public interest.
Social choices are shaped, mediated and channelled by institutional arrangements that are harnessed to serve particular interests. Political history in Ausfralia has shown how dominant interest groups rise and fall from favour as a consequence of redistributions of power in society. Examples include the Ausfralian Farmers Federation, that was influential during periods of Liberal/Country party coalition governments during the 1960's and 1970's, and the Ausfralian Council of Trade Unions (ACTU), which had significant power under the Labor Governments of the 1980's. As social, political and economic institutions have become more complex and resourceful they have become more important to collective social life. DiMaggio and Powell (1991) suggest that in attempting to deal with change, whether the change is coercive, mimetic or normative, highly structured environments that have 36 vaguely defined outputs have a tendency to become more homogenous in structure, culture and output. Thus, the processes of auditing, accounting and government have outputs that are vaguely defined and can be said to rely on symbolic tools to promote their credibility and legitimacy. Awareness of explanations for institutional change enables a different perspective on the justifications for change to come to light.
Scott (1987) has pointed out that there have been a variety of proponents of institutional explanation and that it is important to stipulate which is being applied to a given context. Institutions have been studied in political economy, economics, international relations and sociology. Within sociology, early proponents of institutional theory suggested that institutions were the products of conscious design. In latter adaptations it is conceded that institutions are the product of human interaction. However, this activity needs to be situated within a broader context. The interrelationships between organisational structures on an industry-wide, national or even global scale have the capacity to influence the way institutions are shaped and explicated. Scott (1987) identified numerous variations of institutional theory from a sociological perspective and suggested three significant accounts of structural influence: (1) the types of institutional elements are singled out for attention; (2) the influence or causal mechanisms identified; and (3) the aspects of organisational stiiicture that are affected (Scott 1987, p. 501). This thesis is concerned with the themes of power and vested interests. How power is exercised and how the interests are articulated to affect political policy are closely aligned with cause and influence. Accordingly, discussion and analysis will concenfrate on the second version of stiiictural influence suggested by Scott (1987). The other forms of sti^cttiral influence have peripheral relevance and will be selectively reviewed.
2.5.1 Causes of Organisational Change
Meyer and Rowan (1977) contend that organisations incorporate into their formal structures a host of rational procedures and rules (including accountmg systems) to maintain appearances. Rationalised elements appeal to the external environment and help to confer legitimacy. With respect to auditing, there are many procedures 37 adopted by accounting firms to promote a view of independence upon which its legitimacy depends. The expectations gap literature continues, however, to be critical of the effectiveness of the symbolic separation of management consulting departments from auditing departments.^ Highly formalised structures thus act as a mythical window-dressing exercise, separate from the work that accounting firms actually engage in. Where presentation of organisational-self is unportant the structure is said to be 'decoupled' from organisational practice. It is argued that decoupling enables organisations to maintain standard, legitimised formal structures while their technical activities vary in response to practical needs. This enables diversity in practice within an accepted structure. Carmthers (1995) agrees with the proposition of Meyer and Rowan that legitimating activity often results in standardised processes as one favoured approach becomes the norm for a particular institutionalised process. He claims that "(m)odem Western society privileges a particular form of rationality, and so organisations operating within that cultural context will gamer more legitimacy if they can emulate or symbolically reproduce that rationality" (Carmthers 1995, p. 315). Rationalised formal procedures are considered to matter more to those activities that have outputs and technologies that cannot be clearly substantiated. Or, put another way, institutions are judged more by the appropriateness of their form than by their outputs. Examples of processes that readily fit this description are health care and auditing.
The insights provided by institutional theory mean that the rapid movement to market ideologies by government may be more easily explained in terms of the search for legitimacy than any substantive results. Meyer and Rowan (1977) have argued that because of the difficulty the public service has in demonsfrating results, new approaches that are likely to enhance the degree to which they are seen as efficient tend to be adopted. This means that government departments can appear to be more economical and efficient by adopting procedures from a competitive environment that result in standardisation to promote consistent and rational behaviour within a bureaucratic framework. When there is a best, cheapest or more efficient way of doing something, market forces will eventually impose on
The recent collapse of the Enron Corporation illusfrates that the symbolic separation between departments was not effective. 38 organisations that particular way. While this was seen as the dominant reason for increased similarity in organisational structures in the past
(t)oday, however, structural change in organisations seems less driven by competition or by the need for efficiency. Instead, we contend, bureaucratisation and other forms of organisational change occur as the result of processes that make organisations more similar without necessarily making them more efficient (DiMaggio and Powell 1991, pp. 64-65).
The contention that highly stmctiired organisations have a propensity to become more similar has been termed 'isomorphism'. Isomorphism results from processes that are cultural and political as a means of justification, rather than efficiency alone (Carmthers, 1995). DiMaggio and Powell distinguish between competitive and institutional isomorphism. Three types of institutional isomorphism, coercive, mimetic and normative provide a means of determining how rationalised procedures are adopted by organisations.
Coercive isomorphism arises from pressures external to an organisation upon which an entity may be dependent in some way. Pressures may be financial, based on some form of cultural expectations or they could be formal and informal. "Some institutional sectors or fields contain environmental agents that are sufficiently powerful to impose stmctural forms/or practices on subordinate organisational units" (Scott 1987, p.501). Governments can impose stmctural change by legislation. Corporations can impose changes by, for example, reorganising subsidiaries after a takeover. Organisations that are resource dependent have little opportunity to resist pressures from the providers of funds. Meyer and Rowan argue that as large organisations and governments expand their dominance in a field or social environment, organisations become increasingly homogenous within a field and increasingly organised around rituals of conformity. DiMaggio and Powell contend that the government and the professions have become the great rationalisers of society by virtue of their influence over organisations. Governments are generally a major employer in the community with significant confrol over resource allocations. The ability to also prescribe certain behaviour and procedures by law makes governments a powerful force in the community. The accounting profession, like most other professions, promulgates standards of conduct, technical proficiency and 39 maintains barriers to entry. The accounting profession also has the ability to dominate the agenda for establishing the.mles of accounting, not just for its members, but for the business community.
Mimetic isomorphism is the product of uncertainty in an environment where followers adopt models from other organisations. Organisations tend to model themselves after those considered successful. Generally the broader the population served by an organisation, the greater is the perceived need to offer the same products or services that others are providing. It could be argued that the four major Ausfralian banking organisations are increasingly homogenous in thefr structures and practices with many outward rituals of rationality. Stmctures are outwardly claimed to be responsive and negotiable when rules internally generate an impersonal, lean and cost efficient procedure-driven operation. The procedures adopted by government can also provide an illusfration of mimetic behaviour at a macro societal level. Government structures themselves are often modelled on overseas initiatives. The public choice advocacy of small government has substantial similarities with overseas developments despite parochial variations, hi short, something that is perceived to work well will soon be copied. Whether the same benefits will flow to the new proponent is not as relevant as the sense of legitimacy derived from outwardly being seen as following best (or most popular) practice.
As part of the Ausfralian Government reform agenda the outward rhetoric of the need for economy and efficiency has generated stmctural reforms on a grand scale. The perception that commercial business practices are appropriate for the public sector is not necessarily the best way of achieving the objectives of government, taking the broad public interest view. The copying of models perceived to produce efficient results in the commercial environment is generating homogenous organisational stinctiires. With increased outsourcing, confracting, privatisation and corporatisation in the public adminisfration system, the stiiictiires are accepted as legitimate signs of good governance.
Normative isomorphism stems primarily from the process of professionalisation. The process involves the collective efforts of members of an occupation to determine the 40 conditions of membership and the way in which work will be conducted. Membership of a professional association allows for the dissemination and exchange of information via fraining programs, networks for consulting and processes of socialisation. New members are indoctrinated and are expected to follow the mles or membership is withdrawn. Professions act as a medium to promote standardised practices so that buyers of services can have confidence that they will receive an outcome which is within the norms specified by that profession. DiMaggio and Powell (1983) contend that the promulgation of normative mles by professions creates
a pool of almost interchangeable individuals who occupy similar positions across a range of organisations and possess a similarity of orientation and disposition that may override variations in tradition and control that might otherwise shape organisational structure (p. 152).
Professions will often have a status hierarchy with the designation of a few firms within an industry as the dominant leaders which others strive to follow. This dominance will be reinforced by representation on industry committees, consultation by government agencies, support of influential clients and government recognition of key organisations through the grant or confract process.
The accounting profession provides a clear example of normative isomorphism. It has been dominated by the 'big four' (since mid 2002) firms in what is almost an oligopoly stmcture with most of the world's multinational corporations using the service of these few firms. Professions are subject to the same coercive and mimetic pressures as are organisations. Organisations that include a large professionally frained workforce will be driven primarily by status competition. To be seen as innovative and offering the same benefits and services as their competitors may result in the adoption of new organisational stmctures increasing homogenisation within a field (DiMaggio and Powell 1983).
Institutional theory, or the 'new institutionalism', the term adopted by the most recent proponents (Scott 1987; DiMaggio and Powell 1991; Carmthers 1995), allows change to be considered in micro and macro contexts. The move to reform government operations along private sector lines is not driven by pure public interest 41 motives. Explanation of altemative motivations for changes to fraditional processes of government and management facilitate an appreciation of cause and effect in the change process. Institutional theory gives credence to the proposition that the process of rationalisation/standardisation may have more to do with the shoring up of positions of power than the rhetorical reasons offered for change.
2.6 Economic Rationalism and Legitimated Reform
The term 'economic rationalism' has become an accepted descriptive term in government that is representative of an underlying commitment to public choice theory. The process of government reform is based on economic rhetoric that sees government as generally inefficient with the capacity to improve if managed like the private sector. 'Economic rationalism' has connotations of responsible behaviour with a view to improved performance. Although to be economically rational has relevance to both the private sector and government, the way in which the concept is used in government is often at odds with its connotations.
Economic rationalism implies a reasoned commitment to economic improvement. It is a concept that is not well defined but which is clearly a compelling attribute governments would understandably aspire to claim. The Australian Concise Oxford Dictionary (Third Edition 1997, p. 418) defines economic rationalism as "the theory or practice of government using narrow definitions of efficiency and productivity as measures of economic success, without regard to government's fraditional economic responsibilities to the public sector and the welfare state". This definition is consistent with a process of justification using means that have been rationalised. Pusey (1991) links economics with sociology and questions whether rationalisation is modemisation or a form of reasoning based on logical foundations. He suggests that the post-war boom era in Ausfralian politics can perhaps be characterised as 'directionless consensus' with change bemg a process of modemisation as industiialisation slowly shaped the Ausfralian political landscape. A form of practical rationality acted to produce advances in welfare for disadvantaged citizens, to provide a system of public education, urban development and public fransport. This was then replaced with an ideologically driven process of co-ordination logic. 42 explained in rational economic terms. The solution to the unmanageable chaos of diversity presented by the changing global envfronment was solved by what Luhmann has referred to as "not an immanent logic of needs, but instead a need for immanent logic" (as quoted in Pusey 1991, p. 21).
While public choice theory is a means of achieving economic rationalism, there are inconsistencies in its applicability to government operations. However, the justification for change is theoretically defended by an appeal to rational concepts. Rationalisation implies achieving the same ends using a more logical or well considered approach. The use of the 'economic rationalism' in the context of public sector reforms has shifted the attention from government policy ends to the means used to attain society's wants. This shift has paved the way for the use of private sector techniques to administer and deliver government responsibilities.
The public service now speaks the language of economy, efficiency, effectiveness, outcomes, value for money and performance indicators. Financial terminology has been given priority in government parlance. There is also a presumption that the needs of governing can be achieved better with stmctures that promote competitive resource allocation. Assumptions that are taken as given include:
> that markets exist (or can be created) for activities that are undertaken by government;
> that markets are the most economical and efficient way of providing goods or services;
> that community needs can be completely satisfied by market providers;
> that public interests are best served by managing resources using quantifiable criteria;
> that citizens have a choice between aUemative suppliers; and
> that choices allow altemative suppliers to vary quality and price.
These assumptions give an indication of the power attributed to market mechanisms. The essentially capitalist nature of the underlying market ideology has also served to promote the private sector notions of how government entities should be judged as 43 successful. The fact that the elements contributing to commercial success bear little relevance to the objectives of government has received scant attention (Funnell and Cooper 1998). Large corporations and governments have similarities in that they are both essentially institutions that co-ordinate, plan and mobilize resources. The objectives behind the coordination of resources, however, are very different. Commercial entities desire to maximise fmancial rewards exclusively for their various stakeholders. There is a need to attract customers with prices and investment decisions based on prospective profits (Guthrie and Johnson 1994). In government, resource use decisions are made on the basis of a need to satisfy public demand from a broad economic and social welfare viewpoint. The values used to mn the public sector are thus significantly different from commercial organisations. The criticism of government as inefficient and bureaucratic does not mean that the only choice available for improvement of government performance is a competitive market responsive to the needs of consumers. The choice lies in the way in which institutions of government are coordinated to achieve the goals of society.
2.7 Economyy Efficiency and Effectiveness
The need for government to ensure that limited resources are used to the best advantage has been translated into concerns for economy, efficiency and effectiveness. These three factors have been promoted as the catch-cries of economic rationalism and government adminisfration and are 'akin to motherhood'. The words themselves convey an accepted aura of desirability which responsible managers should aspire to achieve (Wilenski 1986). The promotion of the three 'E's together gives the impression that they are inherentiy compatible or reconcilable. However, for a given level of dollars within specified performance parameters there may be only an acceptable rather than a desirable outcome. If economy has greater importance in the budget process, then the level of effectiveness is necessarily a conceded outcome, fri addition, the ability for management to choose the combination of resources that are selected to satisfy objectives allows for the assessment of outcomes to be equally subjective (Wanna et al 1992, p. 14). 44
Concem with 'economy' reflects a desire for containment of expenditure or inputs, or, to make a dollar go further. The climate of reform over recent decades has supported a general consensus that government needed to be smaller with the assumption that the cost of government was too high. "Against a deteriorating economic background, its (government's) principal agenda was economy. It began with a freeze on staff numbers and the creation of the razor gang" (Zifcak 1994, p. 24). In the mid-1980's the reform movement's first major change in public sector adminisfration saw a reduction in the number of Commonwealth Government departments, from twenty-eight to sixteen, and in the number of public servants. Layers of management were removed with a more simplified personnel management stmcture. This saw a considerable change in the culture of the public service with the old guard of public servants, who had gained seniority after years of dedicated service, being replaced by those with degrees in economics and business. Guthrie and Parker (1998, p. 59) have suggested that
private sector dominated accounting and finance fraining (and continuing professional development) may well have also contributed to the obscuring of underlying differences between public and private sector organisations and respective approaches to managerial and accountability matters.
The bias towards those trained in an economic rationalist approach inclined the new breed towards greater economic deregulation, privatisation and, less welfare spending (Corbett 1996). The ability of government to appoint political and adminisfrative associates also ensured that opposition to the government's particular reform package was minimal.
2.7.1 Economy and Efficiency
Efficiency attempts to calculate the relationship between measured inputs and the outputs produced. The more outputs produced for a given input, or the fewer inputs consumed for a given output, the higher is the level of efficiency.^ However, attention seems to have centered on cost-efficiency. Weller et al (1993) point out that efficiency is contextual with the government providing a more difficult environment
^ From a more general perspective, the structural efficiency between levels of government and resource allocation efficiency within the economy as a whole are also part of the meaning of efficiency in government (Warma et al 1992). 45 for the determination input cost. This difficulty extends to the political process itself Hopwood (1984, p. 414) has observed that
(t)he generality, and indeed the ambiguity of notions of efficiency and value for money, must be recognised. For, although the ideas appeal to the comparison of inputs and outputs, and fmancial resources with their consequences, the dehneation of those inputs, outputs, and financial resources and consequences remains both a practical and conceptually difficult endeavour.
The government environment is characterised by values based on political decision making, inter-organisational and inter-governmental conflict (between states and the federal government) and the need to accommodate high levels of scmtiny and confrol (Prasser, in Kouzmin and Scott 1990). The levels of scmtiny needed in government to ensure that accountability obligations are effectively discharged, generates an environment that is different from that of a corporate entity. Public servants are required to accommodate a range of often conflicting accountabilities that include financial, management, political, ethical and electoral accountability. The greater range of accountability obligations required in the public sector are not inherently conducive to efficient, or economic processes.
The need to assess management performance in their assigned roles requires that efficiency be capable of being demonsfrated and measured. In the commercial environment, the attainment of financial goals which satisfy shareholders are measures of management success. Investment decisions are generally based on prospective profits with management and workers motivated by eamings, either directly in the form of wages or in the form of bonuses tied to eamings. Identifying linkages between management effort (inputs) and outputs generally pose fewer problems in the private sector when compared to government. The conditions regulating exchange in a market environment involve individual agents acting for gain in contexts that can be delineated. In confrast, the public sector has functions and interactions that are based on neither individualistic, singular or simple processes, but rather collective and complex ones (Guthrie and Johnson, in Wiltshire 1994). The prices of inputs in the government sector are determined by an imperfect market system. In the absence of guides or benchmarks to determine public sector costs, the absolute and relatives costs of the market are often used as guides for cost determination. It does not necessarily follow that market forces should then be 46 allowed to determine public service resource allocation. Government policies have social consequences and often costs can accme indfrectly rather than as a product of the governing process.
Given the social context in which government operates, it is appropriate that the efficiency stmctures used in government also differ from private sector norms. While this may be a defensible proposition, the effectiveness of private sector tools of efficiency, as used in the public sector, have not yet been tested by ex-post evaluations of outcomes. However, it is recognised that the use of outsourcing in particular can have negative effects on community well being. The Public Accounts and Estimates Committee (PAEC) Report 34 in 2000 (p. 19) stated that a potential disadvantage of outsourcing was that the "(p)rice for competitive tendering may have an impact on equity and quality issues, particularly in human services areas, and lead to under-funding of services, either by design or defaufr" (emphasis in original). The reform process continues. However, the opportunity to evaluate individual aspects of reform in amongst the myriad of reform initiatives is a difficult proposition. This is made more difficult when new governments have different policy priorities and objectives.
Where guides to enable efficiency measurement in the public sector are not available, performance indicators have been devised to allow budget preparation and subsequent assessment of outcomes. It is evident that such indicators are very different from those used in the private sector. Often there is a concerted effort on quantification for the sake of numerical needs rather than the value of the information generated (Hopwood 1984; Guthrie and English 1997a). fri this way a calculative priority can be given to economic factors. Costs, benefits and consequences can be divided into the defmed and known and the imprecise and intangible. Emphasis can then be given to the known with a suitable chain of visibility to justify, or give support to, particular actions taken. The bias towards 47 calculative efficiency has the same shortcomings as a one-dimensional concenfration on economy.^
2.7.1.1 Efficiency and the Public Interest
While the pursuit of efficiency within government adminisfrative and operational stmctures have been a major part of government reforms, the divestment by government of many goods and services has other efficiency implications. Public choice theory assumes that most goods and services provided by government can be provided using contestable markets. The existence of altemative suppliers able to provide goods and services differentiated by qualify and price supports conditions conducive to the promotion of resource allocation efficiency and, thereby, encourage economic efficiency. The existence of markets is held by economic theory to be a condition necessary for the achievement of economic efficiency. Forester, in Weller et al (1993, p. 164), warned, however, that "markets and efficiency are separate entities at both the theoretical and empirical levels: markets do not necessarily lead to efficiency and, of equal importance in the context of public service, efficiencies can be achieved without the direct use of the market".
Governments have a moral and legal obligation to ensure that resources obtained from the communify are efficiently and effectively used to satisfy a maximum number of public needs. Throughout the 1950's and 1960's the Ausfralian economy was generally prosperous^ with the key role of the government, according to Keynesian theory, being to stimulate the economy by increasing government spending in times of recession. The government was looked to for solutions to problems rather than suspected of contributing to the cause of economic malaise. There was a presumption that the divestment of activities that could effectively be provided by the market would ensure increased efficiencies. This view was
Such a contingent view of measurement and calculative practice does not deny that performance measures can raise quite legitimate and significant questions. ' Quiggan 1996 (p. 8-9) calls the period from 1939-70 a Keynesian boom period with virtually no unemployment and increases in labour productivity. Argy (1998, p. 5) suggests that the 1950's and 1960's represented a 'Golden Age' for the Ausfralian economy. 48
supported by the Joint Committee of Public Accounts (JCPA) in their Report 336, Public Business in the Public Interest (April 1995, p. xxvii) where it was stated that
(c)ommercialisation and corporatisation have undoubtedly led to major improvements in the efficiency and effectiveness with which Commonwealth Government agencies provide goods and services to the pubUc and other government agencies. Improvements in financial performance of commercialised agencies have been impressive, with deficits being reversed and healthy retums made to the govemment.
Irrespective of the methods used to achieve adminisfrative and management efficiencies, a public interest perspective needs to be the motivation behind the outcomes obtained. The methods used in the private sector are necessarily geared towards competitive goals and may not represent the most effective means of achieving public objectives. The wholesale adoption of private sector business practices (many with their own shortcomings) does not give due regard to the different objectives of govemment (Barton 1999b).
The conditions under which private and public goods are supplied are different (Funnell and Cooper 1998). Where communify service obligations exist, the notion of 'markets' is inappropriate. There is no voluntary exchange and no altemative sources of supply. Public choice theory may provide an acceptable rationalisation for those govemment activities that do not have social equify consequences (for example maintaining the govemment vehicle fleet and the provision of asset services), however the harnessing of public choice theory as a blanket justification for more market-orientated practices provides only a partial tool that fosters self-interest before public interest (Nagel and Nagel 1990). The desire for efficiency is only one of many goals that a govemment operating in the public interest may have. Increased efficiency in the public sector is a difficult proposition, particularly in the areas of health and welfare, which assumes all aspects of service provision can be given a monetary equivalent (Self 1995, ). Not only is it difficult to place a value on the wellbeing of a citizen, there is an assumption that citizens have the ability to choose between providers on the basis of the price and qualify of service provision. For goods and services provided by govemment, pricing mechanisms are not solely dependent on a capacity to pay. There is an inevitable conflict between the level of supply and funding for provision of public goods and services. Where there is 49 deemed to be insufficient supply, possible remedies are to increase the efficiency of the supply or reduce the level of demand (number of people eligible). Using as an example the Ausfralian system of providing low cost pharmaceutical benefits to holders of a Health Care Card, the supply of benefits can be reduced or limited to those that qualify under income and asset ownership criteria.
As part of the drive to promote govemment by the market, the monopoly provision of govemment services internally within the govemment adminisfrative framework has come under scmtiny. Govemment monopolies are assumed prima facie to be inefficient (Peters and Savoie 1998). The increasing use of competition as a solution for inefficiencies in govemment operations has encouraged discussion about whether the public interest is best served by governments providing certain facilities to the public in a monopoly environment. This includes considering whether it is socially desirable to have one supplier and whether private interests can more efficiently and effectively provide public goods or services than the govemment. At all levels of production where it is more efficient to have one producer rather than many, a monopoly position may be justified. Inefficiencies are generated in circumstances where there is abuse of a monopoly position to manipulate pricing to the advantage of the supplier. If the conditions of efficient markets can be effectively reproduced then the use of a public choice model can be justified. Unfortunately, this is not evident in many circumstances (see chapter 5, section 5.4.3 and chapter six, sections 6.3.2 and 6.3.3 for discussions about markets and the privatisation of pubHc utilities). The abilify of public choice supporters to undermine existing stiiictures rather than provide ideal solutions appears to have been successfiil. The demise of public sector natiiral monopolies (for example the provision of electricify, gas and water) provide illusfrations of this point. The remedy often provided is to sell the monopoly enterprise to private interests so that competition will induce efficiency. Unfortunately, the existence of market imperfections may significantly limit the attainment of efficiencies that exposure to competition is assumed to bring in the public sector reform process. Market imperfections have long been the reason for govemment to intervene in the workings of the market mechanism, rather than, the reason for giving markets greater influence. 50 fri areas where there are natural monopolies (industries where the production is most efficient when undertaken by a single entity) it may be an inefficient use of resources for there to be more than one supplier in the market. In colonial Ausfralia where insufficient private sector resources existed to be able to supply services the govemment corrected the market imperfection by marshalling resources to provide public needs. Access to goods such as electricity and water have previously been considered a right of all citizens with the industries being accorded a natural monopoly status. Within a global economy, markets and resources are now sufficiently available to ensure that there are altematives to the govemment provision of goods and services. The role of the Commonwealth Govemment, stated by the JCPA in Report 336 (1995, p. xxviii) as "fostering emerging markets, but withdrawing from them as the private sector develops sufficientiy to compete", clearly supports a position of assisting in the provision of, rather than providing goods or services. There are now many privatised companies willing to manage the provision of electricify, rail, gas, and water services that have been segmented into discrete competencies. For example, the electricify industry in Victoria has been segmented into electricify production, distribution and supply and sold to different entities. Despite greater private sector involvement, it is questionable whether the infroduction of more suppliers increases or decreases efficiency in the public domain (Quiggan 1996, p.55; King and Maddock 1996, p.3). A redistribution of efficiencies (financial and non-financial) will certainly occur, particularly if markets are unregulated. Economic efficiency may improve, with benefits going into private pockets. King and Maddock (1996, p.24-7) provide evidence that in the utilities sector productivity growth doubled in 1994 when compared with periods over the 1980's. This increase is attributed to efficiency gains with " Ausfralian consumers enjoying a period of fafling real prices for utilities ... by the beginning of the 1990's the process appears to have reached a plateau with new approaches required if the improved performance was to continue" (King and Maddock 1996, p.33). However, the ability to assess the qualify of service provision, particularly for those with little capacity to pay, will be less apparent. There is an underlying conflict between economic efficiency and effectiveness in the delivery communify goods and services when private providers are involved. 51
At the national level, the benefits from efficiencies obtained by the infroduction of competition into the provision of domestic telephone services are obvious, especially in decreased prices. This is tine for major capital cities where the majorify of users reside. However, for countiy residents, particularly of mobile phone services where marginal costs make it unprofitable to extend services to remote communities, the benefits are less noticeable. Taking another example, m Victoria there is no abilify to choose between the privatised domestic suppUers of water or electricify. The suppliers are few with the market being more akin to an oligopoly than a competitive regime.
Govemment monopolies, rather than business monopolies, have the greatest capacity to affect social equity because they deal primarily with the provision of essential services or fimctions where a profit motivation does not best support public interests. The public are sceptical that business interests will not take precedence over public interests (Dixon and Kouzmin 1994). Despite confractual obligations to limit price rises and the provision of various ombudsman to deal with citizen (customer) complaints, the conditions of provision must still ensure profitabilify for the provider. Once govemment monopolies have been privatised, the abilify to return to previous relationships is remote.
There is obviously a wide gap between the ideal market model of economic theory and the actual modem market system. In the current world economy, large corporations possess sufficient market power to takeover or swamp competitors'^. They have significant resources to spend on extensive advertising, payment of big salaries to their senior staff and acquisition of political power through donations and govemment lobbying. The imperfections of market systems are emphasised in a global economy where a few large corporations dominate the world and a multitude of small firms operate in highly competitive markets that are often dependant on large corporations. As govemment reforms continue to increase the exposure of
' The duoploy of the domestic airline market is an example of large corporations using their power to make it difficult for new providers to enter the market. Ansett and Qantas were consistently imcooperative in allowing first Compass Afrlines and then Compass Airline Mk II an appropriate base to operate within airport terminals. Virgin Airlines have had more success because of govemment support for increased competition. It is ironic that this increased competition has contributed to the demise of Ansett. 52 citizens to a market system for many govemment responsibilities, the emphasis is increasingly on a role for govemment involving more steering and a reduction in rowing. The issue becomes one of finding an appropriate balance between govemment and private provision of public goods and services that will promote maximum social efficiencies, rather than primarily economic efficiencies.
2.7.2 Effectiveness
The third 'E' of effectiveness assesses the qualify of outcomes and whether the predetermined objectives of resource usage have been achieved. Effectiveness is the least definable of the three 'E's because qualify is a vague concept which varies in relation to the first two 'E's. A broad definition of effectiveness can incorporate how satisfied the public is with the level of service provision. This may have little to do with performance measures established to assess public sector management performance. Measures infroduced to standardise processes may not result in the type, quality and quantify of public goods and services that the public deems to be desirable. For example, indicators such as the length of hospital waiting lists, the amount of time it takes to deal with a customer inquiry for welfare recipients and, the criteria used to determine eligibilify for unemployment benefits, all have considerable effects on the wellbeing of citizens. These types of indicators are adminisfrative tools and are not representative of the extemal needs of citizens. The needs of citizens are variable in accordance with factors such as age, cultural background and economic statiis. The inabilify to differentiate between user groups by standardised measures, therefore, creates social inequities. Conceptual difficulties for performance are also compounded by the fact that govemment objectives may be political rather than rational and that assessment of achievement of objectives can be just as politically motivated.
With the increasing use of performance evaluation for the assessment of management in thefr entinsted roles came the need for new techniques to verify that accountabilities had been effectively discharged. The office of the auditor-general provides the primary means of assuring accountabilify at both the commonwealth and state levels of govemment. The role of the auditor-general is to safeguard the 53 interests of the public in terms of both the spirit and the letter of the law. Auditors- general are now authorised to review govemment operations with the objective of establishing that desired outcomes were achieved with economy and efficiency.''
2.7.3 The Audit of Economy, Efficiency and Effectiveness
As public sector reforms have been implemented the significance for pubHc sector audit of efficiency, effectiveness and management performance have risen to at least equal (if not greater) importance with traditional concems for compliance, probify and economy (Guthrie 1994). Guthrie (1993, p.23) claims that
(t)he normative heart of public sector auditing has evolved from provision of independent and professional assurance that govemment resources have been managed in accordance with the law and that no fraud has taken place, to the current expectation that the public sector audit also includes formation of opinions on a range of management matters including value for money, efficiency, effectiveness and performance of various govemment units.
The expansion of public sector auditing at the Commonwealth level into a more broadly conceived role can be fraced back to recommendations by the Royal Commission on Ausfralian Govemment Adminisfration (RCAGA) which reported in 1976. The RCAGA recommended that the audit mandate of the Ausfralian auditor- general be extended to include a regular program of efficiency audits (now referred to as performance auditing) in which departmental performance was assessed. The commission envisaged efficiency auditing as follows.
Effectiveness is concerned with the relationship between purpose and result. Thus an action or program is effective if it achieves the purpose for which it was initiated. But efficiency involves additionally a consideration of the resources used in achieving the results. A program is efficient only if its effectiveness is achieved with an economic use of resources. Efficiency is therefore concerned with the relationship between the resources used and the results achieved: between 'input' and the 'output'. It comprehends both economy and in this sense effectiveness (RCAGA 1976, para. 3.1.4).
Not only did the RCAGA's audit recommendations recognise the mutual dependence that exist between the three 'E's, they served to highlight the fact that each of the
" At the Commonwealth level the Audit Act was amended to include efficiency auditing in 1979 (Division 2, Part VI). State auditors-general were subsequentiy granted the same mandate at different times over the next 10 years. 54
'E's involves value judgements and that public sector auditors were expected to make such judgements. Performance auditing requires that auditors evaluate the management of govemment programs and functions to ascertain how well resources have been used in the pursuit of govemment objectives (McCrae and Vada 1997).
Objective quantitative performance measures, together with qualitative evaluations, are required to form an audit opinion. The move from a compliance orientated audit fimction to a more contested efficiency audit realm was not without problems. Audit staff were ill equipped, in terms of resources and skills, to cope with the additional responsibilities (Adams 1986; Lidbetter 1985; Martin et al 1994). Despite the resolution of early implementation problems, the auditing of efficiency and performance involves assessment of outcomes where the link between the means employed and the outcome is often unclear. Audit emphasis is on the management processes of identifying objectives and targets and setting in place processes for their achievement and for monitoring them. Pugh (1987) has noted that performance auditing requires the auditor-general to work in consultation and co-operation with senior department personnel. While an auditor-general's independence allows him to exercise discretion, the close relationship with the auditee required by performance auditing is considered to be detrimental to audit independence. The effect on independence is further complicated by the subjective assessments necessary in performance auditing (McCrae and Vada 1997). When outcomes can be contested, close relations with auditees may be perceived as having an effect on audit outcomes (Funnell 1996b).
Although there was some initial reluctance by auditors-general to involve themselves in judgements which may appear political'^ or to invite political criticism (Parker, 1987b, Pollitt 1999), performance auditing is now a standard feature of audit responsibilities. The new dimension to auditing assumes that program objectives can be operationalised, that measurement of inputs and outputs of programs can be
-:-» . • The RCAGA and various auditors-general have gone to significant lengths to make it clear that the role of the auditor-general does not include commenting upon govenmient policy. Policy is determined by the elected govemment whereas, the role of the auditor-general is to ensure that the objectives of policies are achieved economically and efficiently. (Adams 1986; Parker 1987b; Hamburger 1989; Monaghan 1986). 55 obtained, that relevant performance indicators can be constmcted, and that sufficient skills exist within audit personnel to be able to assess performance in often very specialised govemment agencies. The fraditional compliance role of the auditor- general had clear parameters. The new role requires an opinion based on subjective criteria with often variable outcomes. Public sector auditmg has been fransformed from a benign low profile role to one where unfavourable outcomes are questioned and auditors are criticised for ineptitude (Parker and Guthrie 1993; Adams 1986).
The audit office operates under the same pressures for resource efficiency that pertain to all govemment agencies. The offices of state and federal auditors-general work with budgetary consfraints and are the subject of annual extemal performance reviews. The need to operate with economy, efficiency and effectiveness has meant considerable change within the scope of the audit mandate and how audit assignments are completed. The confracting of private sector auditors for many financial compliance audits is now commonplace in both levels of govemment. As more commercial accounting practices are adopted in govemment, the relevance and use of private sector accounting and auditing techniques within public sector auditing is increasing. However, the commitment of confracted auditors to upholding the public interest at the expense of profitabilify has the same questionable elements as confracting in any other govemment agency. It could even be argued that, as the role of public sector auditors is specifically to safeguard the public interest, any motivation at odds with this objective will diminish the value of audit outcomes. This concem will be addressed in chapters four and seven.
2.8 A New Order and Better Governance?
The blanket assumption that contestabilify promotes efficiency, provides choice and improves qualify is part of the rhetoric driving public sector reforms. The reform agenda has advocated that reducing the size of govemment and competitive markets are good. To achieve this, the measures infroduced to empower public sector managers and to make them performance orientated have been cloned from the business communify. Changes have been progressively infroduced since the 1980's in a manner that has concenfrated on technicalities, with little abilify to assess 56
whether the changes are contiibuting to better govemment adminisfration. Thynne (1996) is not convinced that reforms are improving the role of govemment. Based on his New Zealand experiences he concluded that
reforms have changed, or are changing, the configurations of power and authority in and beyond govemment in ways that appear to enhance neither the processes of democratic mle nor the individual and collective well-being of many sections of society. It is surely time to stand back, to take stock of the situation, and to question whether the reforms are in fact achieving goals and objectives (Thyime 1996, p. 47).
Rhodes (1996) is equally critical of reform mechanisms. His observations are based on experience in the United Kingdom.
There is no evidence to show this batch of reforms has provided customers with any means whatever for holding the govemment to account. Transparency is a desirable end in itself but information is not accountability, only one step towards it (Rhodes 1996, p. 108).
Reforms have been infroduced as a means of empowering public sector managers with the information they need to make better decisions about resource allocation. The infroduction of a variety of new techniques that include program budgeting, performance contracts, program evaluation and accmal accounting have fransformed the public sector. At the same time the empowerment process has necessitated designing ways of assessing efficiency that are often difficult to construct. The • questionable value of performance indicators as a measure of efficiency assessment lies, in part, with the fact that many management functions are not quantifiable and evaluation is based on selective financial criteria. There is certainly more information than previously available, however the usefulness and reliability of the information is open to subjective interpretation. Many reform sfrategies seem to assume that there is a frade-off between accountability and efficiency. Accountability within the public sector, which is discussed in some detail in chapter three, requires agents employed by the executive on behalf of the public to render accounts of their actions to a wider range of interested parties than is usual in the business sector.
In addition to management and financial accountabilities, the public sector has ethical, political, and electoral accountabilities. Cole (1988) has pointed out that the
elaborate arrangements to make the public service accountable - accountable to ministers, to the Parliament, the public and to various courts and tribunals - have 57
their ovra merits but, taken in their totality, they do ensure that efficiency cannot be taken as an end in itself but has to be subordinated to other ends (Cole 1988, p. 225).
Efficiency of adminisfrative processes is not the unqualified goal of govemment. Efficiency is one of many objectives that must be weighed up in the process of goveming. While the importance assigned to govemment objectives may change with political ideologies, the need to ensure that the public mterest is upheld does not change.
Osbome and Gaebler (1992) have approached the use of competitive tools of management with a different interpretation. Rather than believing that the only possible choices available are between the use of commercial markets and the govemment provision of community resource needs, they argue that within a framework of equitable public mles and democratic coordination there can be the fostering of govemment enfrepreneurship and adminisfrative flexibility. This, it is argued, can be done more effectively and economically through the relaxation of bureaucratic mles, the infroduction of intemal forms of competition and by attending to the needs of different society groups instead of trying to offer uniform services (Osbome and Gaebler 1992, p. 63). This can be achieved in a manner very different from the pressures affecting public service morale, citizen welfare and govemment efficiencies created by restricting the role of govemment and tight confrols on adminisfrative bureaucracy. The differences between the fraditional social equity and market models are not viewed as being irreconcilable. Osbome and Gaebler provide tacit support for the promotion of efficiently managed public and private sector relations without discarding the underlying philosophical norms of govemance.
Wilenski (1986, p.26), another critic of market based ideologies, suggests that
(i)t is not unusual, in public discussion, for the proponents of their own self interest and the preservation of their own power to cloak their arguments in terms of the national interest; to some extent it is almost a prerequisite of democratic debate. But it is remarkable that so many of the arguments for small govemment, especially the economic ones, have so weak an empirical base. 58
Wilenski noted that the small govemment movement in the United States and Ausfralia characterised both countries as over-govemed and overtaxed. While the size of govemment had increased significantiy, evidence from OECD statistics did not support the proposition of over-government. The size of the public sector as a percentage of GDP and, the size of the workforce employed by the public sector for both countries was less than the OECD average in 1980, when reform pressures were mounting (Wilenki 1986, p.27-30). Critics of public power or govemment intervention in business also ignore the problems associated with private power. The govemment has often acted to prevent the concenfration of private power (in the instance of monopolies) with mechanisms for intervention effectively increasing personal freedom of choice.
Considine (1988) has considered that the public sector reforms are part of a dominant paradigm of technical and instmmental rationalify. Referring to the work of Kuhn (1970), he suggests that the changes in administrative and management stmctures are part of a move to stmcture knowledge within a new scientific domain. Halligan (1996, p. 73) agrees that the new scientific domain could be termed a new 'policy paradigm'. This entails a radical simultaneous shift in policy setting procedures, the policies themselves and the hierarchy of goals behind the policies. In The Structure of Scientific Revolutions, Kuhn (1970, pp. 23-24) suggested that history provides numerous examples of communities rejecting time honoured scientific theories in favour of new ones. He claims that
paradigms gain their status because they are more successful than their competitors in solving a few problems that the group of practitioners has come to realise as acute ... The success of a paradigm ... is at the start largely a promise of success discoverable in selected and still incomplete examples.
However, a new paradigm is not necessarily incrementally better than the old. The new public sector paradigm has at its core the belief that the public sector can operate better if it adopts private sector business techniques. The movement away from fraditional bureaucratic methodologies that were based on values and protection towards an emphasis on economics and competition represents the new order. It is assumed that the public sector and the business environment are undifferentiated. The technologies used to accomplish the paradigm shift provide the solutions to 59 ensure that the values of the new order are incorporated within public sector organisations. Considine (1988, p. 6) points out that "(t)he popularity of these technologies is determined not only by the form of knowledge from which they spring, but also by the stmcture of interests within which they must operate". It could be argued that the new order has sprung from the basic tenets of public choice theory that is supported by business groups as a way of furthering thefr own interests. If one distinguishes the technicalities that accomplish the paradigm shift at the micro level from the underlying public interest objectives of govemment at the macro level, individual reform techniques can easily be justified. There is a rational explanation for providing management with new tools to enable better decision making. However, the concenfration on quantifiable outputs places greater emphasis on efficiency rather than effectiveness. The pursuit of public interest objectives is not necessarily enhanced by what may be regarded as a paradigm shift. In isolation, the technical rationalities do not sum to provide better govemment.
2.9 Conclusions
Technologies and economic developments have enabled capital to become more mobile providing governments with an increasing range of options for the achievement of policy goals. In the last few decades the dominance of market-based options for the provision of economic outcomes has had a profound effect on govemment and communify values. As part of the increasmg market orientation in the economy, the rise in significance of interest groups and the harnessing of popular theories to further the aspirations of particular interest groups are important features of political developments. The task of choosing between altemative philosophies by govemment will never be easy. Particular methods can be used as tools to explicate overt and covert political objectives. The dominant political ideology in Ausfralia is capitalist with a continuing acceptance of the basic tenets of economics underpinning all variations. Economic prosperify in westem economies assumes a profit motivation. The rising significance of private sector tools of business and the desire for smaller govemment has fransferred resources from the public to private sector. The power of private interests is thus rising as reform tools become imbedded into the operations of govemment. The consequences of changes in institutional 60 stiiictures for the communify are unclear. The interests of citizens have not yet emerged through an agenda preoccupied with micro processes of reform to the exclusion of the 'big picture'. The lack of real convergence between theory and practice shows that a contested realm remains for a sti^cture that best supports the extant public interest norms of Ausfralian society.
The government's role as the protector of the public interest encompasses economy, efficiency and effectiveness. Effectiveness is concerned with whether govemment objectives are achieved and, although subjective, is the basis for managerialism. Govemment agents act on behalf of the public to ensure that the communify values behind the democratic mandate are achieved. With the increasing use of commercial forms of service delivery by those who are primarily motivated by profit, rather than public interest, it is appropriate to question who or what processes ensure that public interests are being served. Processes of accountabilify provide the public with some means of ensuring that their interests are being safeguarded. The assurance that trast has not been abused lies at the heart of accountabilify obligations. Economic rationalism has affected fraditional lines of accountabilify making it difficult for the public to ensure the govemment is acting in the public interest.
Chapter three will discuss the many forms of accountabilify that exist in both the private and public sectors. Accountability relationships have changed and become more complex as a consequence of the increasing importance of economic rationalism in a global environment. As the relationships between public and private interests become more entwined new tools of accountabilify have emerged to ensure that the public interest is safeguarded. The discussion of accountabilify relationships provides the framework for establishing the importance of the role of public sector auditing in society that follows in chapter four. 61
CHAPTER THREE
ACCOUNTABILITY AND THE ROLE OF AUDIT
Accountability, the willingness and ability to explain and justify one's acts to self and others, is both deeply rooted in social practice and interpenetrated by business practice. The importance of examining the concept of accountability therefore becomes all the more urgent when "new" practices are afoot (Munroe and Hatherley, 1993, p. 369).
3.1 Introduction
Accountability is a dynamic constmct and consists of many interrelated forms that change in relation to cooperative behaviour. As business relationships have become more complex so have the expectations of sociefy with regard to accountabilify. Accountabilify is a social and political process that involves people and the assessment of the performance of people in their entmsted roles. Responsibilities may be clearly defined within set parameters or include values such as qualify, economy, efficiency and effectiveness for which the discharge of accountabilify can be heavily subjective. The adoption of commercial business practices by the public sector has created a need for the franslation of concepts of accountability, in its various forms, to incorporate a different set of beliefs about what constitutes appropriate accountability (Funnell and Cooper 1998). Problems of resistance, professional power, conflicting obligations and lack of knowledge about relationships between inputs and outputs can act to prioritize accountability relationships in ways which are not supportive of underlying objectives Lee 1995; Power 1997).
Interest in, and changes to, accountability relationships tend to be more pronounced in periods of economic decline when there are greater pressures on scarce resources (Power 1996). With concems for efficient allocation of resources has come a desire for reassurance that accountability relationships are being appropriately discharged. 62
This chapter will establish the role and importance of the audit fimction in society as a means of regulation and confrol where accountability relationships exist. The characteristics that are generic and also distinctive to public and private accountability are examined, with evidence of tergiversation' when analysing the underlying rationale behind moves to redefine public sector accountability. This chapter considers the impact of public sector reforms on the understanding and practices of accountability (Funnell and Cooper 1998).
Public sector accountability will be discussed in the context of the Commonwealth Govemment where Australia's govemance ideology has historically resided. Reforms in govemment commenced with Commonwealth initiatives that were subsequently adapted to suit particular state govemment priorities. Reforms infroduced across various Ausfralian states have generally followed the same ideology shifts while the enthusiasm for, and extent of reforms, has varied in each state. The historical context for changes in accountability will include reference to English developments in recognition of the close ties Australia's colonial heritage has with the English system of law and govemment.
3.2 The Nature of Accountability
Accountability is closely aligned with notions of responsibilify. It is concerned with the obligation to answer for responsibilities entmsted. The significance of accountability lies in knowing that one is liable to he held to account for one's actions. This imphes answerabilify in the sense of moral or legal liabilify where to perform irresponsibly would involve a form of censure or loss of the responsibilify entrusted.^ Accountabilify is a concept that commenced with individuals in simple relationships and has progressed to form a significant feature of complex organisational relationships. Face-to-face explanation and justification has been replaced by distant global relations necessitating mechanisms for the discharge of accountability that will be acceptable to an audience of interests. Thus, the key to
To change one's party or principles. ^ There are broader concepts of responsibility where being 'held to account' is not the objective of responsible behaviour. Bovens (1998) differentiates responsibility on a number of levels and identifies responsibility as a cause, a capacity, a task and as an accountability. The latter will be the focus in this study. 63 accountabilify is the information made available to the party that confers responsibilify. In the context of business, the information is usually provided through management representations using measures of performance.
Consensus about what constitutes acceptable performance and the criteria to be used in the assessment of that performance requires a shared understanding of expectations and of the currency of justifications (Day and Klein 1987; Sinclair 1995; Ahrens 1996). This consensus implies a social framework that provides the basis for determination of accountability criteria in a complex association of social and business precepts. Ethical, moral, financial, management, political and legal accountabilities may all be relevant to a position of tmst, with no recipes providing guidelines for the appropriate mix to effectively discharge responsibilities. The forms of accountabilify are thus numerous and the relevance of each will be specific to the context in which accountability is owed.
3.3 Trust, Accounting, and Accountability
Tmst is an essential component of accountabiHfy relationships and, like other socially constmcted values, requires a common set of expectations generated by cooperative relations. Tmst is a product of people's behaviours, habits, customs, and ethics that build with continued use and form the identify for a particular nation (Kramer and Tyler 1996). Accepted cultural norms exist in many countiies with respect to attitudes towards the state, family values and honourable conduct. The norms reflect a spirit of cooperation in the expectation that tiiist will not be abused. Tmst engenders confidence and predictabilify. For example, in Chinese and Japanese societies family bonds are considered to have priorify above all other social loyalties, while in westem capitalist nations networks of voluntary associations and communify stiiictures act to provide support for group relationships. Although specific concepts of tiiist may differ between societies, it is the interrelationship of community-based values which forms a generalised notion of tiiist within sociefy which is essential to the production of 'social capital'. Social capital is "a capabilify that arises from the prevalence of tiiist in a sociefy" (Fukuyama 1995, p. 26) as a consequence of "the abilify of people to work together for common purposes in groups or organisations" (p. 10). He points out that 64
while contract and self-interest are important sources of association, the most effective organisations are based on communities of shared ethical values. These communities do not require extensive contract and legal regulation of their relations because prior moral consensus gives members of the group a basis for mutual tmst (Fukuyama 1995, p. 26).
Fukuyama (1995) emphasises the role of govemment as an equalizuig force to ensure the value of 'social capital' to the broad economic and moral wellbeing of society. Fukuyama sees the role of govemment as a facilitator. When a deficit of social capital becomes apparent the govemment has a role to promote the communify's interests. People that distmst one another will end up cooperatuig only under a system of formal mles and regulations that have to be negotiated, agreed to and enforced. Tmst can encompass norms such as professional standards, codes of conduct, systems of justice and religious beliefs. This thesis will concenfrate on tmst in the context of govemment and business where cooperative relations have determined the levels of tmst that will satisfy accountability requirements.
In both govemment and business, accounting has a role to play in the tmst and accountability cycle. Relationships that were originally face-to-face have been replaced with institutionally created tmst which depends upon accounting to act "as a symbolic media of exchange" (Seal and Vincent-Jones 1997, p. 409). The progressive complexity of business stmctures has generated a greater need for tmst between various agents with accountabilify mechanisms providing a way of demonsfrating that trust has not been abused. The abilify of economic calculation to be an anonymous tool of accountability is supported by the expectation that the same results will be generated time and again because accepted rales of calculation are applied. Hopwood and Miller (1994, p. 3) have suggested that "accounting draws much of its social authorify from the objectivity and neufralify accorded to the single financial figure in certain Westem societies". They offer an altemative perspective by suggesting that accounting can no longer to be regarded as a neufral device that merely documents and reports the facts of economic activify. Instead, accounting can 65 be a powerful tool providing an advantage to those who have access to the information (Cooper 1981; Miller and O'Leary 1987).^
In the relationship between accounting and accountabilify, it is not just the technicalities of accounting that are important to "the giving and demanding of reasons for conduct" (Roberts and Scapens 1985, p.447). Accounting numbers never speak for themselves. They must be interpreted, compiled and compared in ways which organisational members accept as reasonable. Priorities will reflect quite differently constmcted social realities and cultures, and accountability mechanisms must adapt to the fluid dynamic nature of priority reassessments. Roberts and Scapens (1985, p.448) have considered the broader implications of accountmg for accountability by reviewing interrelationships in organisational contexts.
The practice of accounting institutionalises the notion of accountability; it institutionalises the rights of some people to hold others to account for their actions. Viewed in this way, the practice of accounting can be seen to involve the communication of a set of values, of ideals of expected behaviour, of what is approved and disapproved.
The standards for assessment are thus a ftmdamental prerequisite for the discharge of accountability and may be based on historical norms or be supported by the prevailing system of law.
As society becomes more complex the likelihood that unreliable information is being provided in accountability relationships increases. Information risk can arise because of remoteness of information sources, bias and different motives of information providers, voluminous quantities of data being processed and aggregated, and the complexity of data fransactions. In all of these circumstances there exists a risk that data is intentionally or unintentionally misstated. To ensure consensus in the currency of tmst and accountability, monitoring techniques act to reduce potential risk and to shape adjustments to accountability relationships. Without debate, consultation and monitoring, tmst expectations may diverge and uncertainty about intended outcomes creates an environment of distmst. The need for regulation and
^ The intent here is not to debate the broader intentional or unintentional effects of accounting but to highlight the comfort that is provided by routine accounting functions that can be perceived as impartial in a general sense. 66 monitoring activities, as a means of reaffirming confrol and risk mitigation has risen in significance as a consequence of business complexity. Auditing has been accepted as a major tool for the purpose of risk management in the regulation of accountability relationships (Cadbury Report 1992). The general acceptance of audit as a valuable reinforcement tool has resulted in the term 'audit' or 'auditing' being applied with greater frequency in different contexts over the last two decades. For example, environmental auditing and risk audits of various times have become popular as management tools.
There is considerable historical evidence to support the notion that audit has an important role in society as a "risk reduction practice which benefits the principal because it inhibits the value reducing actions by agents" (Power 1997, p. 5). Power also suggests that society has become obsessed with a checking mentality with an increasing focus on auditing to provide symbolic comfort for accountability relationships. This perception relates to auditing in a generic sense as different activities are now being subjected to 'audit' by experts in specific disciplines quite separate from corporate financial reporting obligations. In the context of corporate financial reporting the role of audit is a function of economic significance and the complexity of relationships, rather than of obsessive behaviour.
The ability of auditors to act in a risk mitigation capacity is significantiy affected by the perception that they are independent of both the principal and the agent (ASCPA and ICA 1994). Diverse groups of users are prepared to rely on audit reports because of the expectation of an unbiased viewpoint. Independent audit professionals provide confirmation that the ti^st placed in an agent has been effectively discharged in a manner acceptable to the principal. Without confidence in the outcome of verification processes, the role of the audit function in sociefy is undermined. The role of Arthur Andersen in the collapse of entities such as HIH and Enron is a case in point.
According to Flint (1988, p. 12.),
(t)he audit function and purpose are sometimes explained by saying that an audit is required where there is a duty of accountability between two parties, or between one party and a number of parties, and that an audit is the means by which accountability is ensured. Audit is a control mechanism to monitor conduct and performance, and to secure or enforce accountability. 67
He also places significance on the fimction of auditing as a servant of society.
It appears from the current debate and from the changes which are being canvassed that audit is an evolving process, reacting with changing expectations about the performance or conduct of the individuals or organisations to which it is applied. In so far as the audit process is designed to monitor compliance with specified norms of what is acceptable behaviour, it is clearly culturally, socially and politically dependent (Flint 1988, p. 13).
The following sections will identify how accountabilify relationships in the context of private industry and govemment have become more diverse with the consequent expectations of the monitoring and risk mitigation roles of auditing becoming more significant. While the responsibilities of the audit fimction generally mirror those of the 'agent' (the agent being management, or the board of directors, in the private sector and public servants in the govemment sector), there are differences in the types of accountability owed. Distinction is also made between organisational accountabilify and audit accountabilify. Although responsibilify to third parties has broadened obligations to the public, not all accountability relationships legally require audit verification.
3.4 Accountability and Auditing in the Context of the Private Sector
In general, auditing in its early forms was designed to verify the honesty of the persons charged by governments with financial, rather than managerial, responsibilities. This usually involved 'hearing the accounts' before a selection of persons representing the interests of those granting financial responsibility as few were able to read and write. Public officers were prominent in this category, with English records showing that the chamberlains of the City of London, as early as 1311, were subject to audit (Littleton 1966). Providing oral accounts of receipts and payments from taxes to citizen representatives effectively discharged financial responsibilities, fri a different context, the audit of the accounting records of private household accounts also required evidence of financial propriety. Manor estates were large operations often with several officials acting as stewards for various aspects of the running of the estate. Auditors were required to scmtinise the records of manor officers, making sure that tallies were accurate and to subsequently present an aggregate statement for the manor as a whole (Littleton 1966; Littleton and Yamey 1956). 68
Despite the common usage of an auditor to attest financial probity for manor estates, it was not until the general expansion of frade and commerce in the fourteenth and fifteenth centuries that auditing had broader application (Gul et al 1995) as the importance of the manor was slowly replaced by town-cenfred commerce. While the importance of accounting was acknowledged, the importance of audit was not cemented until compulsory regulatory requirements were enshrined in law. In nineteenth century England the Companies Clauses Act 1845 for the first time provided for the appointment of auditors for joint-stock companies. English companies acts were revised a number of times after 1845 to accommodate bankmptcy legislation as govemment reacted to social needs to protect the interests of creditors as well as shareholders (Littleton 1966). High profile business failures, notably in the railways, had convinced govemment that dfrectors, who had fraditionally been regarded as tmstworthy'' had to be held accountable by formal procedures. Financial mismanagement with consequent loss of public confidence served to highlight the need for accountability to be policed.
With time, the need for an independent expert auditor, and not a shareholder acting as auditor^ to verify (as distinct from checking that records merely corresponded with the financial accounts) transactions and records became evident. Table A - Regulations of Management of a Company Limited by Shares, a schedule of the Companies Act 1862, served to increase the status of auditors by requiring auditors to report
whether in their opinion the balance-sheet is a full and fair balance-sheet containing the particulars required by these regulations and property drawn up so as to exhibit a trae and correct view of the state of the company's affairs (section 94 as quoted in Littleton 1966, p. 292).
The need for auditors to have the requisite skills to attest to this requirement was supported by Table A section 86 of the Companies Act 1862 by allowing for the appoinfrnent of accountants to assist them in thefr task. Expertise and auditor independence evolved as the need for ti^st and public confidence in the reliabilify of financial reports became a necessary prerequisite for business credibilify. The
'^ Chandler (1997) and Littleton (1966) provide evidence that auditors in nineteenth centtiry England did very little, if any, detailed checking of records because of thefr total tinst in directors. ^ Early Companies Acts allowed shareholders to be auditors. 69 separation between ownership and confrol thus consolidated the position of audit in societal relations.
The importance of the audit function has elevated the discipline of auditing to professional statiis with all the consequent responsibilities sociefy expects of professionals. Gul et al (1995, p. 94) suggest that.
The most important of the characteristics that professions have in common which distinguish them from other disciplines are: - an underlying motive of public service which extends beyond monetary gain; - a complex body of specialised knowledge to be mastered in a formal educational process and a substantial intellectual content in the services provided; - legal or other public sanctions which restrict the right to practice to a limited group of qualified persons; - existence of a voluntary organisation which regulates the profession and aims to develop and improve the quality of the services offered; and - the existence of a code of professional conduct generated from within the profession and binding upon members.
These characteristics serve to highlight the significance of auditors as servants of society with duties and obligations evolving to reinforce this status. In Ausfralia, technical competence and mles of conduct are regulated by The Institute of Chartered Accountants in Ausfralia and CPA Ausfralia. The standards enforced by these professional associations serve to maintain public confidence (now shaky after recent experiences in USA) in the expertise provided by the auditing profession. Confidence is further reinforced by the belief that the fimction is provided with impartiality and without any vested interest. Independence allows all parties involved to rely on the outcomes of auditing with the knowledge that the results have been determined with integrity and objectivity.^ However, this does not necessarily mean that the auditee is given a 'clean bill of health'. Companies often fail soon after being audited, showing that interested parties should not rely solely upon audit reports for their resource allocation decisions. The review of financial reports by auditors is concerned with the examination of financial statements and the underlying
A detailed review of independence criteria and the implications of perceived compromised independence will be discussed in the context of audit quality in chapter four. 70 accounting records with a view to expressing an opinion on whether the statements n are presented fairly in accordance with established criteria.
The primary objective of general purpose financial reports, as promulgated by the accounting profession in the Statement of Accounting Concepts-OZ)/ecr/ve of General Purpose Financial Reporting SAC 2, is usefiihiess for decision making. Decision usefulness is based on the language of self-interested economics in a financial context. The audit profession reviews financial statements for compliance with a myriad of mles and regulations using "presents fairly" (AUS 702, para. 23) as a descriptive summary for statements which have been satisfactorily reviewed. Parker (1996) has suggested that the notion of fair representation in a fmancial context is too limited for review of corporate stmctures. He argues that 'broad scope accountabilify' should become the primary objective of financial reporting to recognise the concem of the communify for increased corporate govemance and accountability. Broad scope accountabilify would include a need for management to explain the extent to which the objectives, for which resources were entmsted, are achieved.
Deegan (1999) supports the expansion of accountabilify concepts to include a sustainability agenda in a similar way to that of broad scope accountabilify. This type of reporting has often been termed 'Triple Bottom Line' reporting. Information relating to economic, environmental and social performance is able to incorporate extemalities which financial accounting has fraditionally ignored. In Ausfralia corporations such as WMC Ltd, Rio Tinto Ltd, BHP Ltd and Body Shop Ausfralia, have expressed a commitment to sustainabilify. These corporations provide evidence of a rising corporate environmental conscience (Deegan 1999, p.3 8). The move away from decision usefulness, from an economic maximisation viewpoint, would see
^ The term 'presents fafrly' has been the source of much debate. Lee (1994) has referred to usage of 'presents fairiy' as an undefined quality label. Chambers (1979), Wolnizer (1987), Chambers and Wolnizer (1991) and Clarke et al (1997) have all contributed to the discussion of what 'fairiy' may mean, yet without coming to a consensus. 71 management adopting a renewed stewardship focus with responsibilities not just to shareholders but also to sociefy and groups within sociefy.^
From an 'agency theory' perspective, it could be argued that sociefy is the principal who is safeguarding the finite resources of the communify from the activities of private agents (Power 1991).^ The support for moral and ethical business behaviour has seen an increasing concem for corporate citizenship'° in conjunction with (rather than exclusively to) obligations to the providers of capital (Deegan 1999). This view has not replaced perceptions that economics-based competitive models are superior for the purposes of resource allocation. It involves concessions being made to broader accountabilify responsibilities while maintaining the most advantageous position for owners. Corporations that are perceived to be making profit by exploiting specific interest groups have been boycotted by consumers. Dimmished product sales as a consequence of customers changing their loyalty to altemative brands have consequences for corporate profitabilify. Any prolonged reduction in company sales in association with a negative market image is not desirable in a competitive market. Corporations have become aware of the benefits of a loyal customer base for long-term profitabilify. In Ausfralia this has occurred within the banking sector, with the closures of rural bank branches significantly affecting the local communities, and also in the clothing industry where high profile brand names have utilised child or 'sweat shop' labour to produce garments." The public image of
Higgins (2001) provides evidence that the entity Hubbard Foods Ltd. in New Zealand, despite unclear reporting standards, is regarded as a good corporate citizen. The attempts by the company (Hubbard Foods Ltd. is a private company run by what could be termed a philanthropic owner) to provide positive and moral leadership within the community using a framework of triple bottom line reporting, does atfract customers and provides a high degree of employee satisfaction. It is accepted that govemment activities can also have enviroimiental consequences. However, the rising significance of environmental accountability illusfrates how private organisations are becoming more aware that they share a responsibility for communal resources. Citizenship has a broader significance than perhaps 'shareholder' or 'consumer'. It relates to a wider perception in relation to responsibilities and obligations to the community and society, rather than to a single organizational structure. Nike Ausfralia suffered loss of public standing for its failure to comply with community expectations by paying labour in Indonesia less then $10 per week to produce sportswear (Deegan 1999). 72 large companies, for whom profitabilify is still a primary objective, is being tarnished by the publicity given to such self interested practices.'^
The unclear distinction between audit accountabiHfy (the accountability of auditors) and management accountabilify has contributed to public confusion about where one type of responsibility ends and the other commences. In the private sector, managers of corporations historically have had a primary duty of accountabilify to the providers of capital (shareholders) while audit responsibilities were conceived and defined in law to monitor that dufy.'^ Statutory rights and duties of auditors are defined in Australia under the Company Law Review Act 1998. fri addition to statutory provisions, the Law of Tort has emerged to form new accountabilify regimes. Responsibilities for negligent behaviour under the Law of Tort have established that professionals (in this case the directors) owe a duty of care quite apart from any confract with a cHent. Lord Atkin's explanation of the dufy of care in Donoghue v Stevenson (1932, AC 562 at 580) was "no doubt based upon a general public sentiment of moral wrongdoing for which the offender must pay". This dufy broadens accountabilify to include affected third parties in relationships that are less obvious and indirect. Corporations thus have responsibilities to consumers, creditors, investors, potential investors and others for quantifiable losses suffered as a result of negligence in circumstances that are reasonably foreseeable. This principle is applied to the behaviour of management and directors in their professional roles.
In a similar way, the Ausfralian Competition and Consumer Commission (ACCC) administers the provisions of the Commonwealth Trade Practices Act 1974 goveming business conduct that is misleading or deceptive. The Prices Surveillance Act 1983, that reviews conduct considered anti-competitive or unfair market practices, also potentially broadens accountabilify by corporations to those who have suffered a loss as a result of such conduct. Govemment regulation, at both the federal and state levels, continues to impose new mles to ensure that corporations conduct
The most significant providers of capital are large institutional investors investing superannuation fimds. These fimd managers are assessed on a profit performance basis with business being won or lost by reference to such performance indicators. '^ Within organisational stmctures other forms of accountability also exist. Examples are budget accountability, performance accoimtability and cost accountability. Typically these are intemal functions not associated with statutory responsibilities. 73 themselves in a manner that does not adversely affect the community, vested interests or the shareholders (Ramsey 2001). This is now being extended to the broadest limits with environmental protection legislation safeguarding the community's resources to ensure that corporations adhere to regulations stipulating the maximum level of impacts on the environment. These more diverse forms of corporate accountability do not specifically form part of the mdependent auditors' responsibilities. They are relevant only when they have implications for the reliabilify of financial reports in accordance with statutory responsibilities.
The size, complexify and influence of companies, both socially and economically, have contributed to changes in public expectations and the scope of corporate and audit accountabilify has widened in response. The role of the independent auditor has also become more complex. Shareholders (as principals) employ managers (as agents) to conduct the affairs of an organisation and management (on behalf of the principals) confract auditors to verify that managers have effectively discharged their responsibilities. The auditors are accountable to the shareholders under the provisions of statute and also to the managers under confract law. Confract law enforces the particular provisions of the audit engagement covering the terms of reference, agreed payment and the time frame for completion of the audit. The responsibilities of auditors have been extended by liabilify to third parties under the Law of Tort in the same way as that which applies to representatives of corporations. Auditors in business no longer act solely on behalf of a principal in a simple sense. Third parties, without a direct confractual connection to the principal or the agent, whom have relied upon an audit report in good faith and suffered a quantifiable loss as a result of such reliance, have been afforded the protection of the Law of Tort for the conduct of auditors in their professional capacity. Interests groups such as employees, investors, creditors and potential investors now form part of broader accountability relationships. The principals to whom audit duties are owed, therefore, have become more diverse and less clear under various branches of law.
Communify groups question the use of resources which, although technically under the ownership of specific entities, has effects on the broader communify. The effect may be resource depletion, economic hardship by removal of resources, pollution or other consequences of business operations, resulting in moral hazard and workplace safety issues. The rights of corporations to pursue profit above all other concems is 74 being continually tested with the emphasis now on contextualizuig busmess entities within sociefy thereby identifying their obligations to the continued welfare of that sociefy.
Diagram 3.1 below illustrates the movement over time away from specific to more diverse accountabilify in the private sector with increasing concem for individual rights and the rights of third parties. As a sense of social responsibilify has developed in corporations, the private sector has responded by broadening the range of interests it serves. Corporations have initially made token gestures to appease affected groups with environmental concems. However, partnerships between communify and business are becoming more common as social consciousness increases (Gullifer 1999). 75
Diagram 3.1
Private Sector Accountability and Philosophy
Paitimkf Wocm
Accountabilify of Agents | Audit Accountabilify Philosophy
Management Auditors S/Term Profit -Maximisation
Shareholders
V Financial Reports Users Principals/Owners
V Tort and Trade Practices
V
Ethical/Environmental Principals & Third Parties L/Term Profit Sufficing
Diveise Fooiis 76
3.4.1 The Underlying Motivation of Commercial Auditing
The private sector in Ausfralia reflects a traditional market-based philosophy. The underlying rationale is that the free market will ensure optimum resource allocation by allowing resources to flow to those prepared to supply sought-after goods and services at the most competitive price. Competition is seen as the key to ensuruig that only efficient suppliers remain and that the primary objective of business is profit maximisation. The consumer is able to select between competitive suppliers and, as a rational economic person, choose the altemative that will satisfy wants for the cheapest possible price. In such an environment, the pressure to reduce costs in the face of competition is pervasive, with the maximisation of profit by agents for their principals as the primary objective of accountability measurement criteria (Lee 1995). The market economy thus focuses on the private pursuit of economic gain. Auditing firms, as part of the market economy are encompassed by this motive (Power 1991).
One of the defining characteristics of professions mentioned earlier by Gul et al (1995) is an underlying motive of public service which extends beyond monetary gain. This sentiment, while supporting the notion that auditors serve an important role in society, does not coincide with commercial reality. Market forces will ensure that resources will be diverted to more efficient suppliers of audit services by a competitive market where the buyers of audit services have a choice between service providers.''' Without profits a provider of auditing services will not survive in business. Thus, the pressure to be competitive often places the public service objective expected of auditors lower down the scale of motivations for auditors. This has constituted an expectation gap in beliefs about auditing (Humphrey et al 1993). The existence of an 'expectation gap' between audit service providers and users has highlighted a lack of understanding by the public of the processes and intent of auditing (Hopwood 1998). The audit profession has generally adopted a reactive position by making amendments to the technical aspects of auditing, in response to litigation outcomes, to maintain public confidence. The providers of audit services
''' Evidence exists that buyers of audit services are not solely motivated by price. The reputation of an audit firm, in conjunction with opinion shopping, is related to perceptions of audit quality. Issues of audit quality will be discussed in chapter four. 77 must consider a frade-off between increased liability for poor professional conduct and the subsequent effects on profitability. This has necessitated the adoption of a 'sufficing approach' to the provision of audit services whereby a lesser degree of profitability is accepted as necessary to safeguard long-term interests. The sufficing approach continues to support an underlymg philosophy of profit maximisation with procedures and outcomes being tempered by risk tolerance.
3.5 Accountability and Auditing in the Context of Government
A form of govemment auditing existed in England as early as the twelfth century when, during the reign of Henry I (1100-1135), officers were appointed to ensure state revenues and expenditure was appropriately accounted for.'^ The office of Auditor of the Exchequer was established in 1314 in responses to a series of ordinances established by nobilify to effectively limit the crown's (King Edward II) access to fimds (Longhurst 1995). These early forms of auditing were very basic in their function and were concemed with the receipt and expenditure of public monies. The responsibilify for auditing moved from the Auditor of the Exchequer to the Auditors of the Imprests in 1560 and subsequently to the Commissioner for Auditing the Public Accounts in 1785. Positions in the various antecedent audit institutions were often sinecures for well-connected, rather than talented, public officials. The developments reflected the fluctuating fortunes of the monarchy and the increasing need for a systematic approach to confrolling public spending. Audit powers were still limited in the eighteenth century
to ensuring that money not in excess of authorised amounts had been spent on authorised objects, but the (audit) Commission had no power to inquire whether these objects, and the amounts involved had been reasonable, proper and in the public interest (Longhurst 1995, p. 4). hi the eighteenth century the navy and army in England were the two largest spending govemment departments. The need to be accountable for military spending during this time was the driving force behind changes in accountabilify mechanisms (Funnell 1997c). Expansion of the British Empire in the late 18* centiiry gave further
'^ Auditing has a much longer history in Chinese govemment adminisfration (see Huang and Ma 2001). 78 unpetus to change govemment audit. Before leaving for the colony of Ausfralia the appointed Governor, Arthur Phillip, was insti^cted in 1786 about his responsibifrty to provide evidence of financial probity to the Commission for Audituig of PubHc Accounts in England. Despite the distance and time involved for evidential records to be sent to England, the need to answer for funds entmsted was a requfrement imposed upon the distant military regime by the English Govemment. In Ausfralia the accountability context was one of vast territories, where resources were few and tmst re-enforcement mechanisms generally cormpt under the existing military regime. The ability to keep accurate public accounts was difficult where, "(e)specially in the more remote distiicts, it was Httle short of impossible to ensure against the malpractice by dishonest clerks and storekeepers" (Longhurst 1995, p. 5).
The responsibility for the oversight of colonial accounts was subsequently fransferred to a sub-department of the English Treasury known as the Colonial Audit Office in 1814. Despite the change, the reliability of Colonial Ausfralian records continued to be plagued by inept public servants until the arrival in New South Wales of William Lithgow, who was given the dual role of Officer of Commissary Accounts and Colonial Auditor in 1824. The role involved compiling accounts and subsequently producing reports to satisfy the requirement of the Colonial Audit office in England. The questionable independence this dual role carried was resolved when expanded responsibilities resulted in the eventual separation of the functions in 1827 when William Lithgow became the first person in Ausfralia to occupy the position that was to become known as auditor-general. It was not until after the Australian Constitution Act of 1842, with the commencement of independent govemment in New South Wales, that the audit function became locally accountable. The spread of settlement into new territories progressively created the need for separate govemance and audit fimctions in all states of Ausfralia. The importance of, and willingness to provide, resources to safeguard accountabilify mechanisms rose with the size of govemment and economic prosperify (Ralph 1990; Longhurst 1995).
Govemment differs from the private sector mainly as a consequence of constitutional and institutional relationships from which it derives its authorify. AusfraHa's system of govemment is based on Westminster principles as derived from our colonial relationship with England. It is a representative democracy that is govemed by elected representatives with the consent of those govemed. Firm (1995, p.5) makes 79 the point that sovereign power rests with the people and that "the Ausfralian people are constituted the owners, not merely the beneficiaries, of our system of govemmenf. The Westininster system of govemment provides a political linkage between the wiU of the people and govemment through pariiament.
At the Federal level, the rights of 'the people' are protected, in a collective sense, by the Ausfralian Constitution of 1901, while the law has developed to take account of the inequities that majorify opinion may impose on individual citizens. This evolution of democracy was referred to by Sir Anthony Mason in his opening address to the New South Wales Judges Conference in 1993. He noted that democracy "extends to a new notion of responsible govemment which respects the fundamental rights and dignify of the individual and calls for the protection of the individual's rights against undue interference and intmsion by authority" (as quoted in Finn 1995, p. 7).
Developments in common law within the public sector, like those of the private sector, have resulted in govemment responsibilities becoming more diverse with greater emphasis on the powerless individual to whom obligations are no less important than the collective responsibilities to sociefy. Case law concemed with criminal justice, natural justice and statutory and constitutional interpretation provides ample evidence of the emphases given variously to human dignity and human rights. The courts have a role as interpreters of legislation and have acted to determine a balance between governmental power and individual rights. Justice Brennan in Australian Capital Television Pty Ltd v Commonwealth (No2) stated that Commonwealth legislative power
cannot be exercised to impair unduly the freedom of informed political discussion which is essential to the maintenance of a system of representative govemment. . . (I)t is a valid law provided that restrictions imposed by the law are proportionate to the interest the law is calculated to serve (1992, 177 CLR 106, as quoted in Doyle 1995, p. 163).
This highlights the circular relationship of the AusfraHan system of representative democracy, with an elected govemment (that exercises sovereign power on behalf of the people) having their power kept in check so that the common law democratic rights of the people are protected. Govemment is thus accountable to the people through parliament and the courts, for a democratic govemment govems with the consent of the people. For this consent to be effective and informed, the people must 80 have access to information to effectively monitor the actions of govemment undertaken in their name. The pubHc need to be confident that govemment agencies have not become a law unto themselves and that there is adequate fransparency of actions. AccountabiHfy relationships provide a means of holding elected and appointed officers of govemment responsible in thefr entmsted roles to the public. They are not only a mechanism designed to prevent the abuse of power but also a means by which adequate information concerning economy, efficiency and effectiveness of govemment operations is made available.
The responsibilify of public servants for the provision of information is,
determined by legislation, guidelines and convention. The public service has, without a doubt, certain obligations to Parliament. A framework for those obligations has been developed and covers the preparation of annual reports and the need to provide information to the Auditor-General, the Ombudsman, and to relevant Parhamentary committees (Core 1992, as quoted in Guthrie 1993, p. 49).
The actions of public servants are thus open to scmtiny on many levels. Parliamentary committees provide a valuable means of policy debate and are a fomm for review of program performance statements submitted by ministers. This form of accountability operates at the highest level of govemment with public servants often acting as witnesses before parliamentary committees, without making comment on policy issues so that their political neufrality is not compromised. Most committees have representatives from all parties allowing diverse input into the discussion process. These committees have wide ranging powers to call witnesses, seek expert opinion, sift evidence and draw reasoned conclusions on matters being investigated. The Joint Committee of Public Accounts and Audit (JCPAA), provided with independently audited information on executive use of public fimds, serves as a means for parliament to exact accountabilify from executive govemment. The growth of the committee system (particularly the estimates and standing committees) has been evident since the 1960's. In a bicameral pariiament, such as the Commonwealth Parliament, senate committees in particular allow the senate to act more effectively in the role of systematic oversight of govemment and the public service. This view was reinforced by Odgers who saw
(t)he Senate's committee system (as) a major development in the sfrengthening of the Australian parliamentary system of govemment. In particular, the committee system furthers the effectiveness of the Senate's role as a house of review. No modem 81
legislature can discharge its functions fully and effectively without the assistance of committees (as quoted by Barker in Finn 1995, p. 247).
Independent parliamentary agencies serve to reinforce accountabilify in particular contexts. In addition to the office of the auditor-general, other independent agencies at the state or Commonwealth level that are most well known are the Independent Commission Against Cormption, the Criminal Justice Commission, the Administrative Appeals Tribunal and various ombudsman offices. Some of these offices have corresponding counterparts in the states. Each body represents a public office with the responsibilify to review, correct or report upon adminisfrative misconduct by public officials in a 'watchdog' role by ensuring that public servants account for their actions and that there is no breach of public tmst. Citizen's complaints thus serve as a means for adminisfrative procedures to be responsive to the needs of the people.
Normanton (1966, pp. 409-410) suggested that the best means of securing govemment accountabilify is
through the medium of an independent state audit, which alone can bring to light and pubUsh the unvamished truth from the original sources in the records of the organisation concemed. Such an audit is not the answer to all ills, but where it is carried out under the protection of statute by conscientious and well chosen auditors, the public has a reasonable guarantee that serious waste, inefficiency or financial abuse will be disclosed.
The auditor-general in all federal and state jurisdictions in Ausfralia has proved to be the most powerfiil overseer of accountabilify relationships for the benefit of the public. The legislative protections that give the auditor-general a significant degree of independence from the executive ensure the auditor-general a core role in the accountability chain. Mandates of all Ausfralian auditors-general include annual reviews of compliance with govemment regulations and procedures as well as periodic assessments of performance. The main functions and powers of the auditor- general are contained in Part 4 of the Commonwealth Auditor-General Act 1997. The role has statutory obligations and also discretionary provisions aUowing the auditor- general significant scope to review any aspects of govemment activify to ensure public interests are safeguarded. For example Part 3 section 8. (4) makes it clear that "the Auditor-General is not subject to direction from anyone in relation to: (a) whether or not a particular audit is to be conducted; or (b) the way in which a particular audit is to be conducted; or (c) the priorify to be given to any particular 82 matter. The role acts as a constant review process and has the capacity to highlight not only administrative inequities, but also improper or cormpt conduct within govemment. A need for there to be tmst and confidence in the outcomes of audit processes applies to both private and public sector auditors.
The effectiveness of the auditor-general in ensuring that the executive is accountable to parliament for the management and performance of govemment is actively dependent upon the quality of the independence from the executive that the auditor- general and his office is allowed. The auditor-general's office is an accountability mechanism standing between the executive and parliament, ideally staffed by impartial public servants, free from outside control and without any political allegiances.'^ While the auditor-general reports to parliament, the budget allocation for the funding of audit activities comes from the executive through Treasury (or the Department of Finance and Adminisfration for the Commonwealth), thereby providing the opportunity for sfrategic confrol by the executive over the audit fimction through resource allocation consfraints. Statutory obligations mandating financial compliance audits have precedence over efficiency or performance auditing. Where resources are limited, this has seen the more confroversial (and potentially politically sensitive) performance auditing receive less funding. Evidence that some form of executive confrol has occurred through resource restrictions has been an issue at certain times during the last two decades (Funnell 1996b, Funnell and Cooper 1998; Hamburger 1989 and Taylor 1996). However, audit outcomes must still be completed in an unbiased manner despite operational consfraints. Independence will always be of primary importance to audit effectiveness.
3.6 The Socially Constructed Role of Government
The Commonwealth Harvester Judgement of 1907 was instiiimental m establishing very early in the new Federation a social justice imperative for govemment when it supported rights to an 'adequate' wage in relation to social need rather than market forces. The protectionist policies of AusfraHan Governments until the 1960's
'^ The personal independence of the auditor-general has also been held to be a prominent feature of independence within the public sector audit fimction. The relevance of this aspect of independence is viewed as being more relevant to the quality of the audit fimction which is discussed in chapter four. 83 recognised the importance of promoting social equity through consistent welfare policies. The expectation of citizens to basic services was enshrined as a right and not a privilege. These included age and invalid pensions, maternity allowances and unemployment benefits. In addition
living standards depended on more than just a fair share of the national wealth. In particular, public utilities were seen as services confrolled by govemment to ensure that they were widely available at an affordable cost to all Australians. State ownership of many essential services was part of the vision of Ausfralia as a land of fairness and equal opportunity (Funnell 2001, p. 33).
As Ausfralia grew and developed, the involvement of govemment in the provision of public utilities meant that size and influence of govemment also increased. Public expenditure as a percentage of GDP in Ausfralia rose from 21.7 percent in the 1950's to 32.8 percent by the late 1970's (Wilenski 1986, p. 18). The govemment became a social force with power over significant resources creating a greater need for the govemment to be confrolled and to be made accountable for actions undertaken on behalf of those govemed.
As collective rights were formalised so too was the need to ensure that all had an equal right to participate in society without being marginalised. Concem for the rights of citizens and specific groups within society through equal opportunity legislation, affirmative action and the creation of various forms of ombudsman from the 1970's created a new perspective that considered the rights of the individual. Finn (1995, p. 7) has observed that the rise in focus of the citizen as an object of "worth, respect and civic entitiement" has "(s)een a significant enlargement of the rights, interests and expectations of the individual accorded legal recognition and protection; and a heightened vigilance against improper imposition and unfair freatinent by the state and its agencies". The era of economic rationalism in the last two decades, however, has seen this view of the citizen challenged. The concept of 'citizen' has been continually redefined (Funnell and Cooper 1998) within a new framework that infroduces, and in some cases is subsumed by, the rationale of market economics. This has occurred in the absence of any substantive evidence that the public interest is being served by the continued focus on the perceived benefits of market forces, as a means of achieving efficiency and value for money. Competitive tendering, confractualism, corporatisation and privatisation, have the effect of focusing on financial values with the importance of social equify and justice being 84 eroded as the drive to implement private sector management practices continues. Competitive tendering, for example, has the effect of replacing a govemment supplier with an altemative supplier that it is assumed will achieve stated objectives with greater economy and efficiency. The exercise of customer and purchaser choice within a competitive framework, however, is not relevant to many govemment services as the end users have a limited abilify to 'shop around' and the quantify of suppliers are often more akin to an oligopolistic model rather than free competition. The social rights emanating from an individual's position within sociefy extends beyond the concept of a 'client' or a 'consumer' that the competitive models favour. Rights ensue from being a member of a communify and not whether a person has the abilify to pay for (purchase) public sector services (Funnell 1997b).
The increasing use of non-government providers in the provision of goods and services fraditionally regarded as public services has implications for accountability relationships, something that has concemed several major parliamentary and govemment inquiries. To ascertain who is responsible for aspects of service provision in terms of timing, quantity and quality is often difficult to determine. It has been suggested by Grabosky (1995, p. 538) that using non-government agencies can have consequences that are undesirable.
This diffusion of responsibility can be cynically exploited; to the extent that regulatory fimctions may devolve upon or be delegated to a plethora of private interests, governments may seek to avoid scmtiny, or at least to pass the buck, and thereby avoid blame for adverse outcomes.
Grabosky (1995, p.543) also paints a more sinister pictiire by suggesting that modem society would be represented by a proHferation "of govemment and private institutions of social confrol, which enables govemment to exercise power at minimal economic cost, with minimal visibility, and in a manner likely to provoke minimal resistance". This view does not see greater fransparency of govemment actions, with access to information becoming an encumbrance rather than a democratic right of those govemed. Whether this decline in accountabilify is an unintended by-product of the pursuit of a competitive ideology or an informed consequence, it provides evidence that the emerging hybrid form of goveming has redefined the meaning of citizenship and public interest. The new order no longer supports the fraditional definitions under Westminster principles. 85
Diagram 3.2
Public Service Responsibility & Accountability
i Responsibilify Chain| Forms of Accountabilify
Parliataeiit/Publie
Ethical/Financial/Political/Public
Executive
Political/Management/Financial
Ministers
Public/Ethical Accountability
Management/Financial
Management'Financial 86
3.7 Forms of Accountability in the Public Sector and the Contribution of Audit
The forms of accountabilify noted at different levels ui the public sector hierarchy m Diagram 3.2, are not exclusive. Admuiisfrative developments have produced new accountability obligations with public servants beuig caUed upon to answer for a wider range of responsibilities. The obHgations of public servants arise from a variety of bases. These include those emanating from their role as an employee, as a representative of an appropriate professional body, as a representative of a political party and as a servant to the people. These various accountabilify relationships'^ can often be confiised and obligations toward one form of accountabilify result in conflict with another. Accountabilities within the public sector are complex matters. It is therefore appropriate to question who is accountable to whom before considering the development of different types of accountability that may be owed in govemment relations. The degree or type of accountabilify obligations that are relevant to any relationships can be numerous and, like the private sector, there is no recipe detailing the appropriate mix that will satisfy accountabilify requirements. A simple hierarchy of responsibilify is illusfrated on Diagram 3.2 with the most obvious types of accountabilify relevant to each level in the hierarchy noted. Accountabilify relationships are ultimately derived from the fundamental political philosophy upon which govemment is established. In Ausfralia's liberal democratic form of govemment, accountabilities are derived from promoting the public interest.
3.7.1 Accountability to the Public
Ministers, as the elected representatives of 'the people', are responsible and accountable to parliament for govemment policy and public servants are responsible and accountable to ministers for the adminisfration of policy. This reinforces the fraditions of the Westminster system of govemment by preserving the neufrality of the public service. While these relationships have changed over time with the advent of new adminisfrative practices and devolution of power, they serve as a starting
'^ Corbett 1996 and Bovens 1998 have discussed altemative notions of accountability covering similar concepts. However, the classifications above are considered to have the most relevance to the themes and issues in this study. 87 point for a review of changes made and the implications these have for govemment accountability relationships. Elected representatives are accountable to parliament as agents of the public with an obligation to uphold the democratic concepts of social equity and justice. Election processes allow the public to select representatives that are considered to best serve their needs. Those elected hold office for a specified period of time and can be voted out of office if the public considers that they have not provided appropriate representation. The will of the people is thus exercised through the voting process.'^ Public accountability applies also to non-elected public servants. Advice given and conclusions derived from the application of public adminisfrative procedures and guidelines are ultimately for the benefit of the community. The necessity for all to be freated equitably within the constramts of policy requirements, budget guidelines and the need for demonsfrated efficiencies, makes the determination of how the interests of the public are best served a value judgement. While non-elected public servants cannot be removed from office by the electoral process they have fraditionally been regarded as dedicated individuals who act with the public good in mind. The accountability obligations of public servants stem from delegated responsibility from publicly elected representatives and follows an established hierarchy. This hierarchical stiiicture is more relevant in the area of politics as ultmiate responsibility lies (in a broad sense) with the minister (Bovens 1998).
Public servants are accountable only to their immediate superiors in the chain of accountability without any direct link with pariiament or the public (Management Advisory Board/Management Information Advisory Committee (MAB/MAIC) 1993, p. 13). Public servants act on behalf of the minister or are conferred power to assist ministers in fiilfilling thefr obligations. This type of accountability hierarchy assumes a relationship of authority and confrol between the minister and subordinates, fri reality there can be many levels of delegated authority between ministers and public servants making clear lines of accountability difficult. Hi a broader stiiicture of accountability public servants recognise a general duty to the public in addition to specific accountabilities to their superiors (Uhr 1999).
'^ Criticisms of the voting process as an expression of the will of the people are discussed in Funnell 2001 (pp. 100-3). 88
The tools of govemment reform impact upon accountability relationships in many ways. For example, the increased use by governments of commercially orientated business stmctures has created accountability anomalies when the stmctures of govemment progress in advance of clear assessments of their effects on community values. The establishment of incorporated business enterprises, which are for all intents and purposes owned by the govemment but are not directly under the confrol of any particular minister and thus accountable to govemment, is a particularly contentious issue (MAB/MIAC 1992, p.319; Quiggan 1996; King and Maddock 1996; Ketti 1993; Guthrie 1989b, 1994; Wanna et al 1992). The level of freedom to be allowed these commercially driven stmctures'^ in their pursuit of economic efficiency also requires recognition and support for govemment objectives concemed with social equity. Intensive govemment scmtiny, regulation and undue political influence may prevent govemment business enterprises (GBE'S) from competing effectively in a market environment. Where pressure is exerted to improve retums to govemment, accountabilify relationships become confiised as corporations have commercial obligations to minorify owner interests in conjunction with govemment. The balance between responsibilify and autonomy is difficult to achieve, considering a tension that exists between the different philosophies that commercial business interests and governments support.
As the types of operational stmctures evolve, the need for additional means to ensure accountability to the public can be verified has meant changes to the responsibilities of the auditor-general. Commonwealth GBE's are subject to audit by the auditor- general in accordance with the Commonwealth Authorities and Companies Act 1997 section 35. Effective from January 1'* 1998, this Act has served to place audit responsibility for company financial reports, where the Commonwealth has a confrolling interest, within the mandate of the auditor-general. Prior to 1998 the auditor-general had no official role to ensure that GBE's were operating within a framework consistent with a need to be answerable to the public. Accountabilities were defined in terms of corporate reporting requirements geared towards commercial information users with a specific financial orientation.
'^ The freedom allowed by the Victorian Cain Govemment to one of it's GBE's, the state bank (discussed in chapter six), proved to be very damaging to the government's reputation. 89
The general movement towards smaller govemment as part of the economic reform agenda has created a 'Trojan horse' type reform mechanism. By divesting itself of a particular responsibilify to the private sector, govemment theoretically has the potential to aid microeconomic reform by freeing up of govemment resources. The Commonwealth Government's privatisation campaign has mcluded the sale of enterprises such as Qantas, the Commonwealth Bank, Telstra and the Commonwealth Serum Laboratories. The question of whether this type of reform will ultimately benefit sociefy when considering matters of social equify (particularly when the user is unable to pay for services which may be regarded as basic or even essential) was not evident at the commencement of the path to privatisation. Quiggan (1996, p. 122) suggests that it is surprising that when Telsfra was partially privatised the "competitive industry inherited the fiill State power of the previous public enterprise, though without any form of democratic accountabilify". This led to much public enmity, particularly for the constiiiction of communications towers with minimal public consultation (The Age 30/08/94). The difficulty with holding a govemment to account for changes in standards of service delivery for fimctions that have been privatised is that the time frame for development spans several terms of office. It is difficult to hold to account political interests that are different from those responsible for privatisation.
Politicians generally do not enjoy a positive image in the eyes of the public. There is an expectation that politicians will act with impartiality in the application of policy decisions and any actions which fall short of neufrality carries with them the risk of censure or forced resignation. While parliamentary committees and the auditor- general are able to highlight lapses which amount to partisan interests, the incidence of numerous public inquiries and royal commissions provide evidence that politicians can, and have, acted with impropriety. ^° Examples include the Fitzgerald Commission Inquiry in Queensland, WA Inc. in Westem Ausfralia and the Tricontinental Affair in Victoria. Some of the more pertinent criticisms of the Fitzgerald Commission are summarised as follows:
The existence of questionable behaviour of members of parliament was acknowledged by the UK Committee on Standards in Public Life, referred to as the Nolan Committee after its chairman Lord Nolan. This committee was established in 1994 and resulted in a code of conduct for politicians being approved in the House of Commons on 14 May 2000. 90
1. Decline of parliament in terms of (a) sitting hours, and (b) consistent refusal by the Premier and Ministers to answer parliamentary questions and to be fully accountable and responsible to parliament for public expenditures, ministerial expenses, and extra-parliamentary executive decisions;
2. business deals, joint ventures and other financial fransactions between govemment, its agencies and govemment favourites;
3. lavish funding of the goveming political party by recipients of its favours;
4. political "stacking" of the public service; and
5. use of taxpayers' funds by the Premier and Ministers to finance writs against critics.
Political pafronage has the potential to subvert public interest and threaten accountability mechanisms. The recommendations resulting from the Fitzgerald Commission and other inquiries have suggested sttengthening of accountability measures, particularly with respect to independent officials acting in an oversight function. The existing accountability measures were generally seen to be deficient in some way and by making considered changes the new developments would severely limit the possibilify that instances of political impropriefy would go unchecked again. It is appropriate to note that each state has responsibilify for its own jurisdiction and steps taken to effectively improve executive accountabilify are varied and specific to each state (Finn 1995). The lessons leamed from public inquiries demonsfrate that those who govem cannot be relied upon to adequately account for their actions and place the public interest above their own, or their party's interest in their quest to retain or gain power. Effective accountabilify mechanisms act as a deterrent and a reinforcement of the will of the people (Simms 1999).
3.7.2 Financial Accountability
With the establishment of independent govemment in Ausfralia in 1901, The Constitution of the Commonwealth of Australia provided for a unified approach to goveming Ausfralia with clear distinctions between state and Commonwealth powers. The abilify to levy taxes upon the communify and subsequent usage of such funds formed the basis of financial management. Constitutional provisions stipulated that all spending be appropriately sanctioned 'before' spending of public monies. Section 51 of the Constitution provided the Commonwealth with the power to make 91 law for the imposition of taxes with section 83 stipulating that no monies should be drawn from consolidated revenues unless sanctioned by law. Section 53 of the Constitution provides that any laws appropriating revenue or monies cannot be amended once sanctioned. These provisions provided mles for obtaining and spending of funds, with the Audit Act 1901 providing the mechanisms for ensuring accountabilify for public fimds. From the late 18 century until the 1960's the role of the audit function reflecting the primary importance of financial accountability, recognised the primacy of constitutional accountability imperatives and remained procedure focused. The provision of accountability assurance involved verifying that appropriate mles and regulations were followed without venturing into issues of the economy or efficiency (qualitative) aspects of resource application (Guthrie and Parker 1997; FunneU 1996b; Hamburger 1989).
In conjunction with the adminisfrative reforms of the 1970's and 1980's, initiatives to improve the financial reporting of govemment were infroduced. The perception that market based ideologies would promote economical and efficient govemment fuelled criticism of the different financial reporting practices between the public and private sector. If government reporting could be more like commercial reporting, it was argued, this would assist management of public resources by providing information useful for decision making, as opposed to stewardship purposes. Subsequent reforms to govemment accounting were part of a frend to recognise that financial accountability involved not only ensuring spending was authorised and correctiy accounted for once spent, but also to establish that financial resources were used efficientiy to achieve govemment program objectives. Financial accountability included ascertaining that the means used were economical. The reporting methods used in the private sector were considered to be better able to provide the (useful) information needed for the discharge of govemment financial accountability.
A solution proposed for the provision of more useful information was the adoption of accmal accounting and budgeting. JCPA Report 341 (1995) recommended that all Commonwealth Govemment departments report on an accmal basis from June 1995, with audited consoHdated statements from June 1998. Full implementation of accmal budget reports was to foUow in the year 1999-2000. There was general acceptance in govemment that the ability of accmal accounting to provide the 'full cost' of operations made it superior to the cash basis previously used by govemment. 92
"Accmal information has been elevated to a position where it is held out as an accurate assessment of the fiill cost of service provision and as an indicator of the efficiency of program performance "(Guthrie 1998 p. 3). ^' This view was not without its critics (Ma and Mathews 1993; Aiken 1994; Aiken and McCrae 1996; Guthrie and Humphrey 1996; Guthrie 1998; Clark-Lewis 1996; Stanton and Stanton 1998). Public servants have moved from a clear, unambiguous, form of fmancial reporting to a position where thefr judgement may be questioned and the discharge of financial accountability is no longer clear cut. The adoption of accmal accounting necessitated the use of estimates and judgement to produce figures deemed useful for reporting purposes. Particular difficulty arises with unique govemment assets where clause 8(b) of the Ausfralian Accounting Standard AAS29, Financial Reporting for Government Departments, requires that assets have a value in exchange. Examples such as roads, bridges and infrastiiicture which clearly do not have values in exchange provide valuation challenges and attempts to depreciate such assets sfretch subjective quantification criteria fiirther.
The adoption of a common approach to reporting standards for the public sector between the Commonwealth Govemment, state governments and the professional accounting bodies has meant that public servants need to comply with extemal standards (particularly with AAS29 and Statements of Accounting Concepts SAC2, SAC3 and SAC4) as well as intemal standards. In view of the increasingly generic nature of financial reporting standards between sectors, auditors-general have been willing to allow private accounting firms to undertake financial compliance work on behalf of the audit office as confractors.^^ This reflects the belief that a competitive model for service provision can be applied in certain circumstances. Performance auditing, however, until the recent initiatives in Victoria, has fraditionally been the exclusive province of public servants due to the confidential nature of the evidence, the politically sensitive nature of outcomes and the perceived specialist knowledge
Johnston and Gaffikin (1996) have suggested that accounting practice has caused major financial misallocation in the private sector. The evidence of numerous corporate failures has led them to question what it is about the public sector that would alleviate the ambiguities in accmal accounting. 22 For example, in Victoria during the late 1990's the auditor-general confracted private sector auditors for "75% of all public sector financial audits currently within the Auditor-General's mandate"(VAO 1997a, p. 12). 93 required for completion of such assignments (Victorian Auditor-General's Office (1997a p. 50-51).
Public servants have fraditionally been regarded as adminisfrators that followed the mles and safeguarded the resources entmsted into their care (Parker and Guthrie 1993). Accounting was cash-based as a consequence of parliamentary appropriations for specific purposes and the need to account for the disposition of that money. The reforms of the last two decades have seen the focus shift from inputs to performance- based outputs. The process of developing measurable outputs has heralded a need to assign a financial quantum to judge performance. MAB/MIAC (1992 p.316-7) suggests that the time and resources devoted to "costing and the need to constmct exact costs" for management accuracy may not be warranted. "The requirement for full costing before charging for a service is qualified by the Finance guidelines in that the degree of precision required in specifying what is to be costed will depend on the purpose of the costing". Any lack of consistency in preparation or use of financial reports has implications for the effective discharge of accountabilify. Accmal accounting in the commercial environment has often been criticised for the ability to generate altemative results depending upon which accounting policies have been adopted. The Intemational Accounting Standards Committee (lASC) has developed a conceptual framework for financial accounting and reporting which includes "substance over form, neufrality and completeness" (Carnegie et al 1999, p. 524).
Paragraph 36 of the lASC Framework XVOXQ^ that where the selection or presentation of information is based on judgement the outcomes are not neufral.
Stewart (in Hopwood and Tomkins, 1984) has pointed out that the financial account is only one form of account using one language. Financial information itself does not provide adequate information on its own to satisfy more complex accountabilify relationships particularly as govemment objectives are usually stated in non-financial terms. Normanton referred to the shortcomings of financial mformation by stating that
^^ While cash accounting methods produce information that can be interpreted as more reliable because it involves little estimation and judgment, it can be argued that the exclusion of information such as liabilities which are accming but have not yet been paid (particulariy public service superaimuation and leave entitlements), is misleading. 94
(t)o be accountable means, as any dictionary will confirm, to give reasons for and explanations of what one does. But a certified fmancial account rarely provides explanations, and it never gives reasons. It does not as a mle even contain much detail of what has actually been done (Normanton 1996, p. 1).
Hi the continuing era of managerialism, financial accountability will form only a part of a larger suite of accountability mechanisms.
3.7.3 Management Accountability
Management accountability has become increasingly important in govemment operations as the need to justify the use of public monies in an effective and efficient way has generated a range of performance measures. The manifestation of 'sound economic judgement' and a commitinent to the objective of 'efficiency' has highlighted accountabilify relationships where the ultimate authority of the public is not at stake. For example, "acting accountably to one's public service peers or subordinates" (Mulgan 1997, p. 29.) is part of the new public sector reform 'biz talk' of management best practice. Greater involvement of ministers in govemment policy decision making and devolving confrol and responsibilify to individual sector managers for operational and adminisfrative tasks essentially allowed managers to manage. The reforms introduced sfreamlined processes with a view to the enhancement of scmtiny to ensure performance levels supported efficiency criteria (Guthrie and English 1997a). Managers were given responsibilify and flexibilify and were then held accountable for their actions. This redistribution of managerial powers has been associated with a culture of commercialisation that encourages risk taking and enfrepreneurial behaviour.
The advent of managerialism has required a change from qualitative adminisfration to quantitative management. The new order required public servants to change the way they had fraditionally done things by acquiring new skills, developing ways of more economically delivering program objectives and being assessed on endeavours to reach set targets. Painter (1988) suggested that
(t)he emphasis on management performance evaluation on the basis of quantifiable outputs moves the reward system from one of rewarding public servants for conformity with mles, error avoidance, and attention to detail, to one of rewards for achieving output targets, increased productivity and improved efficiency (as quoted in Parker and Guthrie 1993, p. 64). 95
The move from one set of standards to another has resulted in performance criteria becoming more subjective and, at best, only fridicative of achievements. Accountability relationships within such a framework become more complex and the responsibilities of public servants more onerous.
Management initiatives have resulted in changes to the way information is processed and presented. Assessments of particular forms of accountability are enhanced by the provision of information that allows for improved decision making. The Commonwealth Freedom of Information Act 1981 required govemment agencies to give access to certain documents on request and various pariiamentary committees have wide ranging powers to access information. While not all initiatives have been met with universal approval^^ evidence seems to suggest that there has been better resource allocation, improved linkages with policy formation and a greater openness to review by extemal bodies (Keating 1993; Zifcak 1994). With management accountability has come the availability of tools (information) with which greater transparency and justification of actions can be achieved.
Measures to expand the audit function to encompass performance assessment are closely tied to developments in public sector management practices. Prior to amendments to the Audit Act in 1979 there was considerable debate about the distinction between efficiency and effectiveness with concem that reviews of effectiveness would encroach upon policy issues. The role of the Commonwealth auditor-general did (and does) not extend to having the ability to review matters potentially having implications for policy assessment. There were attempts to delineate accountability obligations to reinforce ministerial answerability to parliament for policy. The Audit Act was amended to include efficiency auditing (Division 2, Part VI), without the debate concerning the definitions of efficiency and effectiveness being clearly resolved. This has resulted in various interpretations of
24 This is particularly tme of the application of accrual accounting to govemment financial reporting (Ma and Mathews 1992; Guthrie 1998; Parker and Guthrie 1993), especially for not-for-profit enterprises such as museums, art galleries and charitable institutions (Carnegie and Wolnizer 1996; Gallhofer and Haslam 1996; Carman et al 1997). The Freedom of Information initiatives are also part of a continuing confroversy as the cost and effectiveness of access to information is debated by political and private interests. 96 mandate boundaries by successive auditors-general (Hamburger 1989; Guthrie and Parker 1997) and exposed them to accusations of interference in policy matters.
The ability to link economic accounting data with the more questionable dictates of political ideology and social preference creates for public sector managers a new and different area of management accountability. Means employed are related to the ends desired in an environment of increasing competition with greater pressures on public resources. This type of scmtiny assesses management performance and requires the exercise of subjective judgement, forcing performance auditors^^ to assess management decisions in relation to choices between combinations of resources and how effective the choices have been in attaining established objectives. Parker (1987b, p. 299) has identified this increase in subjective interpretations as follows:
The VFM audit examines performance, procedures, activities or results, so that evidence may be more elusive, standards for evaluation more opinionative and some inefficiencies more difficult to detect and substantiate ... Performance measurement requires an outlook that includes quantitative and qualitative dimensions and requires the applications of relevance, independence, reliability and objectivity.
The dilemma for management accountability is that assessments of efficiency imply a comparison with some predetermined standard. Unfortunately for public sector auditors there are difficulties in obtaining adequate measures of output, and even more of outcomes, on a systematic basis to support ideals of efficient practice. Performance indicators, when practical^^, are also subjective concepts which do not allow for organisational interdependencies where outputs and consequences can occur in departments different from those initiating developments. The interplay between taxation, social and economic policies is but one example.
25 This type of auditing has been variously referred to as value-for-money auditing, operational auditing, efficiency auditing and more recently performance auditing. "The internationally accepted generic term for auditing of efficiency is performance auditing" (Monaghan 1989 in Guthrie et al 1990, p. 41). The designation 'performance auditing' is now commonly used by Commonwealth and state audit offices and will be the term used hereafter to refer to assessments of management performance. ^* The mandate of the auditor-general does not extend to the discretionary conduct of performance audits for GBE's unless specifically requested by a minister or the Joint Committee of Public Accounts and Audit (JCPAA) under sections 16 and 17 of the Auditor-General Act 1997. Anomalies in accountability to the parliament for economy and efficiency thus remain. ^^ The objectives of govemment programs are often stated in non-financial terms and quantification of such factors is difficult (Guthrie and English 1997a). 97
3.7.4 Ethical Accountability
The fundamental basis of all accountabiHty Corbett (1996) has termed uiward accountability. Corbett believes that personal conscience dictates moral and ethical behaviour by individuals and govems the way they discharge their responsibilities. In the public sector the govemment has a more direct role in upholding citizenship rights. Public servants, as agents of the govemment and the public, have a minimum requirement to act within the letter of the law and also a duty to act m accordance with the common law principles of natural justice (Finn 1995). There is also an expectation that they will be responsive to the needs of the public. As the roles of public servants have changed so have pressures mounted on these 'inward' accountabilities.
As part of the broad reform agenda, public employment has been reduced. The size of the public sector at the Commonwealth level has decreased by 29 percent between August 1990 and August 1997 (PubHc Service and Merit Protection Commission (PSMPC) Feb. 1998a). The Minister Assisting the Prime Minister for the Public Service, David Kemp, issued a statement on 25 Febmary 1998 stating that the Public Service Act 1922 was outdated, prescriptive and unnecessarily cenfralist. He heralded the proposed Public Service Bill as a document which would enhance accountability by allowing the public service to meet competition, to benchmark itself more effectively against other sectors and to bring employment into line with communify standards promoting a sfronger performance culture. Contemporaneously the PSMPC reissued^^ a statement of "APS Values & Standards of Conduct" in a publication referred to as Essentials #3, in March 1997. The values are stated (p. 1) as:
> responsiveness to govemment; > a close focus on results; > merit as the basis for staffing; > the highest standards of probity, integrity and conduct a sfrong commitment to accountability; and
^^ The reissued document refers to 'Guidelines on Official Conduct of Commonwealth Public Servants' as revised by the former Public Service Commission in 1995. Essentials #3 makes minor changes to those previous standards (Shergold - Public Service Commissioner 1997, in PSMPC March 1997). 98
> continuous improvement through teams and individuals.
The implied inappropriateness of previous public service guidelines suggests that new attitudes and policies are necessary for public servants to meet tiie changing expectations of a competitive envfronment. The Workplace Relations Act 1996 came into effect in December 1996^^ and was followed in January 1998 by the Financial Management and Accountability Act 1997, the Commonwealth Authorities and Companies Act 1997 and the Auditor-General Act 1997. These Acts provide a legislative framework emphasising performance, propriety and accountability.
A reduction in the number of people employed by the public service has been supplemented by a desire for greater flexibility in workplace practices in support of economic objectives. Minister Kemp stated that
APS agencies now have the tools available to drive changes to improve overall performance and contribute to a strong and competitive economy. Agreement making is providing significant opportunities for APS agencies to implement broad workplace reforms and to develop arrangements which encourage innovation and continuous improvement (PSMPC Feb. 1998b, p.5).
The principal objectives of the Workplace Relations Act 1996 are contained in section 3 of the Act. Section 3(b) and (c) make it clear that the employer and employees have the responsibility to determine and choose the most appropriate form of employment agreement for their particular circumstances. This level of flexibility has served to act as a two-edged sword. With provision to reward public servants for performance has come the ability to dismiss (or not renew confracted employment) those who have not met performance criteria. Thus, the consequences of changes to employment conditions have impacted upon the fraditional apolitical public service culture, with job security and ethical concems often in conflict.
While the ability to stiiicture the labour force within the public sector may be viewed as part of attempts to increase the accountability of management for its performance, it is the conflict that this form of management initiative has with ethical behaviour that makes it difficult to separate ethical from management accountability obligations. The role of managers in the public service has changed with the
^' Further technical rather than conceptual amendments were enacted with the Workplace Relations and Other Legislative Amendment Act 1997, which came into force in December 1997. 99 infroduction of service confracts. Prior to these confracts employment in the public service was tenured and the need to temper ministerial advice with the knowledge that fiiture employment prospects may be affected was not an issue. Bureaucracy was independent of political affiliation, it had professional status and did not change with each term of govemment so that important experience and knowledge was maintained for the long-term benefit of govemment. It was not unusual for a lifetime career to be anticipated by govemment employees. Commenting on the dismissal by the Howard govemment in 1996 of six department heads and the appointment of replacements, Sherman noted that, "(t)here seems now to be a bipartisan acceptance that the Commonwealth public service heads hold office at the pleasure of the govemment of the day" (as quoted in Smith and Corbett 1997, p. 15). This, according to Smith and Corbett, has led to the politicisation of the public service. Politicisation refers to one of two meanings.
One is pafronage: the appointment or promotion of persons favoured because of their party affiliations or sympathies with the party in power as repayment for past favours or in order that they will do favour for the party in future. The other meaning is intimidation: the instilling into the public servants of fear that their futures are in jeopardy unless they say what their ministerial masters want to hear, and give advise tailored to suit the partisan interests of the minister rather than the public interest (Smith and Corbett 1997, p. 3).
Politicisation of the public service will undermine the fradition of public service neufrality making ethical behaviour more difficult to sustain. The editor of the Sydney Morning Herald (2/08/99) suggested that confractualism would promote a 'Yes Mmister' approach to the provision of govemment policy advice. Ministers have the power to terminate the confracts of senior bureaucrats and, therefore, are likely to get advice that coincides with party preferences.
In addition to the perception that confract employment provisions are not conducive to the public interest, is the lack of fraining and appreciation of a public service ethic in employees recmited from the private sector. Laffin and Painter (1995) have suggested that many departinent heads without public sector experience have failed to manage the simultaneous accountabilities required to accommodate policy needs, political needs and public interest concems. The importing of private sector expertise to facilitate a more managerialist approach to the provision of adminisfrative services has served to highlight the broader range of accountability obligations owed in the public service. 100
The pursuit of efficiency in govemment can result in inequities between groups within society. Adminisfrators need to exercise value judgements in circumstances where there will often be conflict between different forms of accountability. Adherence to standard procedures, time-limits on dealing with cases and caution in the use of public fimds benefits those best organised to make use of available govemment services. Inequities arise where service provision is biased towards those most aware of the services govemment offers and best able to understand bureaucratic procedures. Decisions that are made on equity grounds may result in more than the allotted time or resources being required and, thus, the performance indicators of a particular department become unfavourable. The consequences of adverse indicators on criteria specified in employment confracts may have repercussions for bonuses and fixture employment. These contradictions encouraged Sinclair (1995) to ask: "Do managerial forms of accountability supersede other forms and what happens when they conflict?" (p. 219). Therefore, a frade-off can arise between efforts to secure greater management accountability and accountability to the electorate (Hopwood 1984).
'Inward accountability' can also be interpreted as being a professional with a sense of duty as a member of an expert group with a privileged position m society. Professional accountability can be constmed as a responsibility to professional associations such as the CPA Ausfralia and The fristitute of Chartered Accountants in Ausfralia. Memberships of such associations carry with them obHgations to support certain standards of conduct and practice. Significant representation from public and private sectors provides a fomm for generic expertise and a means for disseminating the views of the accounting profession. This provides a conflict between allegiance to a professional body outside govemment and the public service. In a survey conducted by Sinclair (1995), public servants have described professionalism as a respect for fraditional Westininster principles encompassing a commitment to public service and integrity. Another interpretation, in the same survey, viewed professionalism in the public sector as an attitude that is businesslike, focused and 101 more in keepmg with private management sector values.^" This attitude stems from the increasing recmitinent of 'professionals' from the business community into public service ranks as part of the reform agenda. Smclafr (1995, p. 229) observed that
(t)he very divergence of meanings of "being professional" and the varying difficulties perceived in meeting this accountability indicate that despite the managerialist agenda of replacing fraditionalprofessiona l or adminisfrative values in public agencies with generic management values, professionalism remains the subject of claims by competing ideologies.
The competing ideologies provide a confradiction for public servants to the extent there is a frade-off between management and professional accountability.
The importance of personal integrity to the work of public servants is perhaps more clearly demonsfrated by referring to the obligations and perceptions of the role of an auditor-general. Hardman (1996) considered that auditors-general were public servants with an obligation to uphold the spirit of the law as well as the letter of the law. He concluded that
(a) lot depends, too, on the calibre of the particular auditor-general. Accordingly the nature and extent of the mandate may also be influenced by the personal and professional standards of the auditor-general, his or her integrity and competence, the impact of personality and leadership, and the incumbent's own interpretation of his or her role (Hardman 1996, p. 11).
Guthrie and Parker (1997) have also suggested than the individual qualities of an auditor-general will affect the way in which they interpret the role. Auditors-general varied among themselves, and at times with members of their entourage, in terms of the public sector accountability they pursued, the degree of challenge to the motives and power of the executive they were prepared to mount, and the degree of risk of confroversy with govemment and auditees they were prepared to create (Guthrie and Parker 1997, pp. 40-1).
The consequences of an auditor-general willing to pursue a dfrection which is in conflict with the prevailing govemment is demonsfrated by the relationship between
The survey by Sinclair (1995) also highlighted a view by senior public servants that to be more professional had negative connotations and involved a refreat from values that were appropriate to a public servant. 102 the Commonwealth Auditor-General John Taylor and the executive during his tiirbulent time in office from 1988-1995. During this time there was "(a) reshaping of the de facto mandate ... with a notable swing back to a sfronger emphasis on effectiveness and poHcy issues" (Guthrie and Parker 1997, p. 31). The stance taken by John Taylor in relation to the 'Sports Rort' affafr (ANAO 1993) was seen by Hardman (1996) as a willingness to take an interventionist approach to an issue that was political and unethical.^' Continued criticism by Taylor of the executive in the areas of resource allocation consfraints and a desire for closer ties with parliament, to whom he considered the auditor-general was accountable, resulted in the early resignation of Taylor.^^
Hardman (1996, p. 2) defines ethical audit accountabiHty as "the interpretation of the mandate of the auditors-general to embrace the audit of ethical issues arising from the decisions, activities and policies of the executive govemment". Auditing in the public interest, the observation of the spirit of the mandate as opposed to the stiict interpretation of the role, has been demonsfrated by Auditor-General John Taylor as a difficult path to follow. The willingness to accept or support a public interest view is necessarily a fimction of the role that an auditor-general individually perceives. This perception is affected by personal standards and the character of the incumbent.
The significance of "a more robust and privately anchored experience of accountability" (Sinclair 1995, p. 234) to the public sector has increased with the development of new adminisfrative and management practices. Together with the fraditional 'servant of the people' ethic, there is a myriad of competing accountabilities that are not mutually exclusive and need to be weighed in all areas of decision making.
Mulgan (2000, p. 95) in his comparison of accountabilify in the public and private sectors concludes that
The report detailed how information about the allocation of govenmient fiinding was unavailable and appeared to be arbifrary. The responsible minister subsequently claimed to have made funding allocations on a whiteboard prompting accusations of political bias in the allocation process. This report was embarrassing to the govenmient, resulting in the forced resignation of a minister (Waima et al 2001). ^^ Support for the auditor-general's comments came too late for Taylor with the recommendations of the JCPA - Report 331 generally being in agreement vvdth his views on resourcing and undesirable executive influence. 103
(s)tmctures of accountability appear to be more stringent in the public than the private sector, particularly in terms of accountability of organisations for the processes by which they determine their general directions and policies ... We may speculate whether these distinctions between the pubhc and private sectors are likely to continue or whether the gap between the two sectors is narrowing, leading to more common standards of accountability. Some evidence points to a growing convergence.
3.8 Tergiversation
The increased mobility of capital and the interdependencies between the govemment and the private sector has changed the economic foundations upon which business activities are undertaken. Parochial tendencies have been made redundant by leaps in technology and the ability of capital to move globally to find the most cost efficient resource provider. The philosophical differences that separate the rational profit- motivated individual in private organisations and the society based norms in the public sector have become less polarized as economic ideals converge.
This analysis does not preclude the existence of beneficial effects on resource allocation arising from public sector reforms and the increasing use of commercially- orientated business stmctures. Issue, however, is taken with the underlying motivation behind the application of market ideologies supporting a profit goal compared with the social equity democratic societies such as Ausfralia have supported. From an accountability viewpoint, the desire for profit infroduces less accountability as the need for economy in a competitive market reduces information availability and supports a consumer criteria that has fewer obligations and responsibilities attached to the concept than that of citizenship.
Diagram 3.3 illusfrates the public sector movement away from a collective citizenship focus. The accountability of both agents and auditors is shown as commencing with a narrow definition and as the importance of economy, efficiency and effectiveness has increased accountability relationships have diversified. The more recent market initiatives of confracting and corporatisation have the effect of fransferring power and confrol over certain govemment services to market agents, thereby leaving some accountability obligations without a clear owner. This is illusfrated as a tumaround from the previously increasing accountability obligations owed by the public sector to the pubHc. The underlying philosophy is viewed as progressively changing from collective communify assets and obligations with a long 104 term view, to an increasingly short sighted focus where responsibilities are being handed over to market forces.
Diagram 3.4 illustrates a simplified aggregate of Diagrams 3.1 and 3.3. The private sector is shown as moving away from a self interested specific model to one which recognises public interests in its dealings with the communify. The public sector is shown having moved away from a collective public interest view to recognise a more narrowly conceived accountabilify regime with responsibilities being shared with the private sector. The sharing of responsibilities is however an incomplete ideal as values inherent in social equify are lost in the fransition process. 105
Diagram 3.3
Public Sector Accountability & Philosophy
-Focijs
Accountabilify of Agents Audit Accountability Philosophy
Financial Financial Profit/Short-term A V Management
Corporatisation V
Political Performance
Decenfralisation V Ethical/public
Confractual Confractual Public friterest-L/T
Div^i^ Focus 106
Diagram 3.4 Public and Private Sector Comparison Accountability & Philosophy
Particular Focms
Private Sector Public Sector Accountability Philosophy Accountability Philosophy
Agents Auditors 107
3.9 Conclusions
The role of govemment in society has changed significantly with emphasis on less direct intervention and a greater reliance on market forces. The support for marketplace-based ideologies has facilitated a shift in power away from citizens to corporate groups. Saul (1997) suggests that while money and economics is a cenfral element to political life, the largest and most able interest groups will hamess money for their own ends. He argues that the need in govemment is not for reform, but for a change in dynamics.
The acceptance of corporatism causes us to deny and undermine the legitimacy of the individual as a citizen in a democracy. The result of such a denial is a growing imbalance which leads to our adoration of self-interest and our denial of the public good (Saul 1997, p. 2).
This view does not accord with a philosophy that sees govemment as a 'steerer and not a rower'. Economics has taken precedence over commimify-based tmst with the auditor acting as a tmst surrogate. The reforms that continue to be ttansported from the private to the public sector have a financial and managerialist orientation. This
places an increasing reliance on the auditing function and the exercising of tmst in notions of managerialist control, even though the concepts of audit and management in both a private and public sector context are as subjective and ill-defined as the (now distmsted) skills of the public service professionals (Guthrie and Humphrey 1996, p. 297).
The role of audit becomes more significant when the chain of accountabilify in govemment is obscured by confracted intermediaries who have accountability obligations that are less diverse than those appHcable to public servants. There is little probabilify that this frend will change as reforms continue to make the public sector increasingly competitive.
The need for an effective audit function to ensure that the fraditional and new diverse forms of accountabilify are discharged, places the spotiight on how well the audit function achieves its intended role. Audit qualify has a significant impact on audit effectiveness. The importance of audit qualify will be the subject of the following chapter. 108
CHAPTER FOUR
AUDIT QUALITY AND ECONOMIC IMPERATIVES
4.1 Introduction
The role of auditing has been discussed in the context of accountabilify and bust relationships. As the envfronment of business has become more complex the need for auditors to act as a tmst re-enforcement mechanism has become more significant. By ensuring that the established currencies of accountabilify are being adhered to, auditors provide credibilify to financial reports. The intended role of auditing as an agent of accountabilify can be viewed from a macro and micro viewpoint. The macro perspective is concemed with role effectiveness in relation to the socially constincted fimction of audit. The micro perspective relates to the technical processes of auditing as evidenced by the standards and practices which serve to provide confidence about audit inputs. Qualify processes do not necessarily ensure a qualify audit function. Inputs may be prescribed up to a certain point, however the exercise of skill and judgement in conjunction with independence criteria all act together to provide an effective audit function. An effective audit fimction encompasses both the macro and micro aspects of auditing. Faith in both the process and outcomes of auditing are necessary to ensure that the intended role of auditing (AUS 104) in society is achieved.
In both the private and govemment sectors, audit qualify is dependent upon how well the needs of society are met. The absence of the abilify of users of audit reports to directly observe or assess the audit process means that expectations, derived from the role society has ascribed to the audit fimction, provide the primary means for audit assessment. Audit qualify is thus dependent on how well the fimction of auditing is fulfilled. Harris and Reynolds (1993) consider that the expectations of sociefy
Hatherley (1997) has referred to four drivers of audit quality in a commercial environment: litigation, regulation and monitoring, customer demand and a professional ethos. While these drivers are viewed as being important to audit quality, the motives of profitability and resource allocation efficiencies as the predominant forces behind the identified drivers receive little recognition. 109 should form a primary ethical motivation for auditors in recognition of the exclusive societal privilege granted to the profession. This privilege creates a "social responsibilify for observing ethical standards of performance and conduct" (Harris and Reynolds 1993, p. 108). They have also stated that auditors should consider first the interests of those receiving information rather than those generating information, as this best protects the integrity of the data flow. These priorities are considered to be ideals for ethical audit behaviour, providing support for 'the meeting of customer's expectations' as a plausible definition for audit qualify. Flint (1988), in his book Philosophy and Principles of Auditing, has suggested that the role of auditors in society is ultimately resolved by social consensus. The audit function is clearly socially, culturally and politically dependent. Flint (1988, p. 17) states that
(a)udit is a social control mechanism for securing accountability. The onus is on auditors and audit policy-makers constantiy to seek to find out what is the societal need and expectation for independent audit and to endeavour to fulfil that need.
Society's expectations of auditing are that the audit process enhances the credibility of financial reporting by reinforcing accountability relationships. Flint emphasises the macro effectiveness of the audit fimction ahead of any particular interest groups.
Auditors who see the corporation or company and its members as their only 'client' and resist moves to recognise other representative bodies ... understand neither the nature of the concept of accountability nor the social function of the audit (Flint 1988, p. 16).
Any attempt to define quality requfres an appreciation that altemative definitions are appropriate to specific contexts. There is also a frade-off inherent in selecting one definition over another. "Determining who can and/or should judge or evaluate quality is a key factor in any research investigation" (Reeves and Bednar 1994, p. 440). While there is a vast body of literature devoted to the problematic status and definition of quality, a detailed analysis of the specific issues involved m the determination of a definition for 'qualify' is not relevant to this thesis. However, a selective review of certain aspects of the discourse on qualify will highlight the elusiveness and difficulfy of determining qualify assessment criteria m a service environment. no
The Ausfralian Concise Oxford Dictionary (1997) offers a variefy of definitions for 'quality'. Qualify may refer to "a characteristic or frait" as a component of a broader concept, or to "the degree of exceUence of a thfrig" referruig to how weU something serves its purpose. Reeves and Bednar (1994) provide four definitions of qualify that offer a way of assessing the basis for defming qualify in a general sense. The definitions to be discussed in turn are:
> quality as conformance with specifications > qualify as meeting customer's expectations > qualify as excellence > qualify as a value
Each of the definitions given by Reeves and Bednar has implications for accounting and auditing with historical developments contributing to the current perceptions of qualify. Auditing in the private sector has a multitude of users which necessitates a broad, generalised approach to the provision of audit services. The audit process is often beyond the understanding of individual shareholders (which arguably are the most significant group of users of audit information), while the group of investors who truly understand annual reports, such as banks and institutional investors with access to financial analysts, rarely depend on the audited annual financial reports (Merrill Lynch 1998). Users of financial reports are not restricted to investors. Other classes of users identified in Objective of General Purpose Financial Reporting - Statement of Accounting Concepts 2 (SAC 2) as the major users of financial reports are resource providers, recipients of goods and services and parties performing a review or oversight fimction. The latter of these users safeguards the interests of the broader community with auditors providing the important link between the preparers of financial reports and users. Given that the specific needs of financial statement users are not usually known, auditors provide assurance that financial reports have been prepared in accordance with criteria designed to meet general needs. The pressures on auditors to fiilfil the expectations of interested parties are ever greater (Hopwood 1998). It is expected that private sector auditors can be sued for deficient work, be replaced by more economical service providers and must compete for business. In confrast, the govemment audit function has fraditionally served the specific needs of parliament in an environment removed from market orientated considerations. Therefore, with govemment financial statements there is one primary Ill user for whom the particular qualify needs are more easily identified. With govemment departinents throughout state and federal jurisdictions in Ausfralia having no ability to choose between altemative suppHers of audit services, factors such as provider reputation and audit cost have no significance in public sector auditing. Hi addition, if audit quality deficiencies (however defined) are identified, the auditee is not in a position to sue the provider. Audit literature has suggested that the threat of litigation acts as a quality confrol surrogate by encouraging conduct that meets community standards (Munroe and WoodHff 1994; Munroe and Hatherley 1993). The absence of this form of control in the govemment sector, together with the lack of provider choice, makes the environment for pubHc sector auditing very different from private industry. Therefore, the factors that constitute a quality audit in govemment will be perceived differently from the private sector. However, these differences are becoming less distinctive in the face of continued public sector reforms that promote a competitive regime.
This chapter will review altemative definitions of quality that have relevance to audit before considering the changes that have been progressively infroduced to audit practice as a consequence of economic pressures and the effects of those changes on audit quality in the public sector. The similarities and differences that exist at the macro and micro level between the public and private audit sector fimction will be examined in relation to the incursion of private sector technical processes into govemment practice. Evidence is presented that this incursion has served to standardise audit practice without regard for the differences in the intended roles of auditing in the two sectors. Discussion of public sector auditing will be mainly that of the Commonwealth. The practice of public sector auditing in Victoria will be the subject of chapter seven.
4.2 Quality as Conformance with Specifications
A 'conformance with specifications' view of quality can be illusfrated by reference to early initiatives to promote standardisation in the Springfield and Harper's Ferry armouries in the Uiuted States during the middle of the nineteenth century (Hoskin and Macve 1994; Tyson 1993; FunneH 1997c). The need for reHable armaments in large quantities meant that design and output of manufacturing processes needed to 112 be carefully planned to ensure that all work was consistently accurate. Quality improvements were engineered by ensuring that parts conformed to specifications in a way that allowed for mass production. This form of precision requfred objective measurement and standardisation of all components so that tooling could be designed to ensure interchangeabilify of parts. Tight specifications allowed for deviations from the standard to be identified as poor quality and allowed for comparison of qualities across time periods to see if the qualities of output were maintained. The relevance of this definition of qualify to services applies where it is perceived that objective measures of performance can be determined.
The contributions of qualify to manufacturing are also evident in the definition given to qualify in the Oxford dictionary. Quality confrol is defined/described as "a system of maintaining standards in manufactured products by testing a sample of the output against the specification" (The Australian Concise Oxford Dictionary 1997, p. 1101). Although auditing is not product orientated, there are processes used in auditing that can be associated with 'testing a sample of output against the specification'. Ausfralian Auditing Standard AUS 402 Risk Assessments and Internal Control, paragraphs 39-45, specifically calls for evaluation and testing of intemal confrols to ensure that documented confrols operate effectively. AUS 512 Analytical Procedures provides details on the manner in which sampling techniques can be used to determine the quantity and type of items to be tested. Hi conjunction with these detailed procedures, is a requirement that the financial information be checked for compliance with Ausfralian Accounting Standards, Corporation Law and stock exchange listing requirements where relevant. This substantiation of compliance is concemed with 'what auditing does' (as a quality confrol agent for financial reporting) rather than 'how well the function is carried out' (whether the auditor's fimction of quality confroller was effectively executed).
The mles and regulations that apply to accounting and auditing are designed to promote consistent practice for purposes of maintaining public confidence in financial reports. Accounting standards reflect the coUective design specifications of the accounting profession. Where financial reports are deemed to be misleadfrig or of poor qualify, the cause will be due to non-compliance with reporting criteria or design shortcomings. The role of audit, according to audit providers, is to verify 113 compliance with the mles of auditing, accounting and other statutory provisions (AUS 702, paragraphs 21-23). Public expectations of the role of auditing are more broadly conceived, with continued criticism of auditors where audited financial reports which conform to reporting standards are found to be misleading. The prevalence of legal action against auditors in cases where management have clearly not conformed with the spirit of reporting criteria provides evidence of the inabilify of audit report users to separate management responsibilities from audit responsibilities. Users generally have expectations in excess of audit services provided. This has been referred to the 'expectations gap' (Humphrey et al 1993; ASCPA and ICA 1994). The consequences of not meeting user expectations has been vividly demonsfrated with the demise of the accounting firm Arthur Andersen, after evidence of deficient audit practices came to light in relation to the collapse of numerous, high profile corporate clients in between 1999 and 2002.
Hi Juran's first edition of Quality Control Handbook (1951) he separated qualify into two components, the qualify of design and the quality of conformance. Both are considered to be essential to any assessment of qualify. The design or standardisation elements of accounting and auditing will be first discussed, followed by issues related to conformance with those standards.
4.2.1 Specification and Standardisation
Services are difficult to standardise. As a service, audit qualify involves absfract concepts not measurable in a clear and unambiguous sense. It is a labour intensive process where the outputs are a function of people and assessment of that output is specific to each audit engagement. No two accounting systems, confrol environments, risk profiles or employee resource bases are the same with contextual differences impacting upon resuHs and the modes of audit delivery. The diverse users of private sector audit outcomes can have no specific knowledge of the mputs used by the service provider. The application of expert judgement involves a personal perception of actions considered appropriate to the provision of a service. Certam
^ This thesis was substantially completed by the time these recent events occuned. Reference is made to the recent corporate collapses only where they provide examples of particular consequences of deficient audit behaviour. 114
aspects of audit qualify (those that involve decision making) are subjective without defined parameters to provide an indication of what could be considered an acceptable standard of service provision. Levitt (1972, as quoted ui Reeves and Bednar 1994, pp.427-8) suggests that subjectivify in service provision should be replaced with objectivify so that qualify may be enhanced. According to Levitt
(t)o improve the quality and efficiency of service, companies must apply the kind of technocratic thinking which in other fields has replaced the high cost and erratic elegance of the artisan with the low-cost predictable munificence of the manufacturer.
Levitt proposed that the essence of quality was consistency. He also considered that "discretion is the enemy of order, standardisation, and quality" (1972, as quoted in Reeves and Bednar 1994, p. 428). While this proposition did not gain popular support during the 1970's, it is possible to identify this concept in responses by the auditing profession to economic pressures and expectation gap criticisms in more recent times. As the auditing profession has been exposed to claims for negligence, the need to have some form of benchmark against which audit conduct could be measured became necessary to maintain public confidence in the audit fimction. Chandler (1997, p. 63) has claimed that during the late nineteenth century "only when professional procedures received judicial condemnation or commendation did a stmcture for acceptable auditing practices begm to take shape". English case law has provided precedents for Ausfralian developments as audit procedures have became more detailed, reflecting the changes in user expectations of the audit function.^ Chandler also suggests that the circumstances in England during the late 1800's indicated a crisis of confidence in the audit profession very similar to that of today. Clarke et al (1997) agreed that there was a crisis of confidence in the late 1990's which has been heightened with the corporate collapses of 2002. Clarke et al (1997) have observed that "(p)ublic complaint, criticism and questioning of the role of accountants and auditors were features of the highly publicised bankruptcies and Hquidations in the 1980's and 1990's" (Clarke et al 1997, p.l 1) in AusfraHa. Entities
The most notable of court cases were the London and General Bank case of 1895, the Kingston Cotton Mill case of 1896 and Pacific Acceptance Coip Ltd case of 1970. These cases provided recognition for auditors as professionals and established that auditors owed a duty of care in accordance wdth the standards a reasonably competent and well-informed member of the profession would exercise. The implied standard of a 'reasonable professional' then generated expectations that there was an accepted host of procedures a reasonable auditor would normally undertake during the conduct of an audit. 115 such as the Bond Corporation, Quintex, Tricontinental, Farrow Finance Group, National Safety Council, State Bank of South Australia, HIH, OneTel and others, had in many cases received an unqualified auditor's report not long before failure. Consequently, the loss of public confidence in the providers of financial report credibility has put the effectiveness of the audit role in the spotlight.
The incidence of lawsuits has inspired the profession to react by infroducmg more 'black letter' mles and regulations to promote higher standards of audit conduct and to formulate performance standards. The introduction of such standardisation acts as a two-edged sword. The removal of the mystique of auditing has implications for the professional standing of auditing while at the same time the perceptions of audit quality can be enhanced by appealing to accepted tools of frade. An auditor becomes an expert not merely by virtue of technical prowess that can be duplicated by others, but also in terms of the authority and legitimacy of professional judgement within which audit technology is embedded (Power 1992). The credibility of the jurisdiction can be demonstrated by reference to a 'reasonable auditor's' actions, against which conduct can be compared. Lee (1993) argues that accountants and auditors have reluctantly accepted the need for a generalised set of accounting principles and standards. This position is a consequence of having a professional monopoly where the incentive to maintain the status quo supports a continued position of dominance in the market. However, the need to demonsfrate publicly the existence of a credible basis for the provision of services has been addressed in a partial sense by mles that are sufficientiy vague and ambiguous to pacify critics without 'giving too much away'. In this way auditors continue to retain their status as artisans, with expertise still required to navigate between altematives.
Terrier (in Sherer and Turley 1991, p. 107) claims that professional regulation of auditing can be said to fulfil at least seven roles.
1. It ensures consistent high quality audit practice. 2. It promotes development and improvement in audit practice. 3. It aids users in understanding and interpreting the audit process. 4. It introduces cohesion and regularity to the audit process. 5. It discourages state regulation of the profession. 6. It assists auditors in negotiations with clients. 116
7. It enhances the public image of the profession.
The first four of these claims operate at the micro level and are concemed with the audit process. They provide parameters within which auditors can operate to create consistency and uniformify of practice. The last three are macro in nature and could be considered manoeuvres to maintain the status of auditors as professionals. Gushing and Loebbecke (1986, p. 41) view stmctured audit methodologies as a response to greater risks resulting from litigation, competition, the complexities of business environments and advances in technology. Stmctures are thus a response to extemal factors and have the effect of enhancing an accounting firm's qualify confrol over audits. This reduces the risk of audit failures, at the same time providing documentation that the accounting firm has conformed to generally accepted audit standards and hence is not negligent. This viewpoint equates to the Weberian notion of bounded rationality. The attempt by the auditing profession to develop accountabilify through the means of rules and regulations is a form of deliberative rationalisation.
In Ausfralia the regulation of the accounting profession is the joint responsibilify of the Institute of Chartered Accountants in Ausfralia (ICAA) and CPA Ausfralia. The profession, through the Ausfralian Accounting Research Foundation (AARF), is responsible for developing accounting and auditing standards. One of the stated objectives of AARF is to "improve the qualify of financial reporting and auditing in Ausfralia" (AARF web site July 29, 1999) through boards established under its confrol. Under the AARF umbrella is the Ausfralian Accounting Standards Board (AASB) that has the power to make accounting standards for the purposes of Corporations Law (subsection 334(1)). The AASB and the Public Sector Accounting Standards Board (PSASB) have joint responsibilify for ensuring that financial reports for all entities are prepared on a consistent basis. The Auditing Standards Board (AuSB) has responsibilify for setting standards that are regarded as "principles and procedures that underlie sound professional practice with respect to audit" (para. 24 AUS 106). The standards "are intended to apply to all audits in the private and public sector conducted by extemal auditors" (para. 43 AUS 102). Thus, the two boards act separately (the AASB deals with accountmg issues and the AuSB deals with auditmg issues) to develop mles and regulations that are viewed as generic for both sectors. 117
Francis (1994), Power (1994, 1995) and Hatheriey (1997) have all been critical of greater regulation in the processes of accounting. They each draw attention to the differences between the micro processes and the macro objectives of auditing by highlighting the consequences of a preoccupation of one over the other. Power (1995) regards regulation as symbolic to give order and rationalify to practice as a form of legitimisation technique. The need to legitimise conduct is based on vested interests rather than pure motives of improving audit qualify in response to extemal expectations. From a different perspective Power (1996) and Francis (1994) have been critical of the developments that give greater stmcture to auditing. Francis (1994, p. 236) considers that "good auditing is problematical due to the emergence of scientism and technocratic rationalify in audit practices". Examples of rational, objective audit techniques include statistical sampling applied to test procedures, risk assessments based on probabilities and materiality criteria. These procedures rely on arriving at a number that will then justify a particular view of the adequacy of evidence obtained.
The increasing need to justify audit processes by developing audit standards and limiting the use of subjective audit judgement has come at the expense of the interests which auditing serves. Power views mles as having the character of constituting auditing "best practice" which acts as a form of extemal legitimacy by being credible to the judiciary at times of litigation. "Particular procedures and techniques come to be accepted as constituting reliable knowledge" (Power 1996, p. 294). Hi this way attention is directed to auditing procedures rather than the underlying substance of the role of auditing as a risk mitigation agent in society (Humphrey and Mozier 1990). This viewpoint implies that procedures and standards can also be interpreted as serving to reduce rather than improve perceptions of audit qualify. By concenfrating on techniques, any perceived shortfalls in the achievement of the macro role of auditing in society can be removed from the spotHght.
According to Hatherley (1997), audit quality is significantiy frifluenced by the prevailing confrol and accountabilify relationships. Where relations are long distance, low tmst, quantitative and disciplinary, as in the case of shareholders and company directors, the demand for audit and auditors is established. Where relations are local, high tmst, qualitative and interactive, the need for tmst reinforcement mechanisms are less sfrong (Power 1994). Hatherley suggests that corporations generate a remote 118
low ti^st environment because auditing crises cannot be resolved through mteraction between the polarised positions of shareholders and dfrectors. The self-interested actions of directors combined with the need for auditors to appease management to ensure their fiiture employment, places auditors m a vulnerable position. As a means of ensuring that the auditors are fiilfiUing their role, the actions of auditors (the tmst reinforcement agents) become more regulated to satisfy the demands of the shareholders. Greater regulation provides more opportunities for litigation as the parameters for auditing become more specified, less judgemental and compliance driven. "It is argued that any over reliance on regulatory processes will subvert the audit product from being a professional judgement for the shareholders and stakeholders into being a compliance statement for the regulator" (Hatheriey 1997, p. 1).
Standardisation of audit practice can also be influenced by the way in which audit firms conduct fraining and professional development. The reputations of the 'big four' accounting firms are stmctured upon perceptions of excellence with a belief that professional standards are consistently applied by all employees. The fact that the modem practice of auditing involves practitioners in organisations that are bureaucratically stmctured provides scope for the qualify of service provision to be defined in relation to organisational ranking. Reputable firms generally provide staff with a stmctured environment with formal mles and procedures for professional conduct and development. While this type of environment ensures the firm's ethos is followed, it is not a fransparent process that can be externally observed. The abilify to evaluate services is difficult for those not actually involved in the transaction. Varying degrees of power and different role expectations of the 'big four' auditing firms are perpetuated by the dominance and representation of the 'big four' on standard setting committees and as a voice in the determination of industry practice. Staff fraining in highly regarded organisations is a socialisation process that serves to generate a uniform approach to service provision within defined firm specific parameters. An empirical study by Malone and Roberts (1996) suggests that the incidence of 'reduced audit qualify behaviours' is inversely related to the perceived sfrength of a firm's qualify confrol and review procedures. Reputable firms thus have a sfrong incentive to ensure that deficient audit work will be detected and punished. The ability for individuals to exercise initiative is thus curtailed with firm-specific 119 mles and regulations (in addition to professional prescriptions) also acting as a standardisation element. This view is also supported by Carpenter et al (1994, p. 364) who have evaluated the effects of audit firm culture on decision making. They concluded that in highly stmctured firms "individual decision makers are incapable of'optimising' behaviour and instead seek to make 'satisfactory' decisions".
Govemment reforms of the last three decades have seen commercial accounting and auditing standards become an increasingly greater part of public sector management practices. The most significant migration of commercially orientated tools of calculation into the public sector has been the adoption of accmal accounting in June 1995 by the Commonwealth Govemment followed by 'whole of govemment reporting' in 1999. Financial reporting was previously based on cash accounting procedures that were less susceptible to manipulation, although like aU forms of accounts cash accounting was not without defects. Cash accounting required no need to estimate future obligations or provisions with reporting designed only to provide evidence of the receipt and disbursements of public monies as sanctioned by pariiament.'' With the advent of accmal accounting procedures that incorporate subjective assessments, the public domain has become exposed to the same criticisms that apply to private sector auditing and accoimting practices. The adoption of market orientated outcomes for financial reporting in non-market entities has also created unique subjective issues. For example, where market comparatives are not available to assist with valuation estimates for infrastincture assets, the reliabilify of the values used are doubtful.
In addition to prescribed mles of public sector accounting, there are also specific govemment mles and regulations that enforce Constitutional Law and provide support for accountability relationships that are peculiar to govemment. Standards for performance and conduct arising from accountabilify relationships may come from financial, management, ethical, political, electoral and communify obligations. These accountabilify obligations arise from both formal, prescribed regulation and community expectations of those who act as agents on behalf of the public. As
"" There were some accmals included in the accounting reports but these did not constitute a major component of reporting practice. 120 communify expectations of govemance have evolved the development of performance information to enable assessment of public servants, programs and resource usage have also been developed. Performance information may be quantitative or qualitative. It is only with qualitative mformation, as noted m MAB/MIAC (1993) Performance Information and the Management Cycle, that in many situations (particularly in the areas of social welfare) that objectives and sfrategies can be directiy linked, and the impacts demonsfrated. Standards are often difficult to establish and have at times been 'manufactured' as a surrogate for performance in the absence of clear indicators (Chua 1995). Decisions made using performance indicators provide an additional source of information for evaluation that, it may be argued, improves information qualify giving an 'air of objectivify' to legitimise the decision process. However, the subjective determination of performance measures may limit the usefulness of the decisions that have relied upon the questionable measures.
4.2.2 Conformance/Compliance
As noted above, the underlying objective of GPFR is to provide information usefiil for decision making by those not able to command special purpose reports. In recognition of these diverse needs, compliance with generally accepted accounting procedures (GAAP) acts as a standardisation mechanism. Briloff (1981), Parker et al (1996), Clarke et al (1997) and others have challenged this view by suggesting that the myriad of accounting procedures available allow management to select between altemative freatinents which serve to make financial reports less standardised. Financial reports have many accepted accounting freatments and principles that can generate a variety of results within an existing enterprise. Different methods of stock valuation, altemative depreciation methods, the principle of historical cost accounting, tax effect accounting and principles of consolidation to name a few, are all legitimate tools of accounting.^ The 'creative' accounting options can serve to reduce comparabilify of information between organisations. Sophisticated users of financial reports have worked around this comparabilify issue by adjusting reported data for accounting misrepresentations to produce recommendations for their client
^ The collapse of WoridCom in the USA showed that expenses were intentionally classified as capitalised assets. This was clearly inappropriate and could not be regarded as creative accounting. 121
(Merrill Lynch Advisory Services Guide 1998). Other report users do not have the abilify to make such adjustinents and must rely on the reports to be accurate and reliable. The variety of outcomes attainable make it difficult to envisage a standardised generic product which users are able to find informative for decision making in support of resource allocation efficiency. Clarke et al (1997, p. 258) have concluded that
(n)o evidence has been produced by the professional bodies or the corporate regulators to support the idea that the quality of accounting data and reporting can be guaranteed through compelling compliance with prescribed practices.
Hi the private sector much discussion has been devoted to whether the role of audit is limited to ensuring conformity with generally accepted accounting procedures or a broader approach incorporating concepts of faimess. In the United States' Continental Vending case (US vs Simon 425 F 2d 1969), accountants were held to have a responsibility that is not limited to GAAP (Abbott 1994). There is an expectation that the spirit, rather than the letter of accounting standards is complied with where there are any doubts about the application of an accounting standard (Gul et al 1995 and Gill and Cosserat 1996). Auditors are required to verify that financial reports are 'fairly' presented in accordance with established criteria that includes "(a) Accounting Standards and UIG Consensus Views^; and (b) when appropriate, relevant statutory (primarily Corporations Law) and other requirements "(AUS 702 p. 21). Unfortunately, the ambiguity and lack of clarity in the definition of many components of standards contribute to the divergent expectations between auditors and users of financial reports.
Conformity with the criteria of 'relevance' in Statement of Accounting Concepts 3 - Qualitative Characteristics of Financial Information (SAC 3), provides audit critics with ammunition to criticise the audit fimction when financial reports are not able to "assist them in making predictions about fiiture situations and in forming expectations" (paragraph 8). Audit outcomes confirm that appropriate accountuig standards have been complied with, thereby implying that the qualitative characteristics of relevance and reliabilify (SAC 3 paragraphs 8 and 16) have been
The Urgent Issues Group of the AASB was established to provide a more timely response to immediate accoimting problems where the slow standards setting process often did not allow a solution to be determined for a number of years. 122 met. Users of financial reports may consider that audited financial reports have been verified as 'correct' rather than, as auditors believe, that financial reports have been prepared in accordance with relevant mles and regulations. The difference in perceptions arise, according to Lee (1993), as a consequence of the use of terms such as 'presents fairly' (the wording used in audit reports) and 'tme and fafr' (the overriding provision for financial reports in Corporations Law sections 331A-F) as undefined 'qualify labels'. Qualify labels have a historical significance originating in legal contexts as part of contractual relations (Chambers and Wolnizer 1991). From these uses, labels such as 'tme', 'fair' and 'correct' have been franslated into corporate accountabilify discourse. The meaning attached to such terms is dependent on the context in which they are used. In auditing, 'fair' and 'presents fafrly' are used in the context of conformance with prescribed criteria. The implied accuracy ascribed to these terms in common parlance is not the intended meaning in the context of audit. Directors and auditors alike have an obligation to ensure that the economic substance of an entity is evidenced by the representation depicted in financial reports. The ethos of tme and fair appears to have been subsumed by a compliance ethic with the underlying assumption that compliance with mles and regulations guarantee accurate and reliable information. This criticism of departures from accepted qualify labels is more relevant to the accounting standard setting process (the design features of financial reports) rather than the fimction served by auditors in their tmst reinforcement role.
Issues of compliance are also relevant to the processes upon which audit services depend. The input techniques for auditing have been codified mto Australian Auditing Standards and Auditing Guidance Statements. Documentation of adherence to established audit procedures provides evidence that these were used to support an audit opinion. Conformance with standards implies provision of a qualify audit with respect to processes. However, specifications in audit guidance statements extend past procedures to attitudes where compliance cannot be readily ascertamed. For example, independence of the auditor in 'fact' can be illusfrated by the absence of any financial interests of the auditor in the affafrs of the auditee whereas independence 'in appearance' is related to attitudes that cannot be readfly discemed. Therefore, compliance with specifications, in isolation, is an incomplete notion forming only part of the factors that contribute to the provision of qualify audit services. The 123 specification of any form of standards or guidance for behaviour is consfrained by the interpretation of what a standard measure implies. CPA Ausfralia has highlighted this problem in their Code of Professional Conduct, section Al, by stipulating that "(t)he Code sets out minimum appropriate requirements". The idea that attainment of standards is evidence of sufficient and appropriate service provision is supported by the following paragraph from AUS 106 Explanatory Framework for Standards on Audit and Audit Related Services:
Auditing pronouncements identify those principles and procedures that underlie sound professional practice with respect to audit ... Because users of an audit report are entitled to a uniform quality in relation to the work performed ... on any accountability matter ... (auditors) are required to comply with Auditing Standards (para. 24).
The question of whether the standards prescribe a 'sufficient' or a 'quality' (something above average) attitude to service provision continues to be the subject of debate (see Willekens et al 1996). The mere existence of standards acts as a benchmark but little more. Audit quality can have generic elements common to each engagement however, the specifics of each audit will dictate the depth and breadth of processes which are relevant and contribute to the overall quality of auditing in each case.
The role of audit in the private sector has been discussed in relation to issues of quality from the viewpoint of specification of function and practice. Compliance in the commercial sector ensures a generic approach to the audit of financial reports for issues specified in standards and guidance statements. This generic approach is designed to meet the needs of a multitude of users. Hi confrast, compliance in public sector audit is concemed with the constitutional role of audit to provide information that safeguards parliamentary sovereignty in sanctioning receipts and expenditure of public monies. The user is specific, with accountability obligations for financial reporting being clearly specified within the audit mandate. The Commonwealth Auditor-General Act 1997, for example, in Division 1 sections 11-13, states that the auditor-generals should ensure that annual financial statements of govemment agencies, authorities and subsidiaries present a time and fair view of the operations in accordance with the Commonwealth Authorities and Companies Act 1997. However, the public sector audit function is not limited to financial reporting. The auditor- general also has responsibilify for ensuring that the methods used to arrive at 124
financial outcomes in all govemment bodies support the public sector ethos of economy and efficiency in the public interest.^ This could be viewed as assessment of intemal confrols for which commercial sector auditors also carry certain responsibilities. The difference between the obligation to review intemal confrol by each sector lies in the objective behind the review process.
In the private sector intemal confrols are reviewed with the objective of ascertaming whether the processes of accounting have the appropriate confrols to ensure that financial results generated are reliable (AUS 402, Risk Assessment and Internal Controls). Corporate management is responsible for determining its own agenda with any policies concerning economy and efficiency not being part of the extemal audit responsibilify. Report users thus have assurances about the reliabilify of information provided, without any knowledge of resource allocation objectives or the economy with which they were achieved. This point is clearly made in AUS 202, Objective and General Principles Governing an Audit of a Financial Report.
Although the auditor's opinion enhances the credibility of the financial report, the user cannot assume that the opinion is an assurance as to the fiiture viability of the entity nor the efficiency or effectiveness with which management has conducted the affairs of the entity (para. .03 AUS 202).
One of the tenets of neo-classical economics is that market forces will ensure efficient resource allocation. For private sector auditing, economic theory applies only to the pricing of audit services in a competitive field of providers with little relevance to the fimction that audit serves in society.
To the extent that the processes of audit comply with procedural auditing standards, a compliance orientation may be said to exist. In govemment, although the auditor- general must also abide by accounting and auditing standards, the mandate is not limited to compliance. There is an overriding concem for the judicious use of public fimds, as part of a diverse mix of accountabilify relationships. The Ausfralian
^ The auditor-general may only conduct a performance audit of a govemment business enterprise or a wholly owned Commonwealth company at the invitation of the responsible minister (Commonwealth Auditor-General Act 1997, section 17). The absence of responsibility by private sector auditors for resource efficiency is a factor contributing to the 'expectations gap'. Users expect that auditors make efficiency assessments whereas auditors do not see that their role extends to making subjective judgments outside a predominantly compliance review process. 125
National Audit Office has responsibilify for financial compHance and also performance auditmg (Auditor-General Act 1997, s. 15-19). Performance auditing has been described as:
an independent, objective and systematic examination of the operations of a Commonwealth entity for the purposes of forming an opinion on whether; > the operations have been managed in an economical, efficient and effective manner; > the intemal procedures for promoting and monitoring economy efficiency and effectiveness are adequate; and > improvements which might be made to management practices (including procedures for promoting and monitoring performance) (ANAO 1998, p.56).
Performance auditing reviews the methods of policy attainment and has no mandate to comment upon or review govemment (management) policies (Explanatory Memoranda by the Department of Finance for Audit Act 1901 Replacement Legislation - website March 1999). Performance reviews are part of the reform measures infroduced to assist with assessments of economy and efficiency. Thus, it is evident responsibility for intemal confrol has a different meaning in the public and private sectors. Private sector financial reports have been criticised for not being usefiil for decision making, because the focus is on process and not outcomes. In confrast, the auditor-general has specific responsibility for both process (compliance) and outcomes (performance in meeting the objectives of policy decisions made by parliament). Pat Barrett (1997a, p. 21), Auditor-General of AusfraHa, stated that "we should never lose sight of the means of achieving the outcomes which need to consider among other things, social and equity issues. In this case we must be wary of the ends justifying the means".
Aiken and McCrae (1995) have suggested that specific provisions of SAC 2, Objectives of General Purpose Financial Reporting, should be reversed when considering the constitutional role of public sector auditing.
Paragraph 26 ... the objective of general purpose fmancial reporting is to provide information to users that is useful for making and evaluating decisions about the allocation of scarce resources.
Paragraph 27 When general purpose financial statements meet this objective they will also be the means by which managements and goveming bodies discharge their accountability to the users of the reports. 126
Hi govemment only when all accountabilities have been effectively discharged is financial information usefiil for decision making. This would suggest that paragraph 27 should logically come before paragraph 26. CompHance in a public sector accountabiHfy regime is a basic underlying postulate with efficiency being a complimentary (necessary but not sufficient) condition to discharge accountabilify. It is difficult to envisage how managers in the private sector can be said to have discharged their accountabilify to a variefy of users groups without any assessments of firm-specific resource allocation. Therefore, compliance in private sector auditing is a very different concept from that which applies in govemment.
The drive for efficiency in the public sector has generated an emphasis on quantification of results to allow for assessments of people in their assigned roles. The need for outcomes to be verifiable has meant that surrogate performance indicators are often designed for outcomes which are qualitative in nature. The indicators are not conclusive. However, once constmcted, the arbifrary nature of the design of the surrogate indicators becomes an issue lost in the application of the outcomes as efficiency measures. The tendency to focus on a numeric target creates a danger that achievement of individual targets comes at the expense of overall performance. This is demonsfrated by reference to performance information used in the Department of Employment, Education, Training and Youth Affairs (DEETYA). The number of claims processed by each staff member or the speed of payment of accounts for unemployed youths has no direct relationship to the numbers of persons obtaining employment (ANAO 1997). Chua (1995), with reference to the case-mix funding models used in Ausfralian health care, also demonsfrated that experts could create a rationalised system of accounting numbers not because they assessed efficiency in a meaningful way, but because they were defined, consistent, and there was no practical altemative. The public sector has increasingly become accountable for performance data with achievement of numeric targets viewed as a positive indicator of process efficiency. The link between performance targets and efficiency is vague at best, with ethical and citizen welfare accountabilities being subordinated to financial and management accountabilities.
In both sectors conformify with specifications has generated considerable changes to audit practice. The changes have served to provide more stmcture and consistency, 127 enabling assessment of individual audit providers agauist accepted practice. However, the audit fimction is a combmation of procedures capable of being stiiictured and judgements that are not capable of standardisation. Each audit assignment requires a unique assessment of intemal confrols and risk with auditor experience and fraining providing the basis for subjective decision making. To concenfrate on compliance alone is an incomplete notion of auditing which provides no guarantees of audit effectiveness or qualify.
4.3 Quality as Meeting Customers*Expectations
After its initial appearance in 1952, Juran's Quality Control Handbook had three further editions in 1962, 1974, and 1988. The 1974 edition first infroduced the concept of 'fitness for use' which Juran used to describe the extent to which a product (or service) successfully serves the purpose of the user. This concept introduced the notion that the user was the one who would judge or evaluate qualify in any context. Qualify is whatever the user perceives it to be. In the private sector financial reports have a diverse group of users. It is therefore not possible to meet the expectations of all users with audit outcomes necessarily catering to a generalised perception of their needs. The govemment sector audit fimction serves one specific user, parliament as the embodiment of the public interest, for which the expectations are more easily identified.
4.3.1 Private Sector A udit Expectations
The term 'expectations' carries a number of connotations that, although similar, have meanings that are not identical. In an audit context these may include a perception of what users regard as 'should be' the role of auditors, what users think 'will happen or realistically expect' of the provision of audit services and a concept of the 'ideal' type of audit service. Differences between services provided and public expectations of the audit fimction have for many years been referred to as an 'expectations gap'. The expectations gap can be defined as the difference between the profession's performance, its objectives and results, and that which the users of financial reports expect. It arises from a combination of excessive expectations and insufficient performance. There have been a number of studies concemed with the public 128 expectations of auditors and what the profession believes their responsibilities to be. For example. Porter (1993) in New Zealand, Monroe and WoodHff (1994) Ramsey (2001), in Ausfralia, Humphrey et al (1993) in the United Kfrigdom and, Arrington et al (1983) in the United States. When corporations fail or suffer loss through fraud or mismanagement, there is a tendency to blame the auditor for failure to wam report users of financial difficulties. This tendency indicates a perception that somehow auditors have failed to meet the objectives which sociefy expects of the audit function. A perception that has been given significant impetus with recent corporate collapses in the USA and Ausfralia. The existence of a variety of parties with differing interests in, and demands on, the audit fimction, combined with the probabilistic nature of audit assurance contribute to the existence of an expectations gap. Differences between ideals, standards and service provision are a product of the complex forces that have shaped business relations and changed tmst dynamics.
The existence of an 'expectations gap' was first addressed in the findings of the Commission on Auditor Responsibilities (known as the Cohen Commission after its chairman) in 1974 by the American Institute of Certified Public Accountants. The report made recommendations on the most appropriate responsibilities of auditors after growing public criticism of the quality of audit performance. Corporate scandals generated similar concems in other countries. In Canada, the Special Committee to Examine the Role of the Auditor (known as the Adams Committee after its chairman) handed down similar finding to the Cohen Commission in 1978. In the United Kingdom concem about the role and accountability of auditors were addressed by The Audit Practices Committee (APC) established by the profession as a joint disciplinary committee in 1976. In Australia many auditing standards and guidelines have been infroduced to provide a set of parameters within which the auditor's judgement could be exercised. The framework adopted by a joint working party between the ASCPA and ICAA in 1993 referred to as, "A Research Study on Financial Reporting and Auditing: Bridging the Expectations Gap", highlights the different aspects that can be attributed to the perception of an 'expectations gap'. The working party identified the factors that they believed represented the essence of 'the expectations gap' as follows:
1. User expectations (an ideal) 129
2. Reasonable standards (what they should realistically be) 3. Existing standards (what they are) 4. Service delivery gap (what was provided)
The working party produced thefr report in 1994 and a taskforce to report on the recommendations made by the working party responded m 1996. Schelluch and Green (1996) have stated that the timeHness of the Ausfralian response to an issue of great significance to the accounting profession and the broader community fell well short of comparable studies overseas. They were also critical of the report's preparers, as all were from the accounting profession. This lack of broader representation consequently resulted in issues being "selected because of thefr significance to the accounting profession, rather than for their impact on the other parties affected by the expectation gap" (ASPCA and ICAA 1994, p. 20). The AusfraHan study could thus be considered partisan with the expectations of all parties affected by financial reporting and auditing practice not being adequately represented.^
It has previously been suggested that the outcomes of litigation have served to highlight the existence of an 'expectation gap'. The accounting and auditing profession have 'reacted' to perceived performance failures because there was a financial incentive to do so. The social legitimacy of the audit profession is achieved by ensuring that sociefy continues to value the role of audit, despite the confiicting need to protect vested interests. The collapse of Arthur Andersen in 2001 is a graphic illusfration of the continued importance of maintaining social legitimacy. The 'expectation gap' is a socially constmcted perception of inadequacy in the conduct of auditors. It changes in accordance with sociefy's expectations and has temporal relevance. For example in the late nineteenth century Justice Sterling in the Leeds Estates, Building Investment Co. vs Sheppard (1885 36 Ch D: 787), held that auditors should not confine themselves to "verifying the arithmetic accuracy of the
The working party report did promote extensive debate within the accounting profession and in public seminars. Interested parties were encouraged to make submissions to present a broader perspective on expectations gap issues. Which issues were then subject to analysis were then confined to those "which can be practically adopted in Ausfralia and are consistent with intemational best practice" (ASCPA and ICA 1994, Executive Summary p.iii) in accordance with the view of members. 130 balance sheet, but to mquire into its substantial accuracy". Chandler (1997, p. 64), in his analysis of the role of auditors during the nineteenth century stated that,
(t)he views expressed by courts on the role and extent of the audit varied ... At first these views ranged from the purely nominal holding of the post of auditor through to the idea that financial information should be a correct summary of the accounting records to the ultimate notion that the audit should ensure the reported information reflected the underlying commercial facts and reality.
Reference has already been made to relevance and usefulness in relation to the requirements of SAC 3 and undefined quality labels such as 'tme' and 'presents fairly' in a context of conformify with standards. Wolnizer (1987) has argued that instead of 'presenting fairly' financial reports should provide information that is 'fit for the use intended'. By not ensuring that reported information is usefiil for decision making in a commercial context auditors effectively perpetuate the myth that audited accounts will provide a 'tme and fair' financial disclosure of the financial position and performance of a corporation. MacNeal (1939), Chambers (1979), Wolnizer (1987), Chambers and Wolnizer (1991) and Clarke et al (1997) have all been critical of accounting practice for the way in which it serves to misrepresent economic tmths that an accountant should be trying to reveal. Financial reports they argue are becoming further removed from the 'tmth' as preoccupation with mles takes precedence over the commercial reality which reports are 'expected' to represent.
The desire for auditing to verify a 'tme and fair' view has remained an expectation across the last century. Verifiabilify involves the abilify for qualified individuals to arrive at the same conclusions independentiy of each other from the examination of the same evidence. For financial statements, there is a presumption that compliance with the appropriate mles and regulations will leave a frail of evidence and procedures that can be verified by auditors. Despite thefr faithful attention to compliance issues, Wolnizer (1987) contends that auditors examine allocations and calculations without fiilfilling thefr role of verification. He views verification as a more robust concept than conformity with standards, requiring that evidence corresponds with the underiying facts in a commercial context. This notion of verifiabilify requires that the evidence used to prove the veracify of fransactions and balances be derived from sources independent from the preparers of financial reports. He argues that only when such evidence is available for aU balances in financial reports will they be reliable and meet the expectations of users. Auditors, accordingly 131 could be viewed as not enhancing the credibility of financial reports and, therefore, not fulfilling their function. Report balances are a product of management interpretation and estimation processes. To establish that management processes have complied with mles and regulations is not verification and certafrily not the means of providing a quality audit.
Audit expectations to this point have been discussed assuming a broad definition of auditing as an agent for tmst assurance in society. Many empirical studies (particularly in the United States) assign a dominant role to perceptions of audit quality to specific interests such as preparers of financial statements (Behn and Carcello 1997), shareholders as contributors of capital (Schroeder et al 1986, Carcello et al 1992) and to auditors (Sutton and Lampe 1990; Deis and Guiroux 1992). These (and other) studies are very specific in nature focusing on particular variables being tested. For example, Behn and Marcello (1997, p. 1) consider that in order to compete effectively in an environment where fee pressures are intense and growth is slow audit firms must strive to "exceed client expectations and maximise client satisfaction". This view of quality is then linked to a number of surrogates that will promote client (management) satisfaction and enhance the potential for client retention. Behind this analysis is the presumption of neo-classical economics that relegates the users of financial reports, for whom auditors act as agents, to a subservient role. The incentive for management to elevate their own interests above that of the owners, in accordance with agency theory, is also not considered. In most studies auditors are assumed to be professionals having all the requisite technical competence, independence and integrity to effectively complete audit engagements.
While these studies make important contributions to understanding the factors that contribute to audit quality, they are necessarily concemed with a subjective determinant of qualify from a specific viewpoint. In order to empirically test any particular perception of audit quality a surrogate is derived and all others aspects of qualify are ignored or assumed as given. As it is impracticable to include some groups^° in empirical studies, testing then focuses on a defined user group. Yet, audit
'" From the point of view of shareholders, the large 'sophisticated' institutional investors are generally well represented in surveys. However, the small individual shareholders, that are becoming statistically more significant in Australia, are not easily surveyed. The generalizability of any survey results to the whole population of users is thus questionable. 132 qualify is a complex issue involving inter-relationships between many factors which, in isolation, cannot represent the many viewpoints and vested mterests. This pomt was highlighted in a study by Carcello et al (1992, p. 9) that reviewed quality attributes from the point of view of audtt partners, preparers and sophisticated users. After concluding that differences in interpretations of audit quality exist, tiie authors posed the following question: "Are the findings of this study driven by differences in how auditors, preparers, and users evaluate the attributes of audit quality or by fundamentally different definitions of audit qualify that each group uses?" Given that this thesis is concemed with a broad view of public sector audit qualify as it serves the interests of society as a whole, the answer to both parts of the question is yes. The specific concems of preparers or the providers of audit services are considered to be a means to an end, that is, the provision of financial reports which users can have confidence in for the purposes of decision making. The contributions of specific audit qualify studies are acknowledged as small pieces of a much larger complex model.
Ultimately, for many extemal users of audit reports the 'expectations gap' is concemed with fraud detection. The role of auditors in Ausfralia with respect to the detection of fraud is documented in auditing standard AUS 210, Irregularities, Including Fraud, Other Illegal Acts and Errors. Even though the public places great importance on fraud detection, the audit profession regards fraud detection as being incidental to their normal audit work. A well-planned audit would have a reasonable expectation that material irregularities would be found (paragraph .02), without any need for specific effort to expose fraudulent activity. Nineteenth century case law identified obligations to investigate for fraud only if suspicion was aroused with auditors in their role as "a watchdog, but not a blood hound" [Re Kingston Cotton Mill Co. No 2, (1896) 2 Ch 279]. This view of audit by Lopes LJ was based on a belief that the auditor could not be expected to be responsible for the detection of fraudulent activify, particularly where collusion has occurred. However, public expectations concerning the role of auditors in the detection of fraud continues to be more onerous than that contained in AUS 210. Gay et al (1997, p. 51) admmistered a questionnaire to financial report users which concluded "(i)t appears that users may have 'unreasonable' expectations of auditors' responsibilities for the prevention of fraud and the detection of illegal acts, and that a 'deficient standards' gap may exist". 133
The joint ASCPA" and ICAA working parfy on 'Bridgmg the Expectations Gap' (1994) also regards user expectations with regard to fraud as being unreasonable with the cost of extensive additional audit procedures not befrig commensurate with the benefits users may derive from additional comfort. Rather than meetmg expectations, the approach taken has been to educate users as a means of reducmg unrealistic expectations. Attempts have been made to reduce expectations by makfrig financial report users aware that fraud is management's responsibilify and that auditing involves selective testing without guarantees about fraud detection (ASCPA and ICAA 1994). In the United States the education of users was not viewed as a successful way of dealing with the expectation gap. The American Institute of Certified Practicing Accountants (AICPA) chose a different route to the Ausfralian accounting bodies by promulgating Auditing Standard No. 82, Consideration of Fraud in a Financial Statement Audit This standard identifies over 40 risk factors that auditors must consider in planning and performing an audit (AICPA 1997). In conjunction with section 301 of the Private Securities Litigation Reform Act of 1995, Auditing Standard No. 82 suggests that "auditors are affirmatively obliged to search for and detect fraud - to be bloodhounds, not just watchdogs" (Zeune 1997). The new auditing standard represents a change in attitude by giving prominence up front to fraud detection in audit planning procedures rather than regarding fraud as incidental to the provision of audit services. The recent collapse of Enron in the USA and the experience of Arthur Andersen show the doubtful value of these measures.
With the role of audit now preoccupied with demonsfrating that conclusions are reasonable rather than correct, there is necessarily a shift in emphasis to procedures and away from how well audit achieves its role in sociefy. Where independent criteria to assess quality is not available, then how work is done assumes great importance (Power 1995). The status of auditors as experts is thus dependent in part on their task-specific competences in conjunction with aspects of audit judgement. Hi a landmark case, Justice Moffit noted that,
(r)easonable skill and care calls for changed standards to meet changed conditions or changed understanding of dangers and in this sense standards are more exacting
" ASCPA represents the Ausfralian Society of Certified Practicing Accountants and is the former tide of CPA Ausfralia. 134
today than in 1896 (Pacific Acceptance Corp Ltd v Forsyth (1970) 92 WN NSW 29 at 74).
The expectations associated with the role of auditors have changed in accordance with the technical competence and expertise that the profession is perceived to provide. This level of competence has increased substantially since the late 1900's, with continual changes to professional fraining, education and performance standards (Pound and Fensome 1993). Change has come as a result of communify pressure generally exercised through the courts. As the will of the people has evolved over time so have the factors that contribute to the expectations gap. For example, the codification of performance standards provided a means of addressing liabilities arising from negligent professional conduct. While this provided a partial solution to one aspect of an expectations gap, the rising incidence of corporate failures during the 1970's and 1980's directed attention to the limited usefiilness of audited financial reports for assessments of corporate health. The factors contributing to the expectations gap will differ as solutions are implemented with some aspects remaining unresolved and new concems emerging. Irrespective of possible solutions to reducing the expectations gap, the credibilify of auditors is closely aligned with factual and perceived independence.
Factual independence guidelines are generally concemed with economic vested interests that can be more easily determined than the maintenance of an independent attitude. Independence in appearance is concemed with the individual conduct of auditors as professionals from a behavioural perspective (see below). The professional statiis of members of the accounting and auditing profession carries certain responsibilities with respect to ethical behaviour. The ICAA's Royal Charter and the CPA Ausfralia's Memorandum of Association enable both bodies to prescribe standards of conduct and disciplinary procedures. The Joint Code of Professional Conduct SECTION B, applicable to all members of both accounting bodies, sets out 'Fundamental Principles of Professional Conduct'. These principles include integrity, objectivify, independence, confidentiality, technical and professional standards, competence and due care and ethical behaviour. While standards may be promoted for ethical conduct, ethical behaviour is essentially a state of mind that cannot readily be discemed. Dirsmith et al (1997, p. 20) have referred to this attempt to regulate behaviour as "the cool imagery of formal stmcture 135 and the warm imagery of human social processes". Both of these types of 'imagery' are necessary to the claimed expertise of auditing professionals. The appHcation of judgement by an ethical auditor would ensure that the appropriate mles and standards are applied to each audit engagement.
Institutional theory explores how organisational stmcture and action are moulded by political and social forces that surround entities. Actions are often symbolic and involve demonsfration of the necessity of continuing present institutional arrangements (Meyer and Rowan 1977) as a means of maintaining thefr exclusive right to act in specific domains. The auditing profession operates in an environment where there is a lack of measurable outcomes to summarise performance. The increased public scmtiny in this environment has created an extemal orientation that concenfrates on ethics as the primary quality of audit behaviours to ensure social confidence in audit outcomes. The decoupling of ethical issues from the techniques of auditing practice has allowed ethical dialogue to simultaneously exist with the primarily technological justification for action by the profession (Fogarty 1995). The attention devoted to issues of integrity, ethics and independence can thus be seen as signals that the profession is concemed with user expectations by reinforcing assumptions about professional behaviour. Independence is presently the subject of a separate auditing standard, AUP 32 "Audit Independence" which will in future be incorporated into the Code of Professional Conduct. The status of AUP 32 is as "authoritative guidance" without mandatory status. The importance of independence and the rhetorical nature of professional attention to aspects of independence (Sikka and Willmott 1995) will be discussed separately for private and public sectors to illuminate differences arising from contextual variations.
4.3.1.1 Independence in the private sector
Company directors effectively appoint the company's auditors and determine the size of audit fees. Therefore, they are effectively the auditors' clients. This dependant relationship means that auditors have an incentive to retain client favour as a means of safeguarding their income. With reference to the relationship between management and the providers of capital, agency theory presumes that managers will tend to manipulate financial statements to make their performance look more 136 favourable. Corporate auditors are in busmess to eam a living as professionals in a competitive market. To do so requfres that they pay due attention to self-interest to safeguard their economic well-being. The consequence is that the incentive for auditors to selflessly aspire to provide the highest possible qualify of audit work is subject to many competing and conflicting influences. Not only does economic self- interest operate at a firm level for auditors, but individual rewards, promotion and reputation are all bestowed upon those who retain and bring new clients to the fold. Auditors, in confrast to management, are assumed to be able to subordinate their own self-interest in circumstances where they are not tmly independent. This anomaly has persisted over the last century with the accounting profession vocally supporting independence rhetoric despite increasing criticism. In Ausfralia, the collapse of the HIH insurance group in 1999 has generated substantial criticism of the accounting profession's rhetorical attitudes towards independence (The Age 17/06/02; 9/08/02).
The symboHc fraits of professionalism in auditing have fraditionally been tmstworthiness, altmism and independence. Richard Walker, the USA Securities Exchange Commission Director of Enforcement, claimed that "investor's know that they can tmst auditors because they are, and they appear to be, independent" (Walker 1999, p. 44). Independence is the comerstone of credibilify for the audit profession ensuring the perception of reliability for audit outcomes. The audit opinion is furnished for the assurance of unseen users who must have faith in the integrity and ethical conduct of auditors in the execution of their role.
Oliverio (1999) has presented a selected review of articles in the Journal of Accountancy demonsfrating the increasing concem for independence in the United States from the turn of the century to more recent times. Similar evidence for the United Kingdom is provided by Chandler and Edwards (1996) in thefr review of the Accountant in the late 1800's. Concems about independence have become more pronounced as competitive pressures increased as a consequence of developments in technologies, communications and fransport. Large public accounting firms became multinational entities which, from the start of the 1980's, were permitted to market their services. Accountants were free to advertise and bring to the attention of the business community their expertise in the provision of services other than auditing with the expectation that audit staff will actively market firm services. Each year the 137 media reports the top chartered accountmg ffrms based on revenues and the elite Hst of clientele they have succeeded in securing during the year (Business Review Weekly, 9 July 1999, p. 96). Attention is given to rises m profitabiHfy and the prestige attached to movements in the ranking based on financial criteria. Statistics about the level of income generated from services other than audituig provide clear evidence of the declining level of importance audit fees have to total firm revenues. Until the recent highly public indiscretions of auditors in the US and AusfraHa, any concessions made to ethics at the expense of profits were not acclaimed. Oliverio states that it appears that "(o)perational goals - generally, related to the bottom line - are far more powerful than are absfract pronouncements of independence and objectivity" (1999, p.ll). An increasing public awareness of this conflict of interest has contributed to expectations that safeguards will protect users from poor quality audits.
The ability for management to pressure auditors into compromises over the quality of financial statements has the effect of reducing the effectiveness and, therefore, the quality of the audit function. The potential loss of an audit client can affect the willingness of auditors to make difficult decisions in the short term. The potential for management influence to impede independence would be eliminated if management were prevented from being involved in the appointment or removal of auditors. DeAngelo (1981b) recognising the pressures on auditors which can undermine their independence, defines audit quality as the probability that an auditor will both discover and report a breach in the client's accounting system. The probability of discovering a breach depends on the auditor's technical capabilities and the probability of reporting the error depends on the auditor's independence. The point noted in the following quotation from the Accountant 17 March 1894 was also made by the Cadbury Report on Financial Aspects of Corporate Govemance (Cadbury Report 1992) nearly a century later.
Indeed, it is open to question whether directors should not be debarred, as shareholders, from taking any part in the appointment of a scmtineer of their own dealings with the shareholder's estate (Price, 1896, p. 165, as quoted in Chandler and Edwards 1996, p. 16).
This agency-based impediment to independence remains a concem despite an intervening period of 100 years. Where auditors succumb to management pressure 138 and do not make a necessary accountmg change, or modify the audit opmion to reflect a disagreement with management, an auditor must consider exposure to litigation for negHgent audit work. Lee (1993, p. 97) notes that "the higher auditors perceive their business (litigation) risk, the greater the probabilify of modifying thefr audit report with respect to the subject of disagreement". DeAngelo (1981a), in an eariier study, also supports this proposition by suggestmg that the incentive for auditors to not report a breach (to cheat and thereby lower audit qualify) because of threats of termination (arising from a situation of diminished independence) is tempered by the potential loss of income from the effects on reputation should litigation establish that cheating did occur. DeAngelo concludes that the greater number of audit clients (the size of the firm), the greater will be audit qualify. ^^ This assumes (as suggested by Lee 1993) that large reputable accounting firms have a disincentive to provide low qualify audits in order to avoid litigation in the commercial sector. It could thus be argued that the potential for litigation and consequential damage to professional standing acts as a deterrent to poor qualify audit work. Given the recent events which have come to light involving one of the largest and most respected audit firms, Arthur Andersen, the deterrent to poor qualify audit work has proved to be not entirely effective.
In May 1997 concem for audit independence in the United States resulted in the establishment of the Independence Standards Board (ISB). The significance of the ISB lies in the fact that its scope extends only to auditors of public companies and its composition is four members from the accounting profession and four members (including the chairman) from the business communify. The composition of the ISB recognises the interest of users in the standard setting process and "will gamer greater credibility among the business communify and the investing public" (Jenkins 1999 p. 32). Such bipartisan representation recognises that the expectation gap is a difference in perception between users of financial reports and providers of report credibility. Solutions to impediments of the assurance process require support from both sides of the table. The ISB may thus have greater potential to resolve independence issues, notwithstanding recent disclosures of audit improprieties. The establishment of this board in the United States could alternatively be viewed as a
'^ This positive association between size and quality is limited by the assumption that all other aspects of quality, reasons for changing auditors and reasons for qualifying accounts, remain constant. 139 dilution of the influence and self-regulatory processes of the accounting profession. With equal representation and the chair being from the business community, the accounting profession cannot limit the agenda to vested uiterests (as was the criticism levelled by Schelluch and Green (1996) about the working party on 'Bridging the Expectations Gap' in AusfraHa). From the viewpoint of the accounting profession, this development would represent a decline in thefr power base.^^ Discussion by a panel at a symposium sponsored by the New York branch of the AICPA in 1999 was concemed with differences in standards that may eventuate between non-public company auditors over which the ISB has no jurisdiction, and public company auditors. AICPA ethical standards apply to all members and are overseen by the Public Oversight Board. Any standards set by ISB, potentially apply selectively to public company auditors. The potential for conflict between these two standard setting parties remains unresolved as the ISB has to date not produced any standards where priorities have been challenged.
There have also been calls for a similar Auditor Independence Advisory Board (AISB) in Ausfralia as the outcome of concems about auditor independence.^"^ As a result the federal govemment commissioned a report by Professor Ian Ramsay on Audit independence in AusfraHa. The report, known as the Ramsay Report (October 2001), makes a number of recommendations after considering overseas developments in legislative and professional requirements. The recommendations have not met with any unified accolades as providing solutions for the problems identified. The Ramsay Report identifies a list of core circumstances that create a lack of independence (Ramsay 2001, Part 2, pp. 6 - 10) and suggests that the AISB could oversee and supervise new auditor independence requirements in Ausfralia. Tony Harris (the former NSW Auditor-General) claimed in The Australian Financial Review (AFR) (10/10/01), that "unfortunately the report shied away from important conflicts of interest and thus failed to address why auditors are not independent". The report did not prevent audit firms from undertaking lucrative non-audit services
The image of the accounting profession has taken a substantial battering after many facts emanating from the collapse of the Enron Corporation indicated accounting duplicity. In particular, the collapse of one of Ausfralia's largest insurance companies HIH, showed that Arthur Andersen had a long association with the company and several former partners were long standing board members. This was viewed as an impediment to objective decision making and compromised the independence of the auditors. 140 which are perceived as a significant impediment to audit independence.^^ The BRW (1/11/01) suggested that the report would have "little effect on the way firms work because their own policies equal or exceed the recommended standards". The same article stated that "(w)hat the new mles would not change, auditors say, is the number of corporate collapses or the widely held perception that auditors are to blame ... Auditors feel misunderstood and misrepresented, and may feel defensive, but they cannot agree what to do about it". It is unclear whether the AISB will be formed, for the Ramsay Report recommended it be fimded by the two accounting bodies in Ausfralia who have shown reluctance to provide fimding without a perception of improved outcomes. The Age (5/10/01) suggested that the Ramsay Report "is an indictment on the inabilify of the Ausfralian accounting profession, more specifically the professional accounting bodies, to progress independence mles for the best part of the last decade". With vested interests to protect, this is not surprising.
Mautz and Sharaf (1961) in their seminal book. The Philosophy of Auditing, recognised the importance of vested interests to perceptions of independence over 40 years ago. The climate in which they formed their ideas was less complex and yet it was still clear that the relevance of the fimction of auditing to society would be enhanced where the providers of audit services were impartial and objective. Mautz and Sharaf viewed independence as being represented by three important elements. The first is independence of approach and attitude. This represents a combination of freedom from client confrol, expert skiU and considered judgement based on fraining and experience not available to those who are not members of the profession. The second is freedom from bias and prejudice, whether recognised or not. The abilify for auditors to recognise various pressures that may infiuence planning, investigative or reporting independence and not allow them to affect judgement is necessary to ensure the usefiilness of the audit fimction. The third is recognition of the role of the public in the acceptance of the status that allows for the successfiil accomplishment of the function of audit. This type of independence makes necessary distmctions between audit services and other services. Mautz and Sharaf (1961) believed that "(n)on-auditing services result in an identification of the interests of auditors and
'^ The Ramsay Report concluded that to ban non-audit services would be inconsistent with intemational practice (BRWA/WOl). 141 their clients that is not found in auditing engagements. In the latter, we find only the absence of any conflict of interests, not an identification of mterests" (p. 231). Vested interests were viewed as being incompatible with integrity and unbiased judgement.
The dramatic escalation in competition to obtain and hold onto auditing business has created an environment where independence is becoming increasingly more important during the 1980's and 1990's. Auditors are now often part of multinational organisations where new practice stmctures offer a vast array of non-audit services that present greater opportunities for potential conflict of interest (Walker 1999). "Their prime motivating factor appears to be commercial success" (ISB Chair William T. Allen in Craig 1999, p. 16). Consulting fee revenues are representing increasingly larger proportions of firm income with the temptation to safeguard such income becoming more of an issue (Beresford 1998; Law 1998). Vested interests have thus become an even more complex issue since the time that Mautz and Sharaf made their observations about the relationship between independence and conflicts of interest in 1961, especially with the concenfration of audit into fewer large firms.
Members of the accounting profession have a monopoly over the auditing of corporate financial reports in an increasingly oligopolistic provider environment. The audit of public companies have fraditionally been dominated by a small number of accounting firms, tiie big '8' for nearly 50 years, which has in recent times become more select with a reduction to '5' and in mid 2002 to the big '4' with the demise of Arthur Andersen. Conflict of interest can also occur from the viewpoint of specialist staff providing services for clients that are competitors within the same market. Perceptions of lack of independence in a concenfrated audit market are most significant in fraditional large firm markets such as the banking sector (Talley 1998). With potentially four firms now providing all auditing and consulting services to local and offshore banking interests, fewer eyes will be looking at accounting records and acting as key advisers in consulting roles. The potential for perceptions of conflict of interest to be more of an issue is greater where key specialist staff rely on 'Chinese waUs' within accountuig firms to maintain client confidentialify. The
'^ The SMH (5/10/01) claims that the "US Securities and Exchange Commission has forced accounting firms to split their consulting and audit fimctions into separate entities to ensure the quality of an audit is not compromised by commercial considerations". While this splitting of divisions has 142 professional qualities of integrify and ethical behaviour assume greater significance in such an environment.
Independence in 'fact' and 'appearance' are necessary qualities that operate at both the audit firm level and the personal level. Independence in fact deals with factors that inhibit audit effectiveness that are more observable and verifiable. For example, AUP 32 Audit Independence specifically covers fee dependence (paragraph 26-30) and financial involvements with clients (paragraph 34 - 35). Although these types of relations with clients may be deemed not 'material', the perceptions of users of financial reports about such dealings is held to be equally important to the credibilify of auditors (AUP 32 paragraph 9). Independence is significantly influenced by the personal attributes of individual auditors. Paragraph 13 of AUP 32 highlights that integrity, objectivity and sfrength of character are all necessary qualities for auditors. Such qualities enable individuals to deal with circumstances where conflicts of interest may impinge upon decisions made in an audit context.
The importance attached to the personal aspects of independence has been approached by Wolnizer (1987) from a different perspective. He has likened the role of auditors to that of the judiciary. This view involves auditors being responsible for verifying the underlying facts of financial items against evidence that has an accepted commercial reference. This proposition would see all items not capable of factual verification removed from financial reports. The ability to independently verify the facts of a given situation against evidence that can be tested by others is proposed as a solution for financial reports being more useful for decision making. Independence in this context refers to the evidence being used to verify details of financial reports. The personal qualities of an individual would have little significance if all evidence was required to be factual (as used in a court of law) and capable of being independently verified. Wolnizer is primarily concemed with a critical view of the constmction and design of financial reports. To be more commercially realistic and useful, he argues that accounting principles and practices need to be radically changed to ensure that only extemally verifiable data are included in financial reports. The role of auditors in such cfrcumstances would happened in some firms, the moves provide only a partial solution to the varied issues of audit independence. 143 involve little judgement and would be limited to a compliance orientation. The elimination of subjectivify has been discussed earlier as a proposition by Levitt (1972, as quoted in Reeves and Bednar 1994, p. 43) to replace the "high cost and erratic elegance of the artisan with the low cost predictable munificence of the manufacturer". Wolnizer's view of auditing would also have the effect of reducing the role of audit to a mechanistic concem for the independence of evidence. Until the design of financial reports is changed to accommodate this view of evidence, the independence of auditors remains as an essential ingredient to the credibilify of financial reports.
4.3.2 Public Sector A udit Expectations
The expectations of the audit fimction in the public sector are a function of the fraditional belief that public servants act on behalf of the communify with public interest being the underlying objective. Self interest is expected to assume a far less prominent importance than in the private sector. As the primary agency responsible for providing assurance on govemment accountabilify, the office of the auditor- general reports to parliament. The audit mandate is broad, with the probify and propriety of public servants in the context of the public interest requiring a diverse range of skills to discharge audit responsibilities.
The jurisdiction of the Commonwealth auditor-general received considerable attention as a result of the failure of numerous govemment business enterprises (GBE's) during the 1980's^l The belief that GBE'S should have due regard for govemment rather than commercial interests (particularly where communify service obligations are involved) put GBE's into the spotlight. The more onerous standards of accountability under a fraditional Westminster sfyle of govemment, together with the detailed regulations and procedures necessary to ensure due process is followed in govemment, were seen as a consfraint on the effective commercial operation of GBE's. Although GBE's were permitted to appoint auditors under the same conditions as private sector business entities, audit requfrements under the provisions of Corporations Law were perceived as inadequate to ensure that the fiill range of
''^ The more notable failures being the state banks of South Ausfraha and Victoria, and the Victorian Economic Development Commission. 144 accountabilities owed by public entities were appropriately scmtinised. The abilify to safeguard community resources, regardless of the operational stmcture employed, was a continuing criticism as evidence mounted that commercial auditors did little to protect govemment interests. Thus, public expectations were greater than the existmg audit mandate; in essence a 'gap' between existmg practise and user interests. The debate continued (Monoghan, 1987a; JCPA Report 296, 1989; Walker, 1989b; English, 1990; Guthrie, 1992, 1993) until GBE'S were included within the audit mandate of the auditor-general in accordance with the Commonwealth Authorities and Companies Act 1997, section 35, from January 1^* 1998. This served to reassert accountabilify relationships for organisations in which the public have significant interests.
Audit assurance in the public sector involves more than verification of adherence to procedures, mles and regulations. The importance of ethics in the public sector is derived from the ideal that public service embodies public tmst, the safeguarding of public resources and requires standards of performance from officials carrying out their responsibilities. Ethical behaviour is one of the principal means by which accountabilify is maintained (Wanna et al 1992). Holders of public office are accountable for an increasing array of relationships as the context of public service evolves. Certain forms of accountability can be ensured by mles and regulations. However, the core values pertaining to ethical accountabilify must be personally held and applied in the exercise of professional duties. The basic ethical framework of the public sector in Ausfralia is an amalgam of govemment policy, legislative requirements, adminisfrative and financial codes of conduct, guidelines and conventions. These are not primarily derived from Westminster principles, or from constitutional provisions. They have arisen from the system of responsible govemment where socialised norms based on interpretation and convention have generated accepted/expected standards of behaviour (Chapman 2000). The rising concem for resource allocation efficiencies has generated changes in adminisfrative practice, in power relationships and chains of responsibilify. Throughout these changes, holders of public office have had to adapt to the changing environment with the continued expectation that public interest will remain the dominant underlying philosophy. 145
The Statement of "APS Values and Standards of Conduct" issued fri March 1997 by the Public Service and Merit Protection Commission (PSMPC) details the ethical values that public servants are expected to employ m the execution of their roles of office. These guidelines are in addition to the code of conduct and ethical pronouncements that members of the accountmg profession must adhere to as part of their professional status. For public sector auditors in particular, ethical conduct plays a significant part in the application of judgement with the staff of the Ausfralian National Audit Office (ANAO) (all are public servants under section 40.(1) of Auditor-General Act 1997) requfred to foHow pubHc service regulations, private sector accounting regulations and professional auditing regulations.
The concept of an 'expectations gap', similar to that which exists in the commercial audit environment, has littie relevance in the pubHc sector. As noted earlier, the private sector expectations gap is a product of the conflicting agendas of many users with different information needs, a commercial competitive environment, and the interests of the accounting profession. In confrast to the intimacy between auditors and auditees in the private sector, the auditor-general's office is a separate agency of the govemment that is staffed by public servants on the govenunent payroll. In this respect the audit fimction is extemal to the agency being audited. The concem for the public interest (rather than ensuring that the audit engagement is profitable) is paramount. Accordingly, the potential for conflict of interest is more limited. Audit staff are not expected to market services for other govemment departments, to audit systems designed by colleagues or to be concemed with loosing audit clients if audit reports are unfavourable. Any perceived deficiencies in operation or performance can be remedied by amendments to the audit mandate as sanctioned by parliament (the inclusion of GBE's within the audit mandate from 1997 illusfrates this point). Parliament is the primary user of audit outcomes with no competing users groups requiring that their needs be met.^^
'^ AUS 106 notes that "(a)lthough the financial reports of such (govemment) entities are often presented to parliament as the custodians of community interest, they are also often used by govemment departments, cenfral agencies and other interested parties" (para. .03). These user groups may have an interest in the reports produced but have no ability to influence audit processes or the way in which outcomes are presented unless sanctioned by parliament (the primary user). 146
The characteristics of mdependence in the govemment sector vary from private practice in accordance with contextual differences. However, the importance of independence to the credibilify of the audit fimction has the same significance as m the private sector. The work of the auditor-general acts to reinforce accountability by independently assessing those being audited. Audit quality is a reflection upon how well the role of office is executed and the independence of the function m both an operational and personal sense.
4.3.2.1 Independence in the public sector
The Joint Committee of Parliamentary Accounts (JCPA) Report 346, Guarding the Independence of the Auditor-General (1996), highlighted the principal elements of independence for an auditor general as:
> personal independence in relation to appointment and tenure; > a wide legislative mandate empowering the Auditor-General to audit the complete spectmm of Commonwealth functions; > audit independence including the freedom to determine the audit programme, and to decide the nature and scope of audits to be conducted; > unrestricted access to information in performance of the audit function together with the right to report any findings to Parliament; ^ adequate resourcing to fulfil audit functions effectively (para 2.15)
These elements were the result of concems expressed over a period of two decades that the auditor-general's independence was being compromised. Criticism from the public and govemment officials about the influence of the executive and Treasury over audit activities has been detailed by English and Guthrie (1991), Guthrie and Parker (1997), ASCPA (1994), Funnell (1996b), Taylor (1996) and Barrett (1996a) to name a few. With the rising interest in accountability generated by the changes to public sector adminisfrative practices came the expectation that the audit function would be able to meet the challenges of being the scmtineer for an increasingly different environment. The expectations were difficult to achieve with limited financial resources, the inabilify to pay market rates for good staff because of inflexible public service employment conditions, and limitations on the scope of audit responsibilify for govemment enterprises. Thus, the accountability of the auditor-general for audit performance and performance auditing, as part of the broad reform agenda, received significant attention. The importance assigned to reviews of 147
efficiency and effectiveness prompted the JCPA in Report 296 (1989) to recommend that 50% of the resources of the audit office should be devoted to performance auditing. Although 50% was recommended, Martm et al (1994) provide evidence that the ANAO had not devoted more than \2% of total resources to performance auditing up to 1993. In the ANAO's annual report for 1997/98, the level of resources devoted to performance auditing had increased to 36%), still short of tiie recommended target. Although operational confrol lies specifically with the auditor- general, consfraints on operations may arise as a consequence of financial resourcing.
Under the Auditor-General Act 1997, the auditor-general is appointed as an independent officer of parliament with the budget for the conduct of the audit office being an appropriation of parliament after scmtiny by the JCPAA (with the new financial management acts of 1997 the JCPA became the Joint Committee of Public Accounts and Audit (JCPAA) on 1 January 1998). This position has not always been clearly defined with evidence indicating that there have been times that the auditor- general has had consfraints on the operational independence of the audit office. ^^ Prior to the Auditor-General Act 1997, the auditor general was appointed by parliament with the audit budget being set by Treasury and then by the Department of Finance (now known as the Department of Finance and Adminisfration (DOFA)). The auditor-general was thus in a position where the audit office was responsible for auditing the department (as one of many govemment departments) that determined the level of financial resources his office received. The ability to limit the financial resources of the auditor-general allowed scope for the effectiveness of the audit fimction to be impaired. This is particularly tme for the more politically sensitive performance auditing, where funding effects the number and depth of review activities that can be undertaken. Statutory provisions give priority to compliance audits with resources accordingly allocated. This conflict of responsibilities and interests was the subject of a recommendation by the ASCPA in their Discussion Paper No. 8, The Importance of the Role of Independent Auditors-General in March 1994. The recommendation that the budget for the auditor-general not be determined by a body subject to their audit was subsequently addressed by changes made to the
'' The influence of the executive and Treasury over audit activities has been detailed by Fuimell (1994) in relation to the United Kingdom, in Ausfralia by English and Guthrie (1991), Guthrie and Parker (1997), ASCPA (1994), Funnell (1996b), Taylor (1996) and Banett (1996a). 148
Acts designed to replace the Audit Act 1901. Speciflcally, the changes were effected by the Auditor-General Act 1997 sections 38-40 which establish the ANAO as a statutory authority, and the Financial Management and Accountability Act 1997, under section 27, which stipulates that the finance nunister (also the nunister responsible for DOFA) must issue drawmg rights to the auditor-general for the full amount appropriated by parliament.
Independence of the audit function in govemment also means that the auditor-general is free from any operational consfraints that may influence the way in which audits are conducted. This point is cleariy made in the Auditor-General Act 1997 with the statement that the office
is not subject to direction from anyone in relation to (a) whether or not a particular audit is to be conducted; or (b) the way in which a particular audit is to be conducted; or (c) the priority to be given to any particular matter (part 3, section 4).
The status given to auditors-general, as an officer of parliament^", has also served to improve perceptions of independence. The need for the auditor-general to be, and be perceived to be, independent of executive dfrection or confrol now has legislative support. Personal independence allows an auditor-general to report with confidence knowing that he^' will not be penalised for exposing information that may be damaging to the prevailing govemment. The high degree of subjectivify in performance auditing has placed the auditor-general in a contested domain where often the auditee has greater knowledge than the auditor of areas being reviewed. The political sensitivity of performance reports (as was demonsfrated by the Auditor- General Taylor in his report on the 'Sports Rorts Affafr' in 1993 (ANAO 1993, Performance Report No. 9) can mean that the auditor-general is subjected to criticism and pressures from the executive where reports are not favourable (Adams 1986; Hamburger 1989; Martin et al 199A). For an auditor-general to confidently express audit finding without fear of reprisals a secure term of office has been implemented
Tyn - • At the time of the Audit Act Review the Commonwealth Auditor-General Bill 1996 had not been passed. The changes in the Commonwealth Bill that recommended the auditor-general be made an officer of parliament were also recommended by the Audit Act review committee and were subsequentiy incorporated into the Victorian Audit (Amendment) Act 1997. Ausfralia has not yet appointed a female auditor-general to a state or Commonwealth Govemment position. The use of 'he' with reference to auditors-general, recognises this point without a gender bias. 149 in the new audit Act. Schedule 1 of the Auditor-General Act 1997 details a fixed term of 10 years for the appointment of an auditor-general with removal from office requiring the assent of both houses of parliament and the JCPAA. This has served to strengthen significantly the personal independence of the auditor-general.
'Qualify as meeting customers' expectations' incorporates many elements of 'qualify as conformance with specifications'. In the private sector user expectations evidenced through litigation have been the force behind changes to audit practice. Increased specification has generated standardised procedures that act to legitimise and provide stmcture to audit work. There is an expectation that auditors will ensure that an organisation has abided by all relevant mles and methods of accounting by applying the same skill and care that a reasonable auditor would provide. These standards apply to both sectors. Expectations also apply to those aspects of auditing which cannot be enforced by regulation. The ability to withstand ethical pressures and conflicts of interest are based on an image of professionalism. Auditors are expected to act with integrity providing an impartial and objective audit judgement.
4.4 Quality as Excellence and Value
'Quality as excellence', implies the investment of the best skill and effort to produce an output that will demonsfrate the qualities of the inputs. The output could thus command a premium price. The idea of excellence requires a preconceived ideal with a sufficient number of customers that would be willing to pay a premium price. There is evidence that fee premiums can be commanded by the 'big four' accounting firms, based on the prestige value attached to having such auditors (Ritson et al 1997). That auditing is a service where the outputs and technologies are uncertain, with the qualify of the audit not capable of being unambiguously verified by the beneficiaries of audited information, will require, any judgements about audit effectiveness to be "based, at least partly on the perceived reputation of the auditor. This reputation is closely linked to the public perception of the auditor as a professional person" (Otley and Pierce 1996, p. 32). The differentiation based on reputation is actively promoted by the 'big four' accounting firms. 150
While it has been demonsfrated that industry specialisation reputations can also attract fee premiums (CrasweH, Francis and Taylor 1995; Ritson, Jubb and Houghton 1997; Kend 1998), the links between specialisation, outcomes and quaHfy are not so clear. An exceptional qualify statutory audit could involve more labour at higher levels of expertise with more than the usual fransactions being included in sample sizes. However, the audit report (rather than the signature on the report) is the same as that of any other audit. The inability to differentiate the output based on the qualify of input makes this definition of qualify problematic for auditing.
Defining 'quality as a value' gives prominence to the economic criteria of competitive markets. There is an assumption that market forces are the ultimate judges of sufficient quality by determination of a price the buyer is prepared to pay. The inference that product qualify cannot be considered in isolation from product cost applies in any competitive regime for products and services. In the case of audit, the relationship between intemal efficiency (qualify of procedures or inputs) and extemal effectiveness (price) is not clear. The qualify of inputs for an audit engagement is significantly affected by liability for negligence with the questioning of appropriate levels of skill and care applied in a specific context only occurring in the incidence of corporate failure. At other times there is a presumption that inputs and pricing have been appropriate.
It is conceivable that the price of audits may change without any reference to changes in the quality of inputs. This is particularly relevant to the long history associated with the practice of low-balling^^ (Chandler and Edwards 1996). Competition between auditors may mean that the price charged for services does not cover input costs.^^ The Chairman of the United States Securities Exchange Commission in 1997, Arthur Levitt, commented that there was a perception by the public that the accounting profession was more focused on consulting and other
^^ Low balling involves tendering a low price for audit engagements with the expectation that consulting work done for the client after engagement will offset any losses in the provision of audit services (DeAngelo 1981a). ^^ The effect of potential marginal cost declines in subsequent years may make 'low balling' an economic sfrategy to win business. This assimies an ability to maintain a long-term business relationship in order to attain marginal cost benefits. This premise in an increasingly competitive envfronment is questionable. 151 services at the expense of audit services. Nonetheless, the auditor still has a dufy to do a competent audit no matter what fee is received.^"*
Critics of auditing have also inferred that 'low balling' affects audit qualify by reducing the quantity of input to save on costs. In an environment where the price for audit services is less than input costs, auditors may issue a more favourable report than warranted to increase the chance of retaining a client to recoup costs in future years (Dopuch and King 1996). This also has the effect of compromising independence as self-interest takes priority over the interests of financial report users. This definition of 'qualify as excellence' is more suited to products where the qualify of inputs can be clearly linked with price to determine the value of the fransaction.
The relevance of 'excellence' and 'value' as concepts of audit quality have limited application for the public sector. Public sector agencies are not able to choose between auditors, have no abilify to negotiate fee stmctures on the basis of perceived skill or value and cannot make claims of negligence for inappropriate levels of audit skill and care applied to an audit engagement. Instead, to establish that appropriate levels of skill and care are being applied to govemment agencies, the office of the Commonwealth auditor-general is subjected to an independent audit of its financial reports every year, with performance reviews being conducted in 1982, 1987, 1989, 1990, 1992, 1996, 1997 and 2000.
The need for auditors to adapt to extemal pressures and also to be intemally efficient has driven processes of standardisation. Cost savings are attainable primarily by economising on labour costs. The use of computers and stinctured methodologies enables a redistiibution of audit inputs to decrease labour costs. The followmg section will discuss how each sector has responded to economic pressures and the implications of the adaptive behaviour on audit qualify.
^'' This view was supported by Fitzgibbon, L.J. in Ross & Co. v. Wright, Fitzsimmons & Mayes (ALR 1896) at the turn of the century and continues to be relevant for the provision of audit services. 152
4.5 A udit Responses to Econom ic Imperatives
The prominence given in Ausfralia to the principles of competition (National Competition Council 1996) and the movement of govemment away from a role as a significant provider of services has led to a greater acceptance of enfrepreneurial business behaviour as models worthy of pursuit. For govemment auditing, the need for public resources to be managed economically has seen the audit mandate expand over the last two decades to include assessments of efficiency and effectiveness. Hi the private sector, greater business complexify and mass production technologies have contributed to the need for improved efficiency. Accounting firms have become multinational organisations competing on a global scale for clients who have become more price-sensitive in the market for audit services. These factors have served to give prominence to profitabilify and competition as significant influences on audit outcomes and processes.
Economic imperatives have had the effect of increasing the formalisation of public and private sector auditing at both the intemal level and across the profession. This realignment of the subjective and objective, the judgemental and technical, allows the audit profession to make claims of responsiveness to the needs of users. At the same time, adherence to established audit procedures are likely to result in audits of adequate qualify. In the highly competitive private sector audit market, Fischer (1996, p. 225) provides evidence that firms have "expressed a need to maintain (but not necessarily to increase) the qualify of their audits". Given that auditing is a labour intensive service, it would be reasonable to presume that the application of more labour would have a positive effect on perceptions of audit qualify (all other variables remaining equal). However, this conflict means that improvements in audit qualify can only be attained at increased cost unless there are compensating improvements in efficiency (McNair 1991; Fischer 1996). This link between cost and audit qualify in the provision of audit services was identified by Otiey and Pierce (1996, p. 33) who argued that
(c)osts, which are largely driven by professional hours and are subjected to precise measurement, are closely linked to short-term profitability. Quality, however, caimot be measured with the same precision and, although vital for long-term success, does not usually show a visible link with short-term profits. Economic considerations may therefore lead to quality compromise. 153
Innovations in auditing practice are primarily concemed with uicreased mechanisation of procedures to reduce either the time mvolved or the level of expertise required to perform the fiinction.^^ The potential cost savings atiamable are rationalised as being the result of more economical and efficient practices. As an altemative to cost reduction using efficiency and quality rhetoric, Tolbert and Zucker (1997) have argued that organisations are driven to mcorporate rationalised concepts of work to increase their organisational legitimacy. This is also viewed as independent of the efficacy of the new practices. The notion of'audit quality' is thus, not an objective of developments in audit practice but a means of justification. Further insights from sociology using institutional theory, as promoted by DiMaggio and Powell (1991, 1983), suggest that organisations operating within the same profession have a tendency to become more alike over time. DiMaggio and Powell (1983, p. 147) contend that the process of homogenisation is "effected largely by the state and the professions, which have become the great rationalisers of the second half of the twentieth century". In the Ausfralian public sector, audit reforms have had the effect of making accounting and auditing practice more like that of the private sector as the priorities of the market have been progressively infroduced into govemment.
4.5.1 Responses to Economic Imperatives: The Private sector
Litigation has had a significant effect on the accounting profession with the need for extemal legitimisation acting as a catalyst for developing a framework for audit service provision. Perceptions of deficiencies in audit practice have resulted from financial losses arising from the failure of audited companies and also from the perception of an increasing allegiance of auditors to client interests. Issues of independence remain unresolved as the need for audit providers to remain competitive and viable in a market environment has produced a primary allegiance to profitabilify. This view is supported by Hanlon (1994, p. 107), who has suggested that "(t)here appears over the past decade or so to have been a fundamental shift
^^ One of the most common practices used by auditing firms to economise on audit time is the 'Top Down' risk management approach to audit planning. This involves the application of subjective materiality criteria to different aspects of financial reports to identify principal areas of risk. The application of labour is then prioritised with greater time and expertise assigned to high risks areas. Low risk areas may accordingly receive little or no labour allocation (Gul et al 1995, p. 161). 154 away from a public mterest orientation towards a more commercial, or at least more blatantiy commercial, role". He implies that commercialism has always been the underlying motivation while public interest has been the 'shop front'. Lee (1995, p. 53) has referred to this same premise as "the pursuit by accountants and thefr institutions of economic self-interest in the name of a public mterest".
As suggested earlier in this chapter, audit qualify is difficult to define or assess, thereby providing the accounting profession with considerable scope to rationalise thefr actions and justify changes. By appealing to rationalify as the motivation for it making changes to audit practices, is difficult to argue against the innovations which are touted as improvements. This is particularly difficult in an environment where the abilify to subsequently determine if quality has improved is limited. Where the accounting profession is able to concenfrate public focus on the procedural technicalities of the audit process as the measure of audit qualify they have effectively decoupled input elements from the macro role of audit in sociefy (Power 1992; Carruthers 1995; DiMaggio and Powell 1991). In doing so, the ability to fiirther self-interest is camouflaged behind a technical process. Hunt and Hogler (1993) have suggested that standards exist as a means of attaining consensus and co ordination so that the accounting profession can safeguard their own vested interests. For auditing, these interests include protecting the monopoly status of corporate auditing and ensuring the continuance of self-regulation both with a view to ensuring economic viability in a competitive environment. This professional perspective requires a careful balance between professional expertise (to sustain and justify the statiis of auditors) and the need for confrol over labour to ensure uniform practices. As auditing becomes more stmctured, the need (and opportunify) for the application of subjective judgement diminishes (Hatherley 1997; Lee 1995).
Large accounting firms have the ability to achieve efficiencies through economies of scale. Accountancy firms have sought to establish themselves on a global scale in a manner similar to Coco-Cola and MacDonalds (Willmott and Sikka 1997; Hopwood 1998). In addition, in order to have confrol over labour, audit frnns have highly structured networks of mles, procedures, and manuals. The widespread use of discretion and judgement is not accommodated within a tightly stmctured environment. Auditors are expected to have a broad skill base with business acumen 155 replacing professionalism as the new modus operandi (Hopwood 1998). Accounting firms have moved into a broad range of service provision where the need to be flexible has meant that where expertise is not available in-house it is bought in on a confracted basis. Hanlon (1994, p. 133) has recognised that the abilify to be responsive to customer needs is "only possible if the 'experts' (bought in) act in the buyer's interests and not in the interest of the public". This underscores the increased commercial orientation of the audit function.
The appeal of a technical process, in confrast to the subjective application of judgement, has the abilify to make the outcomes appear more objective and therefore impartial. Power (1992, p. 58) has referred to the use of statistical samplmg m audit as "a shift from the mysteries of professional judgement to claims to an anonymous technology". By giving credibilify to a particular level of audit testing, audit sampling becomes an acceptable objective tool to justify the quantify of evidence used to form audit decisions. The constmction of auditing as an economic product and as a scientific practice is also perpetuated by the increased use of computer assisted audit techniques to save time and facilitate a greater volume of testing. Computers have enabled the more mundane aspects of audit work to become the domain of specialist staff, thereby enhancing the expert status of the skill set used by auditors (Hanlon 1994).
The frend towards risk-based methodologies as a means of efficientiy allocating and directing audit resources has heightened the need for judgement based on professional expertise. This is in confrast to the increasing standardisation of procedural elements of auditing and, therefore, requiring less subjective interpretations in these areas. Throughout these changes auditors have been conscious that the status of auditors as professionals is significantiy affected by claims to expertise and the application of judgement. The question of whose interests the judgement supports has been addressed by various stiidies reviewing the incidence of reduced audit qualify behaviour (Malone and Roberts 1996), time budget pressures (Otiey and Pierce 1996) and numerous reviews of aspects of independence (DeAngelo 1981a; ASCPA and ICA 1994; JCPA 1996; Zeune 1997; Oliverio 1999; Craig 1999). The conflict between pubHc interest and commercial interests continues to be the underljdng message behind these studies. The abilify to 156 justify subjective judgements made in the name of professional expertise by using rational objective procedures is now a feature of the legal system. Case law refers to standards of care that a 'reasonable audit professional' would have used in similar circumstances to legitimate audit actions. However, consistency does not in itself improve audit quality. Processes used must be firmly anchored to professional ethics and independence in the context of the role audit fimction is intended to serve in sociefy.
4.5.2 Responses to Economic Imperatives: The Public Sector
Public sector reforms have seemingly adopted the principles of neo-classical economics by a process of stealth. As reforms to improve efficiency have been progressively adopted there is an underlying presumption that the principles and practices used in the commercial environment are not only better but appropriate to the context of govemment (Hilmer 1993).^^ This presumption sees a greater convergence between the objectives and processes of private and public sector managers. Govemment responsibilities, as previously noted are much more broadly based, however, with social equify, equal opportunify, maintenance and expansion of infrastiiicture and environmental protection all forming part of communify obligations.
As govemment departments and interests have become larger and more complex the abilify of govemment auditors to be able to cope with additional accountabilities and statutory workloads has seen the infroduction of confracted audit services. The services confracted by the Commonwealth auditor-general have fraditionally been compliance work for which parameters and responsibilities are clear. The use of confracted auditors from the private sector unplies an acceptance that the services provided will be at least equivalent to that which would have been provided by in-
^* Some of the critics of this view have been Ma and Mathews 1993; Guthrie 1998; Carnegie and Wolnizer 1995; Stanton and Stanton 1998 and Clarke-Lewis 1996. " Granof (1992) has suggested that when govemment confracts for audit services the specification of inputs and outputs may lead to greater govemment confrol over the accounting profession. The perhaps unintended side-effect of an expanded field for audit services is the greater govemment influence over the accounting profession through the specification process. By shifting or diffusing the focus of the audit from specifically the financial statements to include the financial statements and all other statutes that may affect the auditee, govemment is directing the audit scope. However, the issue of whether such influence has a positive or negative effect on audit quality remains unanswered. 157 house audit staff. Since the infroduction of accmal accounting for financial reporting and budgetmg to govemment departments in 1996, the relevance of the skills of private sector auditors has increased while the general applicabilify of Ausfralian Accounting Standards to both sectors has reduced the differences in compliance auditing between sectors. DiMaggio and Powell have referred to the increasmgly generic skill set promoted by professions generally. They concluded that professional mles and regulations
create a pool of almost interchangeable individuals who occupy similar positions across a range of organisations and possess a similarity of orientation and disposition that may override variations in tradition and confrol that may otherwise shape organisational behaviour (DiMaggio and Powell 1983, p. 152).
This orientation is viewed as furthering professional interests (Chua and Sinclair 1994).
Auditor-General Pat Barrett has stated that where public entities have a sfrong relationship with the private sector it would be too expensive to maintain in-house audit expertise.
(F)rom an audit effectiveness viewpoint, it would be difficult to obtain and maintain the necessary experience to conduct such audits well, with a full knowledge and understanding of the industry in which they operate. Private sector firms with the appropriate connections are often able to call on the necessary expertise and background knowledge nationally and internationally (Barrett 1996b, p. 3).
The use of private sector confractors allows the ANAO to concenfrate resources on those 'core activities' which are primarily budget fimded. "The ANAO regards performance auditing as a core business, and as such, these audits will be delivered primarily using ANAO resources" (Barrett 1997a, p. 25). This recognises that the fimdamental principles of any audit requires knowledge and understanding of the client's business and "represent(s) a marked competitive advantage". This clearly recognises that there are significant differences between the type of business, the responsibilities for accountabilify and, concepts of independence, that separate the public from the private sector audit function. Hi-house knowledge and expertise in relation to core activities are viewed as being unique to ANAO audit staff 158
The ANAO also confracts with the private sector^^ to assist with the conduct of audits in specialist areas where particular skills are needed. This has been to "achieve the best skill mix we can to achieve a cost effective resuH" (Barrett 1996b, p. 4). The need for the audit office to be economical and effective withm performance and budget parameters (in the same way as every other govemment departinent) has fiirthered the reaches of economic principles into the public mterest domain. The pursuit of economy and efficiency has also created a need for intemal confrol over labour costs in the same way as private industry. The uicreased formalisation of auditing which is prevalent in the private sector has migrated to govemment through acceptance of the need for greater procedural definition and membership by public servants of professional associations. Auditor-General Barrett has stated that
(t)he ANAO has had a long association with the professional bodies such as the Austrahan Society of CPAs, the Institute of Chartered Accountants and the fristitute of Intemal Auditors. ANAO personnel have been office holders as well as members of various committees of those organisations (Barrett 1996b, p. 5).
When considered from a sociological viewpoint, organisations (in this case the govemment) have a tendency to accept criteria originally exterior to the organisation as a way of mimicking procedures perceived to improve efficiency (Fogarfy 1995; Meyer and Rowan 1977). The differences in audit approach between the private and public sectors have tended to become less pronounced over the last few decades. This similarify has seen a movement to greater acceptance of the private sector model with the increasing influence of economics as the reason for change. Institutional theory suggests that organisations within a field of knowledge initially display considerable diversify in approach and form. Once a field becomes well established there is an inexorable push towards homogenisation (DiMaggio and PoweH 1983).
The professional credibility of ANAO staff, to a significant degree, is now aligned with the private sector. Govemment audit methodologies have tended to incorporate private sector technical procedures as innovations designed to enhance audit qualify. The common terminologies used in business have been adopted by the ANAO.
^^Immediately prior to the passage of the Auditor-Generals Act 1997, Barrett (1996b, p. 3) has indicated that "just under 30 per cent of our mnning costs are now applied to payments to confractors". 159
Auditor-General Barrett stated the importance of a "more client focussed approach" and "providing a qualify service to cHents (or our various stakeholders)" (1996b, p. 7). This seems to give recognition to a variefy of users of audit outcomes. To increase the usefulness of the audit fimction to govemment the ANAO is now providing 'how to' advice and guidance to govemment departments resulting in a range of products available to govemment departments. The website for the ANAO details a range of audit services utilised to carry out its mandate as the provider of financial and adminisfrative credibilify to parliament. These services include:
> Performance Auditing > Financial Statement Auditing > Audits of Financial Control and Adminisfration (FCA) > Assurance and Confrol Assessment Audits (ACA) > Direct assistance to Parliament and its Committees > Seminars on topics relevant to public sector entities > Better practice guides and other guidance material on various topics
FCA audits are concemed with improving the qualify of public sector adminisfration and aim to assist managers in the public sector with meeting their responsibilities for efficient, effective and ethical use of resources. These audits are part of the package of reforms implemented over the last decade covering devolution of authorify, management risk, financial reporting, emphasis on results and enhanced accountability. ACA audits were infroduced in 1996 to examine basic adminisfrative processes and to provide a positive assurance that agencies are meeting their obligations under the financial legislative framework. These compliance audits are much more deterministic with less confroversial outcomes. Within the range of services provided, performance auditing remains a process not aligned with commercial interests. The need for expert knowledge of govemment accountability relationships and various statutory regulations unique to the public sector has meant that the primary responsibility for performance auditing lies with the staff of ANAO. To assess performance for qualitative rather than quantitative criteria requires expertise and the use of contestable subjective judgement. This judgement is applied in support of an underlying public interest ethos.
The primary user and beneficiary of public sector audit outcomes remains the public through representation in parliament. The needs of departments (auditees) are secondary to this function. Despite this restriction, the ANAO seems to be moving 160 into areas it previousty shunned by providing guidance on how to meet accountabilify responsibilities. Auditors in a commercial environment do not engage in what could be described as 'management consulting' as part of the audit fimction. Any 'guidance' offered by accountuig firms utilizes other departments of the firm to which the auditors belong which are promoted as completely independent from the audit fimction. By offering seminars and 'better practice guidance' to audit clients the ANAO has ventiired into territory that moves public sector auditing away from strictly an assurance fimction.
4.6 Conclusions: The Increasingly Generic Nature of Auditing
There are significant commonalities and differences in audit quality characteristics between the private and govemment sectors. The overriding historical emphasis of auditing in both sectors has been to safeguard the mterests of sociefy. Although the accounting profession still gives rhetorical support for altiiiism, the pressures of an increasingly competitive environment have reduced the credibility of this historical argument. The conflict of interests and consequent impaired independence is now the most significant impediment to audit quality that plagues private sector auditors (Sikka and Willmott 1995). In confrast, the recentiy amended Auditor-General Act 1997 reinforces the importance of the audit function in govemment as an agent of the public. The auditor-general's personal independence has been sfrengthened providing him with the ability to audit 'without fear or favour'. ^°
The greater homogenisation of audit mles and procedures between sectors has meant that the technical aspects of auditing are accepted as being universally equivalent. Private sector auditing has been referred to as primarily compHance orientated. The function of auditing is to ensure that the financial reports of companies "are presented fairly in accordance with applicable Accounting Standards and other
2g " SAC 2 does not specifically refer to the public as users of financial reports. SAC 2 refers generally to users and singles out resource providers, recipients of goods and services and parties performing on oversight fimction as primary users. It is infened that the later would be concemed with the broader interests of the cortmiunity as a whole and that members of the community would only have "indirect or derived interests" (para. 19). This same aversion to the usage of the term 'public interest' applies to auditing standards. The generic reference to 'users' of financial reports is consistently maintained. It is perhaps fronic that the ICAA has as its motto Nee Timens Nee Favens, the Latin form of 'without fear or favour'. 161
mandatory reporting requirements" (AUS 702, para. 23). With the adoption of accmal accounting by govemment and the universal applicability of reporting criteria to both sectors, a generic compliance skill base for auditmg is a supportable proposition. The provision of financial compliance audit work by private sector accounting firms has been a feattire of govemment auditing for the past decade. This provides tacit support for the proposition that there is no difference in the quaHty of audit service provision between the confracted providers of audit services and govemment audit staff There is, however, a need to remember the motivation behind the provision of audit services and the effect that this motivation may have on audit outcomes. Private sector auditors provide their services with a view to profitability, while the objective of compliance in the public sector remains firmly grounded in a public interest philosophy. While the mles may be the same, the underiying motivations are at odds. To view audit quality for compliance auditing as generic to sectors with opposing motivations is to understate the importance of the distinctive roles auditing serves in each sector.
The use of contracted private sector auditors to conduct public audits also has the potential to damage audit quality in govemment because of the reduced exposures to litigation that exist in the public audit environment. Brown and Raghunandan (1995 and 1997) suggest that accounting firms (particularly smaller firms) in the United States enter the market for non-federal govemment audits because of the absence of litigation threats. This makes it easier for lower quality audit firms to enter a more complex audit field.^^ Third party liability for negligence in the private sector is a major concem for auditors. Users (including shareholders, creditors, potential investors, suppliers, employees and unions) are many and the sources of litigation are equally diverse. In the context of govemment the user is specific and the likeHhood of litigation is more remote. The opportunity to broaden the revenue base of accounting firms could thus be perceived as attainable with little threat to long-term profitability. The implications for the quality of audit services provided by confracted private sector auditors are equally relevant to Ausfralia where the govemment
Woolf (1994) has also suggested that smaller firms have practical problems complying with the blanket applicability of auditing standards to audits of all sizes. What constitutes adequate planning, confrolling and recording of audit work from two ends of the spectmm of audit client size may mean that perceived deficiencies are in fact an exercise in rationality. 162
equivalent of 'shareholders' (the citizens) are unlikely to have access to or be able to judge the audit outcomes delivered. A change in audit quality on the basis of reduced exposure to litigation in AusfraHa is a proposition as yet unsubstantiated.^^
The major distinction between the public sector and the private sector audit mandate is that govemment auditors have a major responsibiHty for the efficiency and economy of processes and methods of the auditees used to detemune outcomes. The review of intemal confrol in private industiy does not mclude reviewmg the economy and effectiveness of policies implemented. In govemment, as concem for reviews of economy, efficiency and effectiveness have increased, auditing has moved into more subjective and judgement orientated practices. This development has meant that audit outcomes have become contestable with increasing criticism being levelled at the audit fimction where outcomes are unfavourable (Adams 1986; Hamburger 1989; Martin et al 1994). Performance auditing involves reviews for which there are no clear mles or technical processes to standardise and follow with AUS 806 - Performance Auditing and AUS 808 - Planning Performance Audits providing broad general guidance criteria for subjective reviews. Performance audits have become an mtegral part of the public sector audit mandate as part of the significant financial and management reforms infroduced over the last two decades. These reforms have been part of a drive for the public sector to become more businesslike and efficient. This same type of innovation in audit practice for corporate reporting has not been mandated in private industry despite the need to adapt to similar resource allocation consfraints.
Evans and McVeigh (1996) have argued that the barriers separating public from private, and intemal from extemal auditing, have been eroded in recent years. They claim that this is the indirect result of
govemment policy over the last 15 years, which has seen the deregulation of areas of local and central govemment, the creation of large numbers of quasi-public sector bodies, competitive tendering from private industry and an increase in "value for money" reporting within the public sector itself (Evans and McVeigh 1996, p. 12).
Banett (1996b) has stated that the ANAO predominantiy uses 'big six' (now big four) audit firms for confracting. However, state auditors-general regularly use the services of'second tier' firms where audit quality issues may be more of a concem. 163
They cite the Barings collapse for the prominence given to the unportance of reviewing intemal controls. This very public and prominent example of management confrol deficiencies has had an influence on the flow of expertise across sectors. Although this observation was made with reference to the United States, Ausfralia now has a similar environment with the distinction between public and private sector auditors becoming less pronounced. The increasing use of confracting for audit assignments provides further opportunities for the expertise of public sector audit staff to be atfractive to bidders for public sector audit work.
The increased usage of contracted professionals to provide govemment services in a competitive environment has meant that fimctions fraditionally carried out by those required to support equity and public interest are being provided by those who aspire to profitable service provision. The govemment may achieve resource allocation efficiencies, but the standards of service provision are unlikely to be the same when derived from an altemate philosophy. Evans and McVeigh (1996, p. 12) have noted that "there always will be specialist areas of audit within different sectors, but the frend generally indicates an increasing similarity in work performed". The use of confracted commercial providers for govemment financial compliance work has become an accepted means of efficient resource allocation. However, performance auditing in govemment requires a different philosophical outlook with no commercial equivalent to suggest that skills may be generic. While the ANAO has used commercially contracted expertise to assist with performance auditing, the fimction has fraditionally, in Westminster sfyle governments, been regarded as a unique specialist fimction under the preserve of public servants. The case study of Victoria, in chapter seven, challenges this belief by setting a precedent for a new hybrid form of govemment audit. These changes implemented in the name of competition and market efficiency have had the potential to significantly affect accountabiHty relationships.
4.6.1 The Effect of Generic Auditing on Public Sector Audit Quality
Audit quality has been defined above as the macro role of audit that is concemed with the function which auditing serves in sociefy. As modem public sector audit has changed to embrace new expectations and responsibilities there have been 164 consequences for audit qualify. These consequences can be demonsfrated by proposing three stages of evolution that have been progressive with no particular landmark dates marking the transition from one to the next. The stages illusfrate an erosion of public sector audit qualify from a role fraditionally expected in Westininster sfyle democracies. Each stage has two piUars providfrig the foundations upon which public sector audtt has been founded. Pillar one is represented by the independence of the audit fimction from the executive and auditees. There continues to be a firm understanding that the client of the auditor-general is parliament and that the auditor-general acts on behalf of the public interest. Pillar two represents the independence of public audit from auditees critical of the way in which the office conducts the audit fimction. The stabilify of these pillars has changed as a consequence of economic reforms in govemment.
4.6.1.1 Stage One - Prior to the 1970's: Auditing and Accounting
Prior to the reform era of the past two decades the function of modem public audit was clearly understood within an unambiguous framework. The auditor-general operated independently of the executive and auditees with the audit function viewed as the primary means of ensuring government's financial rectitude. The auditor- general verified the accuracy of financial records to ensure that spending had occurred in accordance with parliamentary appropriations with audit procedures based on ensuring that mles had been complied with. Audit qualify was uncontentious and the two pillars were firmly in place. The relationships were clearly between the auditor-general, parliament and the public.
4.6.1.2 Stage Two - From the 1970's - 1980's: Auditing and Accountability
During the seventies and eighties there was still a firm belief that the auditor-general acted on behalf of the public, with parliament being the client of the audit function. The auditor-general was still independent of the executive and the role of public audit was not to provide advice to the auditee. This stage involved a change in legislation that reflected a public desire for greater govemment accountabilify for efficiency and effectiveness. The difficulties of bedding down the new mandate requirements created instabilify in the performance audit fimction with criticism of outcomes, ft became clear that although the public expected the public audit function 165 to include assessments of efficiency and effectiveness there was a confradiction m expectations arising between the auditor-general and auditees during the fransttional stage of adapting to the new mandate. Auditees were unhappy with critical performance audit reports and complamed of a lack of audit skiH, judgement and the subjective nature of performance measurement criteria. As a consequence this period provided an avenue for the perception that audit qualify (m the macro sense) was beginning to deteriorate. This stage resulted in pillar one remamfrig ffrm and pillar two becoming unstable. Responsibilities were previously based on a clear linear stmcture - from the auditor-general to parliament on behalf of tiie public. During stage two the auditor-general acquired a greater sense of obligation towards the auditee.
4.6.1.3 Stage Three - The 1990's: Auditing and Accommmodation
Stage three occurred progressively, almost by stealth. The use of private sector mechanisms of accounting and audit as reforms progressed saw a more unclear role for public audit beginning to develop. Financial reporting stmctures and the means of ensuring compliance with those stmctures promoted more generic practices between sectors. As use of confracted private sector auditors to provide audit compliance services increased, the perception that public auditors possessed a unique skill set was being challenged. This perception was fiielled by the lack of recognition given to the differences in philosophical and accountabilify obligations between sectors.
While the motivations of confracted private sector auditors have infroduced some concems about audit quality in the area of compliance auditing, performance auditing (still uniquely the purvey of the public sector) experienced evolutionary problems of a different kind. As a consequence of criticisms about the outcomes and processes of performance auditing, the concems emanating from performance auditing continued to mutate through the late 1980's and frito the 1990's. The relationships changed to a point where auditors-general were prepared to develop a closer relationship with auditee in the pursuit of unproved performance, consistent with the goals and philosophies of managerial reforms in the public sector. The auditor-general was criticised for not offering recommendations for improvement as part of the reform process by auditees. This essentially means that the rhetoric of 166
NPM was adopted by the auditors-general as a way of being a faciHtator of reform mechanisms. In addition, a stated desire by the Commonwealth auditor-general to be more relevant and useful in assisting the govemment in its reform measures has generated closer relationships with auditees. This is evident by the provision of Best Practice Guides and a desire to 'be more responsive to client needs'. As auditors- general accept a role as change agents in keeping with govemment reform agenda initiatives, the perception that public audit is independent from the executive becomes questionable. In particular, promoting a system of management as if it were the one-best way does not allow the auditor-general to wait and observe reported performance measures, but takes part in constiiicting what becomes 'auditable' (Power 1994). This stage of audit evolution was in response to auditee expectations, rather than public expectations.
Despite increasing criticism and seemingly a search for a more usefiil role, auditors- general have been at pains to remind parliament, auditees and the public, but particularly the former, that the auditee is not their client, that they continued to exercise their fimctions on behalf of parliament. Under the Commonwealth Auditor- General Act 1997, the auditor-general's position was sfrengthened by making him an officer of parliament with the mandate being further extended to include govemment business enterprises. Thus, this stage saw pillar one being reinforced and sfrengthened while pillar two has become increasingly unstable.
The changed relationship between the auditor-general and auditees, when compared with the understandings in stages one and two, has represented a significant innovation in public sector audit. There has been considerable 'accommodation' by the auditor-general of government's desire to pursue NPM initiatives. As a consequence, the qualify of the public audit fimction has diminished from the fraditional intent of modem public sector audit which sought to isolate the auditor- general from any relationship with auditees because this threatened to compromise independence. The purpose of public audit appears to now include more typically private sector purposes for auditing. By benchmarking (best practice initiatives),
" Gendron et al (2000) provide evidence that NPM is making the Canadian public audit role more of a management consulting role than one of fraditional auditing relationships and motivations. 167 working more closely with auditees and providing recommendations to improve processes (helping auditees) the traditional purpose of pubHc sector audit has been redefined. Audtt qualify has thus been reinterpreted at the behest of the auditee rather than the public, as was the case in stage two.
4.6.2 Further Evolution ?
A significant juncture in the evolution of public audit has been the Victorian experiment during the late 1990's which saw the auditor-general removed altogether from the fraditional role occupied by public sector audit. While the rhetoric of economic rationalism was used to justify changes implemented it became clear that any claims to increased economy or efficiency were not evident and that improvements in public audit qualify (however defined) were never part of the objectives for reform. The Victorian experience, examined in chapter seven, potentially represents a harbinger of a fourth stage to the evolution of public sector audit. By fiirther accommodating competitive mechanisms the public audit function may evolve to represent something other than a fraditional Westminster model.
Chapter five will discuss the outcomes of public sector reforms with particular emphasis on economy, efficiency and effectiveness. The three 'E's have been used to justify many changes within the public sector. The concenfration on technicalities at the micro level reflects the first two 'E's with attention to the last 'E' being a generally neglected theme. The path taken by Ausfralian reform initiatives are not unique with many similar bridges being crossed in both the United Kingdom and New Zealand. Who crossed the bridge first is not as important as the contextual differences that have generated hybrid institutional stinctures, disparities in emphases on competitive tools and contributed to the pace with which reforms were infroduced. 168
CHAPTER FIVE
THE TRANSFORMATION OF GOVERNMENT: ANTECEDENTS AND OUTCOMES
In the final analysis, a balance has to be struck between the values that are in conflict in governing institutions and the wider community. Balance must be found between those actors whose sole reason for involvement is the power it gives them and the expectations of the community as a whole ... There is no one universal model such as many Australians have held on to for so long in the so-called Westminster system. Reasoned discourse must prevail, and those who wish to pursue it need not be overwhelmed by the rationalistic arguments of administrative reformers (Chapman 1990, p. 221).
5.1 Introduction
The global mobilization of capital and labour has meant that fraditional economic relationships between nations have become less important. Trans-national organisations with their own ethics and standards are loyal to shareholders rather than to communities. In this environment governments are less able to confrol economic activities within national boundaries with the distinctions between private and public interests becoming fiuther blurred as the public sector makes increasing use of market principles for govemance. Hi this era of competitive hegemony, as the demands upon the public purse continue to rise, the recipe for most appropriate govemance has been aligned with economic outcomes.
Prior to the middle of the twentieth century governments were able to protect citizens, to some extent, from some intemational pressures. The domestic economy 169 was fashioned around communify norms and values considered important to that society. Changes in global relations have meant unprecedented exposure to economic developments and communify values m other regions of the world, with a consequent blending or bleeding of values providing pressure for changes in both govemment processes and outcomes. Pusey (1993) considers that societies have two stmctures that are collectively coordinated: one being govemment, bureaucracies and the law and the other, being economies, markets and money. Each of these elements has a degree of autonomy and independence with coordination between them resulting in 'civil society'. The form this 'civil sociefy' takes depends on the qualify of tts institutions and on the negotiated limits sociefy imposes on the direction of the political system. For example, law often imposes restrictions on economic behaviour that impinges upon citizen rights. Where the coordination of these two stmctures involves a change to favour one over the other, the make up of 'civil sociefy' is altered.
This chapter will discuss the pressures leading to, and the outcomes of, Ausfralian public sector reforms implemented over the past two decades in the context of the prominence given to the second of the two stmctures suggested by Pusey, namely economies, markets and money. The reform initiatives implemented since the 1980's are considered in relation to the stated aims of 'economic rationalism' as proposed by the Royal Commission on Ausfralian Govemment Adminisfration in 1974. It is suggested that reforms implemented have been rhetorically aligned to popular economic theories without clear indications of how the outcomes from micro level reform instruments would be franslated into achievement of broader based communify objectives. The separation of process from outcomes leaves room for reforms to be politically self-serving rather than conducive to the stated reform aims of economy, efficiency and effectiveness.
Although the focus of this chapter is Ausfralia, developments in govemment reform experienced in the domestic economies of the United Kingdom and New Zealand also will be examined to highlight the pervasiveness of public sector reforms throughout the world, and more importantly, commonalities in reform philosophies and outcomes. The unique mix of contextual factors in these countries has ensured an 170 equally unique regime of reforms. The reforms m the United Kingdom and New Zealand have provided Ausfralia with persuasive precedent for subsequent review and adaptation in a comparable Westininster system of govemance. New Zealand is as geographically remote as Ausfralia from the United Kingdom. Both countiies had a common reliance on primary production in the latter decades of the twentieth century, with similar economic problems. Strategies for public sector reform in New Zealand were, however, far more dramatic and radical. While the tools of reform have many common characteristics between the countiies chosen, the timeframe and extent of implementation varied. The pace of change, the political stmctures of govemment and public expectations have all contributed to a diversify of approaches on a path that has essentially the same direction.
5.2 Historical Antecedents
In little more than a century Ausfralia moved from a penal outpost, reliant on the United Kingdom for financial resources, to a united group of colonies with natural resources providing the basis for economic prosperify. In his book The Tyranny of Distance, Geoffrey Blainey described Ausfralia in the early 1800's in terms of a sparsely populated, vast landmass that made Australians recognise "that distance or isolation was one of the moulds which shaped their history" (Blainey 1974, preface). In the late nineteenth century, only govemment could marshal the resources needed for economic development. One of the early historical examples of the need for govemment to play an active role in economic development during the mid nineteenth century was the provision of rail services. Private industry entities had already started to provide limited rail services with considerable financial support from govemment. Hi order to safeguard public investment in private enterprise the govemment, acutely aware of the difficulties encountered in making rail services viable, kept a close watch over the railway companies. It soon became evident that private interests were stmggling to provide efficient rail services and that more public resources would be required. Consequently the New South Wales (NSW) Govemment purchased two private rail companies in 1854 and the Victorian Govemment subsequently bought its privately mn rail system in 1856. Whereas the private rail companies cenfred activities around cities, in public hands the rail system 171 spread to rural areas and connected cities to enable economic prosperify to flourish. WettenhaH (1990, p. 3), claimed that in colonial AusfraHa tiie "(t)he dominant considerations (for the govemment provision of mfrastt^cture) were cleariy the inadequacy of private resources of capital, labour and technical competence, with the challenge of a harsh physical envfronment". The role of public enterprise was seen as a development stunulator (Quiggin 1996). This early experience set the scene for AusfraHan 'state socialism' in the provision of basic utilities such as water, electiicity supply, communications and fransport (Wettenhall 1990; King and Maddock 1996).^
The production of minerals, wool and wheat formed the basis of Ausfralia's prosperity^ through the twentieth century with the govemment providing artificial market regulations to protect local industries and raise revenue. In particular, tariffs and import quotas levied on imports provided the Commonwealth Govemment with funds to foster economic development. In the early years of Federation, tariff protection was linked to a cenfral wage fixing system and a restrictive immigration policy as a means of promoting industrial development and economic equity. Capling et al (1998, p. 25) claim that the politics of domestic defence was "a precursor to the Keynesian welfare state, in that it established a sfrategy for economic development and social protection in the form of a social pact between labour and capital regulated by the state". At the tum of the 20* century politicians such as Alfred Deakin and David Syme advocated building a powerful independent nation that could be economically self-sufficient in the event of war. In the context of the early 1900's these policies were seen as being necessary to foster the
State socialism took the form of public corporations (or govemment business enterprises - GBE's) in the 1880's as a solution to the colonial govenmients infractable problems with political interference in railway adminisfration (Halligan 1996, p. 75). The existence of GBE's in Ausfralia has a long history and formed a significant part of the govemment privatisation campaign during the govemment refonns of the 1980's and 1990's. Castles et al (1996, p. 26) provide statistical information about Ausfralia's main export products as a percentage of total exports, comparing the year 1952 to 1982. Wool exports were 49.1 in 1952 compared with 9.7 in 1982, wheat 13.4 compared with 9.1, minerals 7.1 compared with 31.0 and meat 5.4 compared with 7.3. These statistics show that 75 percent of all exports were from farming and natural resources in 1952 compared with 57 percent 1982. The blatantly racist White Ausfralia Policy, advocated by government up to the end of the Second World War, provided fiirther protection for white workers from cheap Asian labour. 172 development of local industry and to decrease the paternalistic influence of the United Kingdom.
In the light of AusfraHa's experience over nearly 200 years, it is perhaps ironic that policies that were the opposite of insular protectionism provided the major impetus for microeconomic reform in AusfraHa much later m the 1970's. Extemal elements were forcing Australia to become part of the world economy at the same tune as global relationships were changing. The post-war era saw the decline in importance of the British economy to Ausfralia in an increasingly intemational regime led by the United States. At the same time Ausfralia's political and economic fiiture became more reliant on countries closer to home."^ The Ausfralian economic downtum of the 1970's was widely seen as a consequence of obsolete defensive govemment strategies in an increasingly extemally determined environment. This is illusfrated in particular by Ausfralia's post-war reliance on tariff protection. The protection afforded to domestic industries meant that there was little pressure to improve products, efficiencies or to invest in new equipment and technology. With a slow and inefficient manufacturing sector Ausfralia was reliant on the income that agricultural products could bring. This proved increasingly difficult with intemational frading partners protecting their own agricultural sectors. Ausfralia's economic position had deteriorated from being one of the wealthiest countries along with Canada and the United States after the Second World War, to a position of fourteenth in the early 1970's based on Gross Domestic Product per capita (Capling et al 1998).
Although the theory of competitive advantage suggests that Ausfralia's advantage lies in natural resources and agriculture, the establishment of high tariff barriers allowed the development of industries in which competitive advantage did not exist. Effective rates of protection in 1971-72 were 45 percent for textiles, 86 percent for clothing and footwear and 50 percent for fransport equipment (Terry et al 1988). Concem over these high levels of protectionism led the Whitiam Govemment in
The destination of Ausfralian exports has changed significantly with the initial dependence on Europe and Britain being replaced by Asian countries. Exports to Britain were 31.2 percent of total exports in 1952 compared with 3.7 percent in 1982, exports to Europe were 26.5 percent compared with 18.0 percent and exports to Asian countries were 16.8 percent in 1952 compared with 51.8 percent in 1982 (Casties et al 1996, p. 26). 173
1973 to establish the Industries Assistance Commission to review the levels of govemment assistance provided to business and to promote microeconomic reform (Quiggin 1996). Soon after, the need to inspfre local industry to become more competitive, and thereby, foster export opporhmities, led the govemment to reduce aU tariffs by 25 percent in 1973.^ This reduction meant that those manufacturers who were unable to improve efficiencies could not compete with cheaper imports and went out of business, resulting in higher levels of unemployment. Thus, the exposure to global financial pressures served to move Ausfralia away from parochial myopia and to question the long-standing faith in Keynesian economic prescriptions.
Govemment macroeconomic policies dominated by Keynesian economic theory, still infiuential in the 1970's, supported rising levels of govemment intervention in the market in post-war Westem countries. The Keynesian vision (detailed in J.M. Keynes' 1936 book. The General Theory of Employment, Interest and Money) contended that govemment expenditures were necessary to remedy market failures to ensure the economy operated at full employment. The essential concems of economic policy in Australia, which were based on a distmst of market forces, were illusfrated in the Commonwealth Govemment White Paper of 1945 (p. 2), Full Employment in Australia, which stated that
(o)n average during the twenty years between 1919 and 1939 more than one-tenth of the men and women desiring work were unemployed. In the worst period of the depression well over 25 percent were left in unproductive idleness. By contrast, during the war (when govemment intervened) no financial or other obstacles have been allowed to prevent the need for exfra production being satisfied to the limit of our resources (as quoted in Quiggin 1996, p. 8).
Experience had shown that fiill employment could not be ensured without govemment intervention. By committing the govemment to the maintenance of full employment, the 1945 White Paper became the defming document for economic policy between 1945 and 1975. This promoted a mixed economy in which there was
^ Teny et al (1988, p. 178) showed that while the level of assistance may have dropped in 1974, the economy was moving into a recession and levels of protection again increased after that time. The year of 1982-83 showed the highest levels of protection in industries receiving the most assistance. The effective rates for textiles were 68 percent, clothing and footwear 192 percent and transport equipment 61 percent. Terry et al (1988, p. 177) suggest that while the average rates of protection in manufacturing decreased by 17 percent between 1968-69 and 1986-87, the dispersion in rates increased in line with specific sector policies adopted by govenmient. 174 a predominance of privately owned resources with large-scale govemment involvement to 'iron out' the cyclical economic fluctuations in private demand. Quiggin (1996, p.8) characterised the classical Keynesian policy response as "cutting taxes and raising expenditure on public works during periods of recession and, by raising taxes and cutting spending to curb inflationary booms". By the 1970's a period of high inflation and low growth in an environment of signiflcant govemment spending showed that govemment policies were ineffective in rectifying market conditions and that Keynes did not have all the solutions. The commitment to fiill employment gave way to a priority to tackle inflation.
The recession of 1979 arose from the unusual occurrence of rising unemployment, to 10.3 percent, together with inflation of 11.2 percent (Zifcak 1994). ft seemed that the Keynesian policy initiatives popular before the 1970's did not work well in the presence of unfavourable social and economic conditions (Quiggin 1996, p. 10). The success of Keynesian management sfrategies depended on a government's ability to determine their own interest rates, exchange rates and levels of govemment expenditure (Capling et al, 1998). The need to become part of a global environment meant that interaction with other economies generated substantial extemal pressures on the government's ability to manage the economy. For example, Ausfralia's reliance on foreign investinent fuelled the development of the resources boom in the 1960's resulting in significant foreign ownership of a key sector of the economy. The level of foreign ownership of resources had increased from 27 percent in 1963 to 47 percent in 1972 (Capling et al 1998, p. 32).
Another important intemational factor contiibuting to a worid-wide climate of govemment reform was the liberalisation and globalisation of fmancial markets. Hi Europe, previously the cenfre stage for worid economic power, the breakdown of the Bretton Woods agreement in 1971, which had confrolled uitemational financial relationships since 1945, created a more volatile finance regfrne with a general movement away from fixed to floating exchange rate confrols (Quiggin 1996). The United States was the first to abolish capital confrols in 1974 with most westem 175
countiies following sutt over the next ten years.^ This meant that private interests could move large amounts of fmancial resources offshore to take advantage of better interest rates or taxation condition fri other countries. Thus, the market rather than the govemment confrolled interest and exchange rates. As govemment slowly released the confrol mechanisms for the operation of the economy it was clear that political policies were not able to solve emerging economic problems, leaving room for a dominant ideology to emerge from the business commurufy. The govemment was seen to be interfering too much in the market and a systemic belief that the private sector was a better vehicle for many govemment fimctions provided the fuel for a mood of change (Pusey 1991).
In the United States, the 1960's saw a mood of antagonism toward govemment intervention develop within powerfiil industry groups. Heavy corporate sponsorship was provided to intellectual discussion groups (often referred to as 'think tanks') whose objective was fewer govemment confrols. The justification for promoting small, less intmsive govemment was motivated by the desire of owners of capital to act independently to protect their own interests. Self (1993, p. 65) has referred to the benefits and the influence of 'think tanks' as
provid(ing) a vital arena for fiising academic theories with practical policies and for spreading the gospel among politicians, officials, academics and the media ... A vital factor in the growth and influence of these bodies was the plentiful finance provided by big business either directly or through foundations set up from private fortunes.
The outcomes of these think tanks were not impartial, with predictable support for ideas that would benefit business interests. 'Think tanks' were a major vehicle for the dissemination of new ideas in public policy around the world. In America, think tanks included the American Enterprise Institute, the Heritage Foundation, the Manhatten Institute of Policy Research and the Hoover Institute. In Britain, The Institute of Economic Affairs and the Cenfre for Policy Studies provided the intellectual and politically orientated vehicles for the spread of new ideas (Self 1993,
A key aspect of the financial deregulation in Ausfralia during the 1980's was the floating of the Ausfralian dollar and removal of most foreign exchange confrols from December 1983. In response to these developments financial markets expanded in Ausfralia and became increasingly integrated into intemational capital markets (White 1992, p. 48). 176 p. 65). Ausfralia had tts own 'think tanks', includmg tiie Ausfralia Business Council, the Tasman fristitiite and the Sydney Histitiite. Media commentators and political parties were also used to provide a fomm to disseminate the belief that smaller govemment was best (Pusey 1993). The ideas that emerged from these intellectual hothouses heightened the momentum for an frtcreasingly competitive environment that would stimulate efficiency and economic growth through the private sector, rather than through increased govemment spending.
Yeatinan (1990) suggests that policy direction in Ausfralia had been influenced by its unique dual stincture of govemance. This has evolved to give state^ governments significant responsibilities in present govemance stiiictures. After Federation, which united a group of independent colonies, there was an increasing cenfralisation of decision making based on the constitutional fiscal powers of the Commonwealth Govemment (Castles et al 1996). While dependent on the Federal Govemment for the majority of fimding, state governments have some access to revenue sfreams and are able to have their own individual views of exchanges and relationships with the stmctures of civil sociefy (Yeatinan, 1990 p. ix). At the beginning of the 1970's, as the pressures for govemment reform began to emerge, state governments became a rising force in govemment policy determination. The fact that state governments are elected independently from the Federal Govemment has often resulted in altemative political parties confrolling state affairs. The effect of diverse political attitudes between the Commonwealth and state governments has become more pronounced as competition allows economic resources to move where conditions are the most favourable.
The need for Ausfralia to have a consistent competitive framework to atfract foreign investment continues to ensure that the coordination of state/federal govemment relations remains an important political issue. State governments that were closer to the citizens in a range of policy issues, objected to the abilify of often opposing political party ideologies to be imposed upon state govemment affairs. When
Ausfralia has, in effect, eight independent second levels of govemment comprising six states and two territories. While the Federal Govemment has exclusive powers over national affairs, 'state' governments are concemed with the welfare of those within their borders. 177
Ausfralia's economic prosperity declmed in the 1970's the need for the states to develop greater independent streams of revenue commenced a period of rismg power and influence for state governments. This coincided with a movement towards distmst of big govemment with smaUer decentralised adminisfrative stirictures being favoured over cenfralised functions. Quiggin (1987, p. 23) considered that the role of state governments
play two different roles in a federal system. At the national level they may be viewed as significant interest groups in themselves. Uncooperative states have the power to derail a wide range of federal govemment initiatives, and they can use thefr power to extract concessions on various issues ... As both the Fraser and Hawke governments have found, however, recalcitrant states can obstmct the process of cutting back federal expenditure by ensuring that the cuts (for which the federal govemment takes the blame) fall in the most sensitive areas.
By providing funding under the umbrella of the conditional provisions of section 96 ^ of the Ausfralian Constitution, the states were forced to spend cenfral funding on the achievement of Federal Govemment policies. This restrictive practice, after a decade of govemment resfraint in the 1970's, reinforced the need of the states to find independent means for discretionary expenditures by developing the revenue sources open to them under section 51 of the Constitution.^ Revenues from state taxes, fees and fines represented 40 percent of total revenues for the states of New South Wales and Victoria in 1991-92 (Bureau of Industry Economics, 1994, p. 22). Independent sources of revenue have enabled state politicians to take a greater role in goveming their own citizens by developing policies which best accomplished their vision of the role of govemment.
Under section 96 of the Constitution the Commonwealth has the power to make conditional or unconditional grants as a means of distributing Commonwealth funds to state governments. While all Federal Governments made use of section 96, it was the Whitiam Govemment of the mid 1970's, that "made such extensive and systematic (conditional) use of the section" particularly to further its education policies (Kouzamin and Scott 1990, p. 26). ^ Section 51 of the Commonwealth Constitution represents a comprehensive list of all the areas in which the Commonwealth has the power to make laws to ensure the welfare of the nation and to govem relations between states (Constitutional Commission 1988). The 'state' governments were only able to make laws for those things not specifically covered in section 51. 178
5.3 The Reform Era of the 1980 's and 1990 's
The process of govemment reform over the last two decades has been sustained and continuous. The reforms have centered on a managerialist approach that promoted rationalisation of govemment services and provided for a bureaucracy dominated and directed by the political executive (Halligan 1996, p. 77). Halligan (1996) agrees that the core ideas contained in the new political direction involved managing by reducing the size of govemment with a focus on performance and results by applying market principles. Zifcak (1994) suggests that govemment reforms are the outcome of a series of inter-related factors: economic, social, political and the adminisfrative contexts. He argues that
(w)hen administrative reform is introduced, it is likely to be interpreted according to the dominant frame of thought present in a govemment system and through its associated stmctures, systems and relationships of power. This frame of thought will be informed by a set of values and attitudes developed and refined over a considerable period of time (Zifcak, 1994, p. 142).
March and Olsen (1995, p. 43) agree that "(i)n general, neither competitive pressure nor current conditions uruquely determine institutional options or outcomes. Institutional forms also depend on the historical path of their development". While the adaptation of processes and institutions to an extemal environment provide a source of pressure for change, intemal dynamics can also shape and consfrain the path of development. A brief summary of the contextual setting for reform Hi Ausfralia in the 1980's will be foHowed by a discussion of the factors contributing to the direction of reform in Ausfralia.
5.3.1 The Economic and Social Contexts
Economic conditions have had a significant effect on govemment poHcy. In buoyant times, the public is likely to support govemment expansion policies and not scmtinize too closely the modes of delivery for pubHc goods and services. Conversely, when economic conditions are adverse, aU spending and processes of goveming are likely to be questioned. The 1980's was a period in which Ausfralia was plagued by ongoing economic problems. With commodify prices faUing and a 179
diminishing natural comparative advantage in primary production, the foundations of fr-aditional sources of economic wealth for Ausfralia were in long- term decline. These changed economic circumstances meant that the previous commitment to the maintenance of full employment and "to the traditional social democratic objectives of modifying the reward stmctures of capitalism in order to estabHsh greater social and economic equity" (Casties et al 1996, p. 8), could no longer be sustained at the same levels. The economic pressures for reform could not be ignored. However, changes to govemment stiiictures had to be acceptable not only to Australia's citizens but also the world's financial communify. Perceptions about financial security and long term prosperify can have a significant influence on Ausfralia's intemational credtt rating. The interest rate the community pays on govemment debt, the value of the Ausfralian dollar compared with overseas currencies and levels of foreign investment all have repercussions on economic prosperity. Given the economic problems experienced by AusfraHa and others in the 1970's, microeconomic reform was needed to improve the effectiveness and efficiency of the Australian economy in a global environment (Wanna et al 1992; Weller et al 1993 and Guthrie 1994).
Governments elsewhere responded to the changing world economic order by moving the coordination functions of govemment away from cenfral bureaucracies to enable them to be susceptible to market forces. "The justifications are imiversal and the political rhetoric that has been used to drive reforms is familiar - 'eliminating waste and inefficiency, and feather-bedding', 'saving the taxpayer's dollar', 'sfreamlining' the public sector, to make it 'lean and sfrong' and so on" (Pusey 1991, p. 3). With the Ausfralian economy already at the mercy of market forces as a consequence of the deregulation of the finance industry^ °, the govemment proceeded with the adoption of other market-orientated reform tools, among them corporatisation, privatisation, performance indicators to assess efficiency, full accmal accounting and common accounting standards in both the private sector and govemment. These reforms were ostensibly to improve economy and efficiency within the economy by using
The dramatic fall of the Ausfralian exchange rate in October and November 2000 to a low of 52.1 cents US without any clear incident to support the downgrading, illusfrates the vulnerability of the economy to extemal market forces. 180
measurable outcomes." The problems of the economy were to be solved by using private sector tools of management and by reducing govemment involvement in activities that could be provided more efficientiy by a competitive market.
Argy (1998, p. 5) suggests that "(e)conomists assessmg the longer-term performance of an economy have tended to focus principally on the rate of growth in real per capita incomes and on various measures of stability or sustainability like inflation and current account deficits". When these indicators were rising there was a perception that the economy was in crisis and a remedy for the crisis needed to be found. Argy (1998) questions the logic of assumuig that when these indicators have improved the state of the economy has also improved. He suggests that Ausfralia has concenfrated on financial efficiency measures during the govemment reforms of the last two decades and that attention should now be directed towards non-financial assessments of the nation's well being.
In the early 1960's the govemment had enshrined the right of all citizens to basic services as part of govemment welfare polices (discussed in chapter three section 3.6). As collective rights were formalised so attention moved to ensuring that all had an equal right to participate in society. As part of the government's social equity agenda the rights of individual interest groups, most notably women and aborigines, are now protected with legislation. The granting of Aboriginal land rights with the passing of the Commonwealth Native Title Act 1993 and the establishment of The Aboriginal and Torres Sfrait Islander Commission (ATSIC) by Commonwealth statute has ensured that the rights of indigenous Ausfralians are protected. The interests of employees have been improved with paid maternity leave, superannuation entitlements and anti-discrimination laws reinforcing the equality of workers' rights. The rights of women have been recognised by equal opportunity for
One of the most notable and far reaching examples of market principles being applied to an economic problem is the principle of 'import parity pricing' for cmde oil. The escalation of world oil prices for the period 1970-75 saw an anomaly in domestic and world oil pricing create a disincentive to further exploration. The Fraser Govemment during the late 1970's was the fiirstt o peg the domestic oil price to the world market price of oil and freat the gain as govemment revenue (Terry et al 1988). The policy for import parity pricing for cmde oil has since been modified and used by all governments as a major source of revenue. 181 women in the Workplace Act 1999 and affirmative action poHcies^^. Interest groups leamed to use the govemment to promote their own interests. Previously acquiescent sections of society have now become assertive lobby groups putting strains on the democratic system resulting in competing demands on resources, as more and more interests became politically active. During the post war period these demands were financed by economic growth as economic prosperify increased the pressure for equalisation amongst communify groups.
As the competition for funding intensified the need for govemment to be actively involved in many sectors of the market was questioned. Traditionally the role of govemment was based on the proposition that markets operate imperfectiy.^^ When private industry is not able to provide public goods the govemment intervenes in the market by stepping in as a provider. This need for govemment to remedy market failure has fostered the development (at least historically) of public utilities (usually regarded as essential services) so that all citizens may have access to basic services at reasonable cost. At some point in the economic development of a communify, the private sector is able to marshal the required capital and expertise to provide the services previously supplied exclusively by the govemment. When this abilify arises it is appropriate to question whether the govemment should relinquish a role as provider in markets.
Private providers of essential services are motivated by self-interested profit seeking goals and have more scope in decision making to maximise their own interests ahead of the recipients of govemment services. Decisions will be based on the need to increase profits that will flow to the providers of capital. This is in contrast to the social equity motivation of govemment. If the provision by govenunent of essential services is characterised as being too slow and bureaucratic to allow efficient
'^ Political parties are now applying quotas to pre-selection candidates (particularly the Labor Party which in its national conference in 1994 infroduced a 35 percent quota) to ensure that the number of women representing the electorate increases. This form of encouragement is aimed at improving the disproportionate representation of women in parliament as an outcome of the Joint Standing Committee on Electoral Matters, Women, Elections and Parliament Report of May 1994 (Finn 1995). '^ Barton (1999b, p. 8) refers to market failure as the product of 'externalities' which prevent a market from operating efficientiy. He claims that extemalities form the basis of govemment intervention in the market. 182 aUocation of resources (Wilenski 1986), any withdrawal from provision should consider the opportunity cost of having less effective confrol over social equify. With tiie rising distiiist of big govemment in the 1980's came the belief among mfluential political interests that the time for govemment to relinquish provision of certain services had come (King and Maddock 1996). Social equify elements of service provision became subordinate to the uiterests of economy, efficiency and profitabilify (Alford and O'NeiU 1994; Hopwood and Millar 1994; Costar and Economou 1999).
5.3.2 The Political and Administrative Contexts
In the early 1980's economic management in Ausfralia was increasingly a function of intemational market pressures, although the depressed investment in domestic manufacturing was also of concem to the govemment (Capling 1998, p. 30; Quiggin 1996, p. 133). By the time the Hawke Labor Govemment came to power in the 1983
(n)ational confidence in interventionist defence sfrategies had been eroded ... (making the country) susceptible to the new intemational pohcy agenda of neo classical liberalism. Deregulation, 'downsizing' government, restmcturing the public service along managerialist lines, and the privatisation of government business enterprises (and even services) became the dominant paradigms shaping the discourse of public policy (Castles et al 1996, p. 9).
Despite the mounting evidence of the need to reform govemment economic policies, the main beneficiaries of govemment protectionism, farmers and unions, continued to delay reform through their political influence. These interests had consolidated their support base during the 23 years of Liberal Coalition Party mle (1959-1972). The Labor Party retiimed to power in the eariy 1980's (after its brief taste of power between 1972-75), coming unencumbered with obligations to the old elites thereby leaving room for a new breed of interests to rise in influence. One of the most influential elites during the 1980's (that subsequently feH from favour in the 1990's) was the Ausfralian Council of Trade Unions (ACTU). The Labor Party formalised cooperation between the govemment and the unions with a Wages Accord in 1983. Economic reforms were infroduced with an approach that was consensual. 183 representative and negotiated. ^"^ For the govemment, the close association with the ACTU had the added benefit of effectively delegatmg the enforcement of negotiated outcomes to the Council. However, the unions were able to use the same agreement to successfully maintain their members' interests by opposmg the sell-off of some public assets, thus safeguarding the jobs of workers. According to Casties et al (1996, p. 11) "(t)he success of the Accord as an uistmment of consensual poHcy making provides the explanation for the limited privatisation mitiatives of the late 1980's".
Under the Hawke Labor Govemment, deregulation, reducing the size of govemment, restmcturing the public service along managerial lines and the privatisation of govemment business enterprises became the dominant themes of reform. The political support base for the Labor Party was traditionally working class with policies that were supportive of democratic socialistic ideals advocating social and economic equity. Thus, the sfrong influence of economic rationalism in Labor policies was widely seen as inappropriate. However, the economic problems confronting the Labor Govemment meant that it could not support the welfare and income redistribution policies fraditionally favoured by Labor policies. The maintenance of fiill employment had previously underpinned social welfare and social security. Increasing unemployment and declining economic wealth meant that resources were no longer available to continue previous policy dfrections (Corbett 1990, p.296, Forsyth 1992, p.4). Howard (1990, p. 73) noted that when Treasurer Keating made his first budget speech in August 1983 he "began by stating that the govemment had inherited an economy undergoing its worst recession in fiffy years ... Gross Domestic Product had declined by 4.5 percent from ft pre-recession peak ... with inflation running at 11.5 percent". When combined with a higher than
"* The Ausfralian Federal Govemment, and all states except Queensland, is based on a bicameral system of govemance. Laws must pass through two houses of parliament. Legislation of govemment is assured of passage through the Lower House (the House of Representatives in the Federal Govemment) by virtue of its majority. However, the system of proportional representation in the Upper House (the Senate in the Federal Govemment) means that bills (proposed laws) have no guarantee of agreement. The govemment is usually forced to amend bills to make them acceptable to other political groups before a majority is secured in the Senate. This need to compromise allows for a greater range of input into the political policy making process. 184 anticipated budget deficit of $9.6 biUion, there was "a significant re-ordering of priorities" (Howard 1990, p.73).
Contributing to the progressive natiire of reform uiitiatives has been the bipartisan consensus between political parties and the absence of any effective electoral opposition (Pusey 1991, p. 3). While ft was the Liberal Party supported by big business that commenced the reform process from 1975-1983, ft has been a succession of Labor Governments that has continued thereafter to implement and further the significance of competitive mechanisms in the public sector. This continuify allowed for building upon previous reforms without undermining the basis adopted for reforms. The stock market crash of late 1987 led the govemment to over- reflate the economy with "the govemment attempt(ing) to slow activify through tightening monetary policy, leading to the downtum in 1990 which Keating unfortunately characterised as the 'recession we had to have'" (Casties et al 1996, p. 15). The continuing poor state of the economy meant that in the 1990's 'markets' continued to dominate the agenda of governments (state and federal) throughout Ausfralia with the need to emulate the private sector practices becoming the guiding principle of reform. To be economical and efficient when entmsted with public resources was a powerfiil justification for the advance of new institutional stmctures. Despite the radical nature of reform, especially when compared to previous eras, market philosophies have been consistently espoused but without supporters questioning the principles upon which the tools are based.
By the start of the 1980's unemployment and inflation were both over 10 percent, with rising levels of national debt and current account deficits. The pace of economic change and the growth of govemment adminisfration was the fastest than any other time in the post-war boom years. Public expenditure^^ as a percentage of GDP m Ausfralia rose from 21.7 percent in 1955-57 to 26.4 percent in 1967-69 and to 32.8 percent in 1974-76, with the fastest increases in health education and welfare (Wilenski 1986, p. 18). Public expenditures continued to rise during a climate when
^ There are considerable problems trying to quantify variations in govemment expenditures during the post-war period. There are some activities, such as tariff protection or the regulation of competition, that can have a significant effect on the economy but involve little financial outlay by the govemment. 185 global economic factors combined to compromise the abilify of the govemment to manage the domestic economy. The distmst of big govemment by economic rationalists placed the adminisfrative stmctures of govemment firmly m the spotiight.
Ausfralian govemment adminisfration was characterised as slow and cumbersome prior to the last decades of the twentieth century (Public Service and Merit Protection Commission [PSMPC], Ministers Statement 25/02/98). The stiiicture of the public service was based on a conservative 'follow the mles' mentalify with little discretion available to public servants. Layers of bureaucracy provided little avenue for flexibilify or for managers to show initiative in adminisfration or management. Public servants were generally ensured of a lifetime of employment with detailed rales goveming promotion, grades of pay and job specifications. Seniority rather than abilify govemed avenues for promotion and remuneration was generally inferior to private sector salary packages. These features of the Ausfralian Public Service had long been of concem (Halligan and Power 1990, p.287; Corbett 1990, p. 298; Howard 1990, p.83). However, not until the appointment of the Royal Commission on Ausfralian Govemment Adminisfration in 1974 were they closely scmtinised.
The Royal Commission on Ausfralian Govemment Adminisfration (RCAGA), commissioned in 1974 by the Whitiam Labor Govemment, reported to a Liberal Coalition Govemment in 1976. The report chairman, H.C. Coombs, argued that the stmcture and organization of govemment adminisfration was excessively cenfralized and hierarchical. Managerial responsibilify needed to be devolved and decenfralized in order to increase managerial efficiency (RCAGA 1976, Chapter 3). frrespective of the high praise for the recommendations of the RCAGA, the substance of the reforms was not embraced by the Liberal Govemment which had commissioned their own review chaired by John Reid. This review perhaps forestaUed the inevitable need for change but for a short period only. The Reid Report of 1983 confirmed most of the findings made by Coombs. Reid recommended that to improve efficiency and obtain value for money the principles of accountable management be employed to ensure that management efficiency ranked equally with policy by ministers in the running of thefr departinents. The recommendations formed the basis of the Financial Management Hnprovement Program (FMIP), infroduced in 1983 by the Hawke 186
Govemment. This resulted in a push for greater mvolvement of mfriisters in operational decision making with the devolving of responsibilify to mdividual sector managers. Managers were given flexibilify and were then held accountable for both their actions and their use of resources.
Hi December 1983 the Hawke govemment released its plans for public sector reform in a White Paper entitied Reforming the Australian Public Service. The plans were incorporated into the Public Service reform Act 1984 that were based on an equity agenda, allowing for appointinent to senior executive positions on the basis of open competition and on the basis of merit. Equal opportunity principles prohibited discriminatory appointinents and the accompanying Merit Protection Act of 1984 established an agency to ensure the faimess of personnel management. A second White Paper in 1984, entitied Budget Reform, focussed attention on ensuring that govemment goals and objectives coincided with budget priorities. The framework for the implementation of the FMIP was provided by new forms of management information and from program budgets.^^ The ability to assess performance against established criteria created a result-orientated pubHc sector. The implementation of FMIP was considerably assisted by a positive approach by public servants who were increasingly better educated and exposed to competitive market theories at universities (Zifcak 1997, p. 25; Galligan 1990; Pusey 1991, p. 171-2).
The 1990's saw a concerted push for ensuring 'value for money' in the application of govemment resources. The stmcturing of the machinery of govemment along fraditional lines to ensure compliance with constitutional and legal mles and regulations was no longer seen as sufficient. The need for new methods and systems saw successive governments fransform their management practices in the image of the private sector, notably with the infroduction of a confracting culture. ^^ The public sector was infroduced to confractual appointments for senior officers that concenfrated on fixed term appointments with performance-related bonuses to motivate management to achieve previously agreed outcomes. Confracts were also
Program budgets replaced line-item budgets in the late 1980's. Program budgets concenfrate on the objective to be achieved rather than individual components of the budget (Funnell and Cooper 1998). "^ These developments were not without critics. These included Aiken 1994, Hopwood and Miller 1994, Power 1994, Carnegie and Wolnizer 1995, Gallhofer and Haslam 1996 and Guthrie 1998. 187 used to outsource activities that were deemed to have commercial equivalents in the expectation that they would be cheaper and more efficient to do so. Information systems were redesigned to incorporate private sector techniques in the hope of providing better information for govemment decision making. Therefore, the desire to improve efficiency and ensure value for money saw radical new approaches taken to govemment adminisfration.
The continuous nature of public sector reforms has meant that processes and procedures have been subjected to refinement as reform mechanisms evolved. The first detailed review of the effect of public sector reforms was undertaken in 1991 by the Commonwealth Government's Management Advisory Board (MAB) through its
1S? Management Improvement Advisory Committee (MIAC) task force. The committee's report, issued in December 1992, entitled The Australian Public Service Reformed - An Evaluation of a Decade of Management Reform, suggested that the direction of reforms had been correct and that, although the reforms were well accepted, there was more work to be done to extend the reforms across the whole pubHc sector (MIAC 1992, p.l). The review considered that the progress achieved had improved the cost effectiveness of the public sector in conjunction with a change in attitudes in public servants. "Unlike the findings of the RCAGA in 1976, both agencies and staff are now seriously interested in responding to client service issues" (MIAC 1992, p.422). Hi many of the specific recommendations for various areas of review ft was noted that there remained much potential for fiirther improvement. The momentum for reform continued through the 1990's with continued pressure for a responsive, leaner and more 'professional' public sector. This culminated in new legislation that would make the public sen^ice more like the private sector, ft was argued that this would allow the govemment to atfract talented people to ensure that public resources were managed efficientiy and effectively. Thus, for example, the infroduction of the Workplace Relations Act 1997 allowed the govemment flexibilify in determining the type of employment agreement most suited to govemment objectives. With the abilify to reward performance came the abilify to dismiss public
'^ As a means of achieving its management improvement objectives the Department of Finance and Adminisfration supported the work of the MAB and the MAIC which developed after the closure of the Public Service Board in 1987 (Funnell and Cooper 1998, p.65). 188 servants for poor performance. The Financial Management and Accountability Act 1997 also changed the way in which managers were required to discharge their responsibilities. Managers were given responsibilities and resources to achieve designated objectives. They were required to account for their actions and decisions using commercially sanctioned performance indicators. Prasser, in Kouzamin and Scott 1990 (p. 186) has pointed out that to some extent the goals of reform may also be enhancing a government's abilify to manage the Histitutions of admmisfration. "(M)any changes, especially those inspired by the Labor Party, have been concemed with ensuring the political confrol of the public sector so that policies can be more quickly and effectively implemented".
As a result of these reforms, the fraditional apolitical public service culture has been changed and challenged. The potential for conflict between ethical principles guided by public interest concems and the need for employment places a public servant in a difficult environment. Performance assessment using efficiency criteria can mean that public servants are forced to give greater priorify to meeting targets rather than the qualitative concem for citizen welfare. The full ramifications of change on the long-term public administrative horizon are not yet clear.
5.4 Economic Rationalism Implemented
The new paradigm for govemance that favoured market-based competitive models emerged without any clear opposition or altematives. The task of fransforming govemment needed support from both within the bureaucracy and from the community. Reluctance by public servants to embrace change, once the electorate had given govemment the mandate to implement a platform of policies supporting reform, could have been a significant stumbling block for govemment. ^^ Early attempts at reform in both Ausfralia and the Uiuted Kingdom during the 1980's, for example the Financial Management Initiative in Britain and the slow implementation of much needed reform by the Fraser Coalition Liberal Govemment in Ausfralia, met with a lack of any commitment to execute reform. Public service bureaucracies have
Early attempts at reform in both Ausfralia and the United Kingdom during the 1980's, for example the Financial Management Initiative in Britain and the resistance of senior public service staff under the Whitiam Govemment in Ausfralia, meant a lack of commitment to execute reform. 189 been built on tradition with enfrenched attitudes, allegiances and power stmctures. These factors make change a difficult process. Despite this, the rationales behind the methods of fransformation were endorsed by both the federal and state governments, with some minor differences in emphasis arising as different political parties came to power.
Changes to the public sector have included restraint in govemment spending, the selling of public assets, the adoption of market models incorporating performance measurement and the use of commercially orientated auditing and business accounting systems for public sector organisations. The role of govemment in the years up to the 1970's focused on what the govemment should do, and for whom. Without the resources to achieve new ends, the attention has fumed to the means used by govemment to achieve existing ends. Where commercial equivalents clearly existed for services that were previously provided by govemment the fimction has been relinquished to private providers. The govemment in Ausfralia has embraced the concept of providing leadership without the need to be the provider of goods and services. This popular standpoint was referred to in the United States as 'steering but not rowing'. The terminology was justified as follows.
The word govemment is from a Greek word, which means "to steer". The job of govemment is to steer, not to row the boat. Delivering services is rowing, and govemment is not very good at rowing (Savas, in Osbome and Gaebler 1992, p. 25).
The election of the Thatcher Conservative govemment in Britain in 1979 and of President Reagan in the Unites States in 1980 provided sfrong examples of a commitment to market orientated principles. The radical reforms implemented in New Zealand commencing in the mid 1980's were clearly grounded in principles that considered that "(t)he govemment should only be involved in those activities that cannot be more efficiently and effectively carried out by non-governmental bodies" (Boston et al, 1991, p. 4). The uiuque contextual nature of political stiiictiires and power relationships necessarily generates variations in policy determination and implementation in different countiies. However, the emphasis remained on encouraging more 'steering' and less 'rowing' by governments. 190
The new culture of managerialism fostered the continuing trend of efficient and effective resource usage by requiring that public servants 'manage' rather than 'administer' resources. Thus, changes in the way public sector managers were rewarded, the responsibilify entmsted to allow functions to be effectively managed and the information made available to ensure that resource allocation and efficiencies could be assessed were referred to as encouraging managerialism m the public sector.
5.4.1 Managerialism
Managerialism is generally concemed with the adoption of private sector business practices in the public sector. Some of the key aspects of managerialism promoted for use in govemment adminisfration were defining cenfres of responsibilify, the use of performance confracts for senior executive service, greater use of consultants where expertise was required and the promotion of commercialisation, corporatisation and privatisation (Parker and Guthrie 1993; Weller et al 1993; Pollitt 1983a). These fimctions require the clear statement of objectives, decentralisation and devolution of responsibilify and risk management, constmction of performance indicators for systematic measurement and evaluation and a commitment to decision making that will promote efficiencies (Guthrie 1994). However, the public sector also requires attention to human relations and a sfrong commitment to accountabilify to ensure that the public interest is maintained (Self 1993, p.168).
The move from adminisfrators to managers in the public sector in the 1980's has resulted in the extensive use of business consultants and an increase in the number of senior officials with business qualifications. Management is freated as a portable technical skiH that is context-free and value-free (Pusey 1991, p. 122). Pusey claims that from this perspective "the social and value characteristics of public sector work recede from view and, of course, management and senior executive work in the private and public sectors looks increasingly similar". Caiden (1990, p.45) also suggests that the managerial approach to public adminisfration was much more aligned with
the mthless cost-cutting strategies of management, incorporating performance indicators, management by objectives, and management through information technology. The operations of the public sector came to be seen more in terms of 191
management improvement and less in terms of the public interest or other non- managerially defined objectives.
There has been a presumption that the ills of public sector adminisfration can be solved by making adminisfrative practices more like that of the private sector. Pollitt (1993 a) made reference to numerous studies that evaluated whether public and private management were different. In 1975, at a time when govemment reforms had already accepted the superiorify of private sector management practices, it was tentatively concluded that there were no significant differences between private and public management practices. It was subsequently acknowledged in 1986 that some differences did exist. Soloman noted that
(p)olicy makers in the public sector are faced with special organisational imperatives. They confront political and often value-laden issues very specific to their society. The size of many governmental organisations, the pluralism in policy implementation networks, and the inadequately developed performance criteria, render the task of chaimelling sanctioned goal-orientated activities more difficult (Soloman, as quoted in Pollitt 1993a, p. 146).
The differences between private and public management practices have re-emerged as noteworthy after a period when implementation of reforms had already commenced. Despite the acknowledgement of the differences, the reform agenda continues as though the differences need to be eliminated by change and will diminish with time. Changes to employment conditions, adminisfrative processes and reporting requirements have all generally followed private industry methods.
The reform process was ostensibly to improve and to make more efficient and economical all govemment operations. There is no doubt that efficiencies have been attained in the provision of certain goods and services for which there were readily available commercial equivalents. However, discemable improvements are often not easily determined. Meyer and Rowan first noted in 1977 that adminisfrative reforms, as a mle, seemed to result in neither improved admmisfrative performance nor improved economic performance. Olsen and Peters arrived at the same conclusion in their 1996 study that involved adminisfrative reforms in Ausfralia, Britain, France, Germany, Japan, Norway, Switzeriand and, the United States, ft was also suggested by March and Olsen (1995, p. 196) that. 192
reforms seem more likely to stimulate demand for new reforms than to eliminate the problems to which they were manifestly addressed. As a result of initiating reform programs, reformers secure rewards that have httle to do with thefr effects on administrative practice.
The difficulties of determining cost savings and identifying efficiencies is often more complex when dealing with private contractors (PAEC 2000 Report 34, p. xxvii). In its Performance Audit Report No.9 2000-2001, Implementation of Whole of Government Information Technology Infrastructure Consolidation and Outsourcing Initiative the Ausfralian National Audit Office provides an example of such difficulties. This report concluded that shortfalls in industry capacify and industry participation in tenders for equipment caused significant service delivery difficulties, implementation delays and additional costs of nearly three times original estimates (paragraph 9 and 10). Paragraph 12 also concludes that the savings realisable by agencies from outsourcing were overstated, with the Performance Audit brochure accompanying Report 9 suggesting that it was difficult to draw parallels between the savings identified in budgets and the individual tender processes.
5.4.2 Con tractualism
As part of the desire by governments to promote economy and efficiency, the 'confract' has become an increasingly more prevalent feature of the organisation of public life. The language and practice of contracts involves concepts that have fraditionally not been part of govemment operations. In law, 'confract' refers to an exchange of consideration (usually cash) for a product or service and establishes a legally enforceable obligation. There is a perception of a mutually beneficial relationship with an explicit negotiated nature to the tasks required to complete obligations (Sullivan 1997, p. 2). At the same time, the franslation of both the economic and legal relationships associated with confracts into the public sector has highlighted a number of inconsistencies in their application.
The economic concept of 'market' has generally been associated with a rigid framework of conditions that will promote optimal resource aUocations. However, the rigid conditions ensuring optimal allocations cannot always be met, resulting in market imperfections with consequent resource inequities. One of the more 193 controversial of market imperfections is the existence of monopolies and the perception that monopolies are undesirable in a market economy. The term market is loosely used in the public sector because it is often not possible to meet the criteria necessary for perfect competition. This is particularly evident where the govemment has been a monopoly provider in areas such as welfare services. The competition prescription assumes that there is a competitive market for the goods and services that the govemment buys. A market depends on arm's length fransactions among a large number of buyers and sellers for a product that can be clearly differentiated to enable buyers to discriminate between altemative suppliers. These conditions can be met in relation to many 'goods' used in govemment operations. The purchase by govemment departments of computer equipment, vehicle and operating supplies has many altemative suppHers in the private sector. However, in the area of 'services' there potentially exists less choice between service providers resulting in market imperfections and inefficiencies. These inefficiencies are often referred to as extemalities and are a fimction of the need to ensure that the agent (the provider) acts in the interests of the principal (the govemment). If suppliers are limited in the market, the lack of sufficient competitive forces needed to promote efficiency may mean that there will be deficiencies in service provision. The limited number of providers in the market may also mean that the ability to change from one supplier to another to obtain better service or pricing may not be feasible. Where markets do not operate efficiently other arrangements may be more conducive to securing appropriate gains from exchange relationships (Brennan 1997, p. 27). The altemative of retaining the govemment as the provider of services is clearly more efficient where the agency costs of maintaining and monitoring the confract provisions (the extemalities) are greater that the benefits obtainable from confractual relations. Efficiency is only one of the many objectives of governments operating in the public interest. ^° Markets also promise choice in qualify and price to the customer.
The conception of a govemment as an independent actor appropriating gains from exchange, like markets, makes a number of questionable 'leaps of faith'. These
TTK • • • Kettl (1993 p. 17-18) suggests that five standards compete to shape the public interest. These are efficiency, effectiveness, capacity, responsiveness and tmst and confidence. Whilst other interpretations may produce slight variations in the way govemment objectives are described, it is clear that efficiency represents only one of the objectives. 194 include the assumption that the legaHstic notion of a confract has relevance to the public sector where the public is essentially a third parfy fri confract relations (FunneH 2001, p. 172). The legal concept of a 'third party' refers to those who are not direct parties to the confract but may be affected by confract outcomes. Hi the public sector, it is contended that there are three parties to confractual relations: the purchaser, the provider and the recipient. While the purchaser (the govemment) acts on behalf of the public hi an indirect sense, it could be argued that the public is a direct beneficiary of the confractual relations. In this tiiangular relationship the public (the recipients) are not free to choose between providers, have no capacity to dictate the terms of service provision or the financial terms of the exchange. Therefore, the notion of a fully informed and capable individual as a parfy to a confract in the public sector is an illusion.
In a more general sense the legaHstic notion of confracts reduces the status of citizens by considering that "the recipients of govemment services are customers, and merit such dignity as that description connotes" (Brennan 1997, p. 36). This replaces the values attributable to citizenship in westem societies.^' As citizens find themselves at the mercy of market conditions, those that can afford to pay for services that were previously free, having been paid for by taxes, retain their rights as consumers.
In other respects, providing basic benefits for all and allowing those with a capacify to pay to have better levels of care results in greater socio-economic inequalities (Funnell 2001, p. 76). The ability for contracts to embody the individual circumstances and capacities of citizens (particularly those who have special needs) to ensure that the values of society are maintained, is limited (Yeatinan 1997, pp. 39- 55). Confracts freat citizens as though they have equal (standardised) needs and capacities. These particular aspects of markets hasten the decline of public confidence in democratic govemment.
^" Yeatman (1997 p. 39-55) provides another dimension to the use of confracts in govemment operations by a discussion of how 'confracts' have allowed attention to move to relationships entered as free willed individuals at the expense of 'status' that claims identity in relation to a social grouping. She contends that as confracts are devices that concenfrate on the individual, they caimot do anything to provide the bases for social capital that underpins support for the needy as a community group. 195
Outsourcing of govemment services has also provided challenges for public service staff that are required to determine and administer confract provisions. The abilify of public agencies to effectively supervise confractors requires that they retain adequate confrol over their suppliers. Sufficient in-house expertise to oversee confract specification, confract management and the capacity to monitor and assess the confractor's performance, are necessary to safeguard the public mterest (PAEC 2000 Report 34, p. xxiv). After services have been moved to the private sector, whether the govemment is able to effectively monitor confract provisions in the long-term without the knowledge that comes from operational experience is not yet clear. Boston (1995, p. 106) has suggested that governments that engaged in significant outsourcing become 'hollow'. This term implies the removal of the memory and expertise from govemance. It can be argued also that confracts encourage the constmction of boundaries between govemment functions by limiting action to specified fimctions, for specified recipients within a clear timeframe. This divisive stmcture creates an inability to act as a cohesive unit to facilitate govemance with sufficient flexibilify to cope with changing economic circumstances.
As a mechanism for reducing the size of the public sector, confracting has enabled govemment to shed labour and shift responsibilities to confractors and has eroded the distinction between public and private realms. Martin, in Boston (1995), has quoted John Stewart, a British political commentator, as stating that
(c)arried too far, govemment may become a series of separate units, some external, others normally intemal, which conduct their relationships through a series of confracts. The consultant of the future called in to examine, let's say, a local authority constituted on this basis will surely say: This is a strange organisation, that has lost its capacity to leam and to adapt, and above all, to see problems and issues that do not fit into the boxes into which it has divided itself, or the confracts it has dravm up.... A capacity for govenunent is required (Martin 1995, p. 36).
5.4.3 Government Business Enterprises (GBE's) and Privatisation
Ausfralia has followed Britain in a long fradition of operating tts infrastiiicture industries as govemment owned business enterprise monopolies (GBE's) (Guthrie 1989b King and Maddock 1996, p. 4, Corbett 1996). The creation of Telsfra, Ausfralian National Railways, Federal Airports Corporation and Ausfralia Post from the Postmaster-General's Departinent in 1975 are the most notable examples. 196
However, as part of the govemment reform agenda GBE's have come under the spotHght as a consequence of the significance of these enterprises to govemment operations and the negative perceptions about their efficiency (Forsyth 1986). King and Maddock (1996, p.6) suggest that
(g)ovemments have long realised that there are problems in the management of pubhc enterprises. They seemed to be subject to poor productivity, low rates of retum, and over-staffing while demanding large amounts of public investment to develop new facilities.
A comparison of the rates of retum in Ausfralian public and private enterprises between 1983-1994 detatied in King and Maddock (1997, p. 7 and 22), provides evidence that retums in the public sector were far less than in private enterprise. The desire to improve rates of retum for GBE's and perceptions of inefficiencies led govemment down the path of public enterprise reform in the 1980's. GBE's fraditionally operated as arms of govemment with restrictive employment regimes (typical of the public service at that time) and little of the flexibility enjoyed by most private employers. The ability for politicians to promote a particular govemment stance and interfere in policy making also gave managers little flexibility to operate entities in a manner most conducive to efficiency. The fashioning of GBE's into corporate stmctures, as a preliminary stage in the fransformation of GBE's in the image of the private sector, allowed for the setting of commercial goals for enterprise managers and the use of boards of management to mn the company. In this way corporatised enterprises remained outside govemment strictures while satisfying managerial and free market expectations.
Once corporatised, GBE's are then in a form that could be easily assimilated by the market through privatisation. The next logical step in the appHcation of market principles to GBE's is to question whether GBE's should be retained under govemment confrol. Those that consider GBE's should be retained as corporate entities under the indirect influence of govemment claim that "(i)n tts simplest form, the public interest model suggests that GBE's will yield better outcomes than private
^^ Corbett (1996) suggests that the fransfer of large businesses from govemment to private interests has not been hampered by a decade of business scandals and cormption which have done little to dim the reputation of the private sector as the economic exemplar of good management. 197 enterprise because private enterprises are interested in maximising profit while GBE's pursue poHcies aimed at promoting social welfare" (Quiggan 1996, p. 63). Arguments for privatisation suggest that GBE's should not be directed to serve the interests of the public. Extemal political direction would amount to interfering with the mnning of the entity thereby reducmg its ability to react to market conditions and impeding tts efficiency. The solution was to seU the entify to private interests so that optimal resource aUocation efficiencies can be achieved. The revenue received by governments for the sale of assets could thus be applied to other areas to satisfy the social welfare polices of the govemment. The proposition advocated by the Labor Govemment in tts electoral campaign of 1999 that the proceeds from the sale of the remainder of Telsfra would be directed toward environmental policies, provided evidence of this approach. Corbett (1996) has also suggested that another reason for the sale of govemment assets has been the high levels of public debt. Privatisation allowed for the retirement of debt while also eliminating a fiirther drain on govemment resources by removing the interest cost of servicing that debt.
Foreign firms have done particularly well from privatisations in Ausfralia. There are many examples at both the state and Federal Govemment levels that illusfrate how overseas corporations now own significant parcels of Australian utilities. Examples include the break up and sale of the Victorian electricity system, with five American-confrolled companies taking over the retailing of electricity. In Westem Ausfralia the State Bank was sold to the Bank of Scotland and in South Ausfralia the management of water utilities went to United Water which has French and English- based ownership. That the redistribution of resources means a significant share goes to the global economy rather than to the domestic economy effectively means that the short-term gains of reducing public debt and interest costs have fransferred long- term profits to those outside the domestic economy. Without the abilify to assess the economic impacts of GBE sales on fiiture revenue sfreams, the implications for the public interest are difficult to determine (see Fuimell 2001, chapter 2).
King and Maddock (1996) suggest that Ausfralia was able to leam from experiences overseas to ensure that sales of GBE's did not result in fransfers of monopoly power from governments to powerfiil corporations, as has occurred in the United Kingdom. 198
For example in the electricify industiy the separation of power generation from distiibution and selling has created stiiictural separation which effectively removed the monopoly position previously enjoyed by GBE's such as the State Elechicify Commission in Victoria.
The timing of privatisations in govemment in Ausfralia has generally been behind that of the United Kingdom and New Zealand despite a shared worid economic environment (Corbett 1996, p. 80). Common to each of these countties as the impetus for reform has been the perception that some kind of crisis existed m govemment that needed to be remedied (Olsen and Peters 1995, Osbome and Gaebler 1992). The existence of an unusual combination of economic conditions that fraditional govemment policies could not resolve acted as the critical determinants of reform for many westem-sfyle democracies. Most importantly, the way in which reforms were embraced was dependent on the historical framework of institutional arrangements and the power balances within the respective communities. The economic pressures, the adoption of public choice solutions and the types of instruments of reform used in Ausfralia, New Zealand and the UK have great similarities. To illusfrate the way in which these factors have contributed to different approaches to reform, a brief discussion of some aspects of reforms in the UK and New Zealand will follow. The path taken in the UK was particularly notable for the extent and outcome of their privatisation experiences while in New Zealand it was the degree to which all reforms were theoretically consistent with an overall guiding philosophy that was the hallmark of govemment reforms.
5.4.4 Government Reforms in the United Kingdom
The Thatcher Govemment held office from 1979-1990 during the most active periods of reform advocating a typically public choice theory approach. The 1970's represented a period of increasing inflation and unemployment to levels unseen since the depression in the 1950's (Zifcak 1994). This precipitated the movement towards market-based solutions, with the ascendancy of the public choice preference for jj~ ^ Puxty (1997) provides evidence that economic, political and socio-economic crises provided the impetus for the drive to privatisation for British Telecom and British Gas industries. 199 smaller govemment, reforms to adminisfrative stiiictures and the sellmg off govemment assets. "The Thatcher Government's program of privatisation started earlier and became larger than that of any other govemment. ft served as something of a model to be copied" (Self 1993, p. 94). Britafri had earlier in 1945-51 nationalised industries such as gas, electricify, coal, steel, railways, civil aviation and the Bank of England so that they would operate in the public interest. The same rhetoric was used some thirty years later to justify better resource allocation efficiencies by selling the same assets. Nationalised industries were not performing well when Thatcher came into govemment in 1979. Much of the success of the moves to privatise are attributed by Self (1993) and Hutton (1996) to the unpopularity of unions (for the strikes in 1978-9 that affected the whole economy) and the inflexibility and restrictive practices of the public service unions.
The unitary system of govemment allowed the Thatcher Govemment a great degree of flexibility (Pollitt 1993a, p. 36) to exercise their mandate. It also suited the autocratic style of Margaret Thatcher. Self (1993) suggested that Margaret Thatcher ran govemment like a chief executive of a very large corporation with a hand picked board of directors. Prime Miiuster Thatcher was able to implement policy decisions with minimal debate, consultation or challenges to her domination of parliament. The sfyle was confrary to the fraditional respect for established interest groups and social consensus that conservative governments were known for. The sfyle was, however, very similar to that of the Kennett Govemment in Victoria during 1992-99 (see chapter six).
The reversal of fortunes in what had previously been a prosperous economy led to criticism of govemment and also of the civil service. Civil service was alleged to have neglected their role in effectively managing governmental business and needed to adopt processes that would promote accountable management (Zifcak 1994, p. 13). The Thatcher Govemment infroduced the Financial Management Hiitiative (FMI) in 1982 to reform the civil service as calls for value for money, efficiency and effectiveness mounted. The objectives of FMI were to ensure that managers had clearly defined responsibilities as well as the means to exercise responsibilities. Managers were to have a clear view of objectives and a means to assess performance 200 in relation to attaining the objectives. By the middle of the 1980's FMI had traversed the same path as previous attempts at civil service reform with little havmg changed in the way the civil service was provided or managed. FMI had accomplished little more than adding to the workload of civil servants and producing a volume of descriptive information.
The implementation of FMI in Whitehall and the implementation of FMIP in Canberra met with different measures of success. In Ausfralia the ranks of senior public service positions had been staffed with people who had economic and business qualifications and were therefore more receptive to reforms during the 1980's (Pusey 1991). FMIP was also more comprehensive than FMI with considerable attention being directed to ensuring the efficiency of public servants allowing them to be more responsive in an environment where working conditions were more fair and equitable. While FMI was implemented in a combative sfyle, the more open consultative approach of the Hawke govemment ensured that civil service reforms in Ausfralia had a smoother path. A more open sfyle of govemment may have alleviated some of the implementation problems associated with reform measures, thereby allowing the Ausfralian public service to keep pace with reforms rather than follow in their wake. It was not until the Next Steps initiatives of 1988 that measures were taken to rectify the deficiencies of FMI. The 'Next Steps'
sought to generate more efficient and effective public services by separating the policy making function from day-to-day management/service delivery matters, and by securing a greater alignment in operational and financial responsibilities of civil servants (Humphrey et al 1998, p. 311).
The FMI had concenfrated on ministerial information whereas the Next Steps allowed for govemment agencies to have responsibilify and flexibilify over decision making. It sought to generate a more efficient and effective civil service by separating policy making from day to day management and service delivery matters.
The proposed change was to fransfer 95 per cent of the civil services said to be concemed with service delivery to hived-off agencies, each of which would have a chief executive, a confractual relationship with its parent department (and) a corporate plan detailing its powers and obligations (Self 1993, p. 172). 201
The Next Steps initiative lay the roots for a contracting culture that was to promote the superiority of market mechanisms as the means for efficient resource allocation. Self (1993) has referred to this as the 'big business model' which sfresses the importance of objectives and division of functions within a hierarchical stiiicture. Next Steps had the support of senior civil servants who appeared to welcome returning to the provision of policy advice and leaving management tasks to agencies. Implementation was therefore smoother despite the constitutional problems of who was responsible for agency failure should it occur.
The perceived benefits of the corporate form of organisation are essentially tied to arguments of increased efficiencies attainable by the use of market forces. It is unclear who benefits from these efficiencies in both the short and long term. Evidence from the privatisation experiences in the United Kingdom suggest that efficiencies obtained are not necessarily desirable from a social and community viewpoint. Initially, the government's privatisation campaign offered citizens favourable redundancy payments, generous share offers to workers in nationalised industries and generous discounts for tenants to buy public housing. The short-term gains acquired by bribing affected interests into acquiescence resulted in the creation of many private monopolies providing with rewards/profits going to large institutional shareholders. Vickers and Yarrow (quoted in King and Maddock 1996, p. 32-33) have concluded that
(b)y failing to infroduce sufficiently effective frameworks of competition and regulation before privatising such industries as telecommunications and gas, the Govemment has lost a major opportunity to tackle fundamental problems experienced in the past under public ownership. By pushing the program too far and too fast, the govemment is undermining the long-mn success of privatisation in Britain.
King and Maddock (1996) see the British privatisation process as providing an important lesson for Ausfralia. The UK allowed the purchasers of assets a dominant market position with the benefits of privatisation going to big business that owned major shareholdings (Ernst 1997).^"* By leading the way, the UK experience showed other countries that it was important to ensure that power did not remain
^'' The profits arising from privatisation were often regarded as excessive because the prices set by the British Govemment were too low (Puxty 1997; King and Maddock 1996; Hutton 1996). 202 concentrated in the hands of a limited number of providers and that tt is politically more palatable for profit to be more equally distiibuted. The Australian Financial Review (27/01/95) also suggested that UK privatisations were subject to significant underpricing leading to revenue loss to the govemment of around 2.5 billion pounds. This fransfer of wealth significantly benefited the shareholders in both the short and long term with citizens missmg out on the benefits from more equitable sale proceeds and a price regulation regime that favours shareholders rather than citizens. Self (1996, p. 327) considers that evidence to support stmctural short- termism, social fragmentation and a decay of the political system is a consequence of the universal imposition of the market principle. It appears that the crises that became the catalyst for govemment reforms still remain, although in a marginally different form.
5.4.5 The New Zealand Experience with Economic Rationalism
Like Britain, New Zealand has a unitary govemment with the abilify to implement govemment policies without the need for extended debate and consensus once office had been achieved. Ian Ball, the Cenfral Financial Confroller of the New Zealand Treasury in 1994, confirmed that without any formal written constitution and no state governments, "the New Zealand Govemment can, if it chooses, act relatively quickly and decisively on matters" (Ball 1994, p. 20).
After some initial steps toward economic deregulation in the mid 1970's, the Muldoon National Govemment (1975-84) refreated. It was not until the Lange Labour govemment of 1984 that radical reforms commenced. New Zealand has since been regarded as the most ardent disciple of public choice theory with the Labour Govemment making substantial changes to the machinery of govemment between 1984 and 1990, using pubHc choice as the guidmg ideology. Fallot (1998, p. 156) considered that the
(f)inancial management reforms in New Zealand formed an integral part of a comprehensive fransformation of the public sector and in tum, part of wider economic social and constitutional change. All changes have been fashioned in accordance with clearly articulated theories from institutional economics. 203
Hi New Zealand the realisation of the need for major economic reforms was slower to emerge. However, once the process commenced, progress was faster than experienced in both Australia and the UK (Silverstone et al 1995). The speed with which change was accomplished was a combmation of shorter Imes of communication that a population of less than 4 million allows, a unitary govemment and consensus between politicians and senior govemment officials of the need for action. The Lange Govemment of 1984, and more particularly Roger Douglas a Labour minister^^ acted on public choice beliefs that bureaucracies and mterest groups promoted individualistic benefits. Self (1993) characterised the New Zealand model of govemment reform as being a more pure form of public choice theory. He claimed that
(o)ne mling principle was to separate different types of govemment activity, such as policy advice, implementation, regulation and public enterprise, into separate departments or agencies. The dangers of 'policy bias' or 'producer capture' were thought to be partly due to the combination of fimctions within a single department (Self 1993, p. 173).
The clear distinctions between policy and management are the significant feature of New Zealand govemment reforms. Where a fimction was clearly of a management nature there was no public/private distinction and all players operated in full competition with each other.
The New Zealand Govemment sold the majority of public agencies including, energy, fransportation, banking, insurance, air fraffic confrol, communications, broadcasting and postal services. Those fimctions that remained were separated into those requiring a policy management role, a regulatory role and a social welfare role. To undertake such separation the role of the civil service needed to be restmctured along managerialist lines. Previously stmctured around input confrols as a means of ensuring subordinates were performing, the civil service of New Zealand was highly cenfralised, with a privileged safe career stmcture insulated from political and economic pressures. Like the system in Ausfralia and the UK, the ability to recmit talent outside the public service was very limited with flexibility and initiative being
— . Walker (1989a, p. 3) suggests that Roger Douglas was not the only leading advocate for reform but certainly the most radical amongst a new breed of young members of parliament who were ready to question established policy assumptions. 204 hampered by a rigid employment framework. "In one fell swoop. New Zealand did away with its old civil service system" (Osbome and Gaebler 1992, p. 330). This was accomplished by the implementation of the State Sector Act 1988 in conjunction with the Public Finance Act of 1989. The State Sector Act was the product of a desfre by govemment to manage its own affairs on a basis comparable with the efficiency deemed to be available in the private sector. This necessitated moving the public service away from input confrols to a system orientated towards output accountability. Boston et al (1991, p.52) considered that
(t)he Act change(d) relations between Ministers and public servants and among public servants, alter(ed) the character of the public service and makes possible important shifts in the manner of its operations and the principles which guide it.
The State Sector Act 1988 allowed managers to negotiate their own confracts with their employees, thereby opening the door for political appointments by chief executives, appointments without any merit criteria, and for the principle of independent policy advice to be challenged. There were also implications for the quality of advice in an environment of service confracts with appointinents and promotion being tied to efficiency criteria. Thus, the fraditional Westminster based concept of a civil service in New Zealand was replaced by private sector management practices with the stated aim of efficiency and effectiveness (Walsh, in Boston e? a/1991, p.73).
The Public Finance Act 1989 (PFA) and the State Sector Act 1988 are mutiially reinforcing. Without the changes to the civil service the initiatives of financial reform could not be achieved. Any form of resistance to PFA initiatives were denied as the environment for the effective operation for PFA was already a fait accompli. The PFA is concemed with financial management reform and is the New Zealand equivalent of the FMI initiatives of the UK begun in 1981 and the FMIP in Australia begun in 1984. The New Zealand reforms commenced later and were able to consider the initiatives of other countries before arriving at their own unusual approach. While Ausfralia and the UK concenfrated on improving management efficiency by moving attention to outcomes and constiiicting performance fridicators, the New Zealand model was a more comprehensive reform initiative that concenfrated on distinguishing between govemment output and outcomes. The goods 205 and services produced by departments were described as outputs while the impacts or consequences of govemment activity were described as outcomes. Usfrig these definitions, the govemment would then (using clear agency theory confractual relationships) purchase outputs from departments to achieve stated poHcy outcomes.
Hi confrast to the efficiency arguments, and the desfre to reduce the power of state sector unions, that dominated UK privatisation policies. New Zealand's approach to privatisation seemed to be a desire to reduce debt (Mascarenhas 1991, p. 43). Over a period of little more than two years the New Zealand govemment had effectively sold the majority of public agencies including, energy, fransportation, banking, insurance, air fraffic confrol, communications, broadcasting and postal services, yielding over $8.3 biflion in revenues (Mascarenhas 1991, p. 47). Without the need to negotiate policy implementation in parliament, privatisation was swiftly effected. New Zealand's approach to privatisation "sought to keep regulation and bureaucracy out of industry, preferring to allow the parties to strike commercial arrangements for interactions" (King and Maddock 1996, p. 30). This was reinforced with the threat of regulation if market mechanisms did not create a positive environment.^2 6
The public choice concem for separating policy determination from policy implementation had practical problems. The PFA effectively separated efficiency from effectiveness by allowing agencies to see outputs as the objective of their function. For govemment, the clear articulation of objectives is often as difficult as determining the best way to assess if objectives have been attained. Fallot (1998) and Thynne (1996) suggest that since 1992 concem has been expressed that the increased fragmentation of govemment departments would produce problems for the co ordination of policy and collective decision-making. Boston et al (1991) suggests that this makes ministers in Treasury all powerful with no altemative sources of civil service advice being given to ministers. This is tempered with the belief that the minister is more likely to get more contestable advice. Within these arguments, 'corporate memory', or the wealth of past impartial civil service experience, seems to ^ — The move to direct regulatory intervention did occur in the communications industry where it was found the new entrant into the market. Clear Communications, received little cooperation from New Zealand Telecom. This resulted in a long protracted court battle to determine a fair network access price (King and Maddock 1996, p. 30). 206 be regarded as an obsolete concept. Self (1993) regards this form of institutional stmcture as being more akin to 'ideological capture' rather than 'provider capture'. While measures have been taken to improve fransparency and cohesion, the significant improvement in New Zealand's economic prosperify during the 1990's appears to have made critical analysis a peripheral concem.
Boston et al 1991 have expressed concem for the excessive speed and haste with which reforms took place. Critics have claimed that reforms were poorly managed, had insufficient attention given to their social impact, were highly disruptive, with departments operating in chaos and lack of consultation creating tension and resentment. It appears that "the principal driving force behind Labour's devolution policy was the quest for greater efficiency and accountabilify rather than a quest for participative democracy" (Boston et al \99\, p. 395). On the positive side a striking feature of reforms has been their consistency. Reforms have built on and supported previous initiatives following a similar body of theory and a common analytical framework. The reforms were comprehensive and logically developed. It now remains for the details (some not so small) and consequences to be resolved.
5.4.6 Common Themes in the UK, New Zealand and Australia
The importance of govemment institutional stmctures and the imbededness of interest groups within the political framework have important effects on the abilify of a govemment to impose its will upon the people. Castles et al (1996, p. 34) compared the Ausfralian system of govemance with New Zealand and concluded that
(t)he Ausfralian institutional system - with its formal constitution, its federal stmcture, its upper house in which govemment is usually in the minority- entrenches checks and balances to unilateral decision making ... New Zealand, on the other hand, has a much less formal constitution with fewer checks and balances to hinder the implementation of govemment priorities.
A comparison of the paths taken in the three countiies shows that govemment stiiictures that allow the UK and New Zealand to implement thefr policies swiftly can produce results that have been inconsistent. The New Zealand experience mdicates that where the direction of change has been carefiilly thought out, with appropriate 207
attention to Imkfrig aU aspects of reform under a guidmg, rigorous framework for reform, reforms can result m significant change in public service culttire and generate improved economic performance (Self 1993; Boston et al 1991; Castles et al 1996; Osbome and Gaebler 1992; Fallot 1998; Fallot 2000). Other differences in tiie approach to govemment reforms in the UK and New Zealand were noted by Self (1993, p. 176). He suggested that "(t)he difference is between the more co-ordmative or 'big business' framework of the British reforms and the purer competitive or 'public choice' model of the New Zealand ones. A critical distinst of bureaucracy is present m both cases, but is more marked m New Zealand". The distmction between management and policy and its articulation m new institutional stiiictures is a common theme, with different responses as a consequence of the differing political environments and interests that have had hegemony at cmcial times in the reform process.
Ausfralia has been forced to work more slowly to infroduce reforms with lessons leamed from the precedents set in other countries providmg some input for policy formulation and resfraint. The path taken in the UK was not as well orchesfrated as New Zealand with the unintended consequences of market-based govemment stmctures emerging more quickly than perhaps is apparent in both Ausfralia and New Zealand. The proposition that theoretical justifications were used as a legitimisation tool for reform initiatives rather than as the drivfrig force (as in New Zealand), seems to explain the inability to ascertain improvements in economy and efficiency which reformers had promised.^^
The paths taken in both Ausfralia and the UK have challenged the fimdamental principles goveming the civil service in Westminster style governments. Confractual relationships do little to reinforce accountability obligations in the fraditional sense (see chapter three) and obscure the chain of responsibility to parliament and the people. New Zealand, on the other hand, has found that the fraditional principles of an apolitical civil service were clear obstacles to the reform process and has
2^ —;—~ Halligan (1996, p. 79) agrees that there are closer parallels between Australia and the UK in a numbers of respects. "Ausfralia has followed a more pragmatic mix of principles and practice in contrast to the theory driven reform of New Zealand." 208 substitiited them for the discipline of the market. The quotation from Chapman (1990) on the first page of this chapter seems to have been a premonition that the Westminster system would be challenged. All three nations have made considerable progress with macro economic reforms by assummg that the private sector has solutions for all govemment operations. However, the issues of the appropriate boundaries between public and private relations, between managerial freedom and democratic confrol, the underlying values of civil society that the reformed govemance stiiictures now support and the accountability mechanisms that ensure the public interest, are all increasingly elusive propositions, hi Ausfralia the decreasing separation between public and private mterests received a significant boost with the infroduction of a national competition policy that gave preference to competitive solutions for govemance mechanisms.
5.4.7 Australian National Competition Policy
Before the infroduction of a national competition policy. The Trade Practices Act 1974 (especially part IV) played a significant part in regulating anti-competitive behaviour in industry. The Trade Practices Act regulated behaviour such as resale price maintenance, certain mergers^^, misuse of market power and price discrimination. Prior to the 1970's the inefficiencies within Ausfralian industries were concealed by tariff protection. With increasing foreign investment and rising competitive pressures, the Trade Practices Act 1974 protected the public interest by ensuring that the benefits available from greater efficiencies were not shared by the few at the expense of the general communify (King and Maddock 1996, p. 35). The attention directed to restrictive frade conditions served to highlight uncompetitive practices within govemment monopolies. Govemment monopolies in fransport, telecommunications, and energy were free of direct competition and were a significant part of input costs to most businesses. The difficulties of instituting reform in these govemment enterprises was compounded by the fact that power is shared between three levels of govemment. Commonwealth, state and local govemment jurisdictions often overlapped with GBE's operating at, and sometimes
__ _ _ •— For example, Ausfralian banks are not permitted to merge from four major market operators to three because this has been considered to be detrimental to competition in the banking industry. 209 across, all three levels of govemment. ft was clear that a coordmated approach to reform was needed.
By the 1990's there were many different approaches to applying competitive principles to govemment operations. The methods used included competitive tendering and confracting out, corporatisation and privatisation, market deregulation and reductions in trade barriers (Senate Select Committee on the Socio-Economic Consequences of National Competition PoHcy August 1999). It was possible to change the ownership stmcture from total public ownership, to mixed ownership and, at the other end of the spectmm, to sell govemment assets to private interests entirely. The most significant impetus for a competitive solution to economic efficiency was provided by the Commonwealth Government's comprehensive competitive model known as the National Competition Policy (NCP) (JCPA Report 336, 1995 p. 197). NCP is the result of cooperative agreement between the Commonwealth and state governments for a unified approach to economic reform that was established as a consequence of the Independent Committee of Inquiry into National Competition Policy. The inquiry, chaired by Professor Fred Hilmer, reported in 1993 with the recommendations of the committee mandated in the National Competition Reform Act 1995. The agreement of Commonwealth and state governments to implement NCP initiatives was affected by their endorsement of the Competition Principles Agreement (CPA) signed by state premiers in April 1995.
The Hilmer Report provided the basis for the comprehensive application of competition principles consistently across all levels of govemment and all business enterprises. One of the main features of the report was the requirement for governments to clearly demonsfrate that any restrictions on competition were in the public interest.
The Competition Principles Agreement represents a major fransformationi n the way the Australian economy is govemed. In future, pubhc pohcy will be based on a presumption in favour of competition. Any govemment proposal to restrict competition in any way will be subject to a formal assessment, and may be overmled if it fails to meet certain criteria. Policy makers who until recentiy have been lobbied to provide protection for one industry group or another, will in future be constrained by legislation which assumes against such protection whether it be of a state electricity market or an irrigation area (King and Maddock 1996, p. 42). 210
Governments had previously been able to claim exemptions for many govemment functions from the competitive provisions of the NCP's predecessor, the Trade Practices Act 1974, Part IV section 51(1) (b). The onus of proof under competition policy had now shifted with the need for continued govemment ownership or service provision to be justified as necessary for the public interest, rather than assuming that traditional operational relationships remam appropriate. This was made clear in the guidelines issued by the Ausfralian State of Victoria. The guidelines stated that "as a general mle the Govemment does not support exemptions from the Competition Laws. In other words, the offending conduct should wherever possible, be modified so that it ceases to offend the Competition Laws" (Guide to National Competition Policy 1996, section 6.1, paragraph 6.2). For any govemment to claim exemption from this policy required a detailed process of justification. The Victorian guidelines fiirther stipulate in section 6.1, paragraph 4 that
4.2 Exemptions from Part IV of the Trade Practices Act (or the Competition Code) will be granted only when it has been demonstrated to the satisfaction of the Govemment that:
4.2.1 the benefits to the community as a whole of the restriction on competition (caused by the conduct to be exempted) would outweigh the costs to the community as a whole of the restriction on competition (caused by the conduct to be exempted); and 4.2.2 the objective of the proposed exemption can only be achieved by restricting competition.
These paragraphs have been referred to as a 'public benefit test'. The degree to which these tests are subjective and require prediction about potential cost savings and benefits which restiicted competition may generate makes it difficult to justify any exemption. The task of defining public interest is assessed on a case by case basis in relation to a list of indicative factors affecting costs and benefits (National Competition Council 1996; Maddock et al 1997). The existence of a public interest override highlights that there are certain circumstances where it was contemplated that society's interests would not be served by allowmg the govemment to pass responsibility for service provision to non-government providers, due to a conflict with social objectives. The long-term nature of the provision of social infrastiiicture in govemment is not compatible with the short-term impacts of profit-orientated markets. The perceived need to adopt market-based sfrategies will not necessarily 211
improve democratic rights. Histead, each case will be considered on its own merits by a govemment that, as past experience has demonsfrated, may have an objective that is different from that of the 'public friterest'.^^ ft remains to be seen whether the means available for ensuring that the public interest is adequately safeguarded are effective in curbing any overiy enthusiastic proponents of reform 30
The application of National Competition Policies to govemment operations has made significant new market segments available to private business. As the govemment refreated to provide 'steering' rather than 'rowing' capabilities this provided a vacuum into which busmess could move. Representation of business interests in many influential circles of politics has allowed them to successfully market their services and fiirther the pursutt of self-interested profits, ft is not surprising that NCP has played a significant part in moving business interests forward in govemment operations.
Chapter six, which follows, provides a detailed analysis of the way in which economic rationalism was implemented during the period between 1992 -1999 when Premier Jeff Kennett held office in Victoria. This period of govemment represented the most significant govemment assault on accountabilify, the public interest, auditing and the fraditional Westininster principles of govemment
5.5 The Outcomes of Economic Reform
The theoretical basis for economic reforms is neo-classical economics or, "more generally, it is a theory that provides an ideological justification for laissez-faire capitalism" (Stilwell, in Rees et al 1993, p. 31). Stilwell also claims that "the atfraction of the market model lies in its apparently democratic character ...
25 1 Evidence of this concem exists in an interim report of the Federal Senate Select Conmiittee on the Socio-Economic Consequences of National Competition Policy, Competition Policy: Friend or Foe Economic Surplus, Social Dejicit? (August 1999). The report states that there is evident confiision over what constitutes 'public interest'. There is evidence that reforms are having unintended consequences. The Senate Select Committee on the Socio-Economic Consequences of the National Competition Policy (Febmary 2000) Riding the Waves of Change expressed concem that efforts to increase competition had eroded "the social cohesion of some communities and devalu(ed) social objectives at the expense of economic objectives such as productivity and efficiency (p. xiii). 212
However, economic inequalify is built into the system because it is based on a principle of 'one doHar buys one vote' rather than 'one person one vote'" (p. 32). Public virtue and collective purpose have been subordmated to ideas of negotiation, political coalition and competition (March and Olsen 1995, p. 5). The Canberra Times (24/10/98) echoed this viewpoint by suggesting that
(w)hile the notion of tiny government and large private sector keeps the banks and stock markets happy, it does nothing for community wellbeing. As we destroy our commons, we progressively destroy our social capital and our sense of belonging. As we dance to the tune of the economic rationalists, the rich get richeran d the poor get poorer.
Goveming involves affecting the institutional frameworks within which citizens and officials act and politics occurs to achieve democratic ideals. Changes to the framework are made in response to the will of people as democratic ideals evolve over time. The reasoning underpinning institutional change during the reform era has been couched in public interest advocacy terms as a consequence of the need for govemment to act responsibly with public resources. The persuasive appeal of these resource efficiency arguments has resulted in much smaller govemment. The extensive use of confracting has allowed the govemment the option to withdraw from service provision and in some cases to withdraw from the market altogether by selling interests to private suppliers. The savings arising from the reduced number of public servants provides a measurable outcome for the tools of reform that can be used as an indicator of positive efficiency gains. Direct provision of goods and services has been substituted by regulation in an oversight capacify with no operational involvement. While this seems to represent the current philosophy of Ausfralian governments, there is evidence of some, perhaps unintended, consequences of the reform processes.
The reform agenda has promoted competition, economic consfraints and economic rewards as the basis for decision making. Citizens are being freated as though they are consumers with choice between suppliers and the ability to pay for a product or service of the quality they desire. The reality is that citizens can often prove to be captive markets at the mercy of infrastiiictiire suppliers. The link between the quality of community services and efficiency cannot be clearly demonsfrated in financial terms. While public choice ideology claims to reward the efficient with resources. 213 however well or how poorly private sector tools deliver the aims of economy and efficiency, competitive resource allocation is deemed to be superior to non competitive resource allocation.
Economic rationalism is not unique to the public sector. The need to be intemationally competitive has changed the attitudes of large corporations (BRW 17/11/2000). With increasing competition, the willmgness to cater for the wants of a marginally inefficient small group of consumers has been superseded by economies of scale. It is more profitable to cater to the many with a standard product with the notion of cross subsidization having a diminishing following. The need to economise is common to both public and private enterprise. Private industry cannot be forced to provide services in uneconomic locations (unless paid to by govemment) as their prime objective is to maximise retums to owners of capital. The govemment on the other hand still retains social equity obligations even in circumstances where the provision of public goods and services has been privatised. Private providers of services will be reluctant to forego profitability and the government's ability to influence or ensure equity is thus reduced. The potential to disadvantage certain sections of the commuruty exists unless the govemment is able to build appropriate safeguards into legislation goveming the provision of goods and services to the public (57? ff 21/01/2000, The Age 5/02/2000).
As rural communities become the losers in 'resource allocation efficiency arguments' there is a perception that depressed prices for primary production together with economic rationalisation is creating 'regional divergence' (BRW 21/01/00, pp. 43 - 48). The withdrawal of services has the effect of fiirther reducing employment opportunities and contiibutes to an uicome and wealth divide between countiy and city citizens. Given that AusfraHa's collective prosperity is derived from political stability and social cohesion, growing inequalities in income and wealth have the potential to undermine the social fabric of the community. The ability to service other needs is no doubt part of the rational justification for resulting inequities. Consequently, the fraditional notions of social justice are being challenged (Funnel 2001). 214
The Worid Economic Fomm held in Davos during Febmary 2000 voiced similar concems about social justice issues. Globalisation and reduction of frade barriers were generally viewed as being beneficial to economic growth while at the same time increasing the divide between the rich and poor individuals. The director of the Intemational Labor Organisation, Juan Somavia, wamed that "the world cannot divorce social and employment issues from other developments in the global economy if the processes of globalisation are to prove sustainable" (The Age 5/02/00, p. 9). A continued commitment to increased competition in the domestic and intemational arena changes economic outcomes and the role of govemment needs to be reassessed to ensure that social values of the communify are maintained by other means.
The complexify of govemment cannot be reduced to the measurable outputs that competitive management practices require to assess efficiency. Armed with this knowledge it is surprising that the private sector was viewed as holding the necessary keys to reform. Wanna et al (1992, p. 10) suggest that
(o)ne of the major dilemmas for public sector management is that formal objectives adopted or imposed on the public sector are problematic and difficult to combine. Some objectives are not easy to reconcile, others are competing. Some may be mutually exclusive or even contradictory in intent. Public sector goals are inherently complex and many are formidable and even unquantifiable.
Meyer and Rowan (1977) claim that while the desire for efficiency may have been the main motivation for organisations to change in the past, today, however, the appearance of efficiency rather than efficiency itself drives the change processes. The process of isomorphism results in common standards and forms for operating. Meyer and Rowan (1977) and Carmthers (1995) have suggested that the continuing convergence of private and public sectors' management practices have more to do with copying another acceptable practice than any inherent benefits of change. Despite the perceptions of uncertain outcomes, the neo-classical economics model, once given a clear path for development, cannot realistically be undone. To buy back govemment enterprises and regain a depth of knowledge in departments that have been vastly reduced in human resources is not practical in the short term. Development along a chosen path can become a self-perpetuating exercise. 215
Retiiming to Pusey's two stiiictures of govemment at the start of tiiis chapter, it is becoming clear that the prevalence of the economic rationalist agenda is creatmg an imbalance between the dual stmctures oft govemment, bureaucracies and law, and economies, markets and money. The smaller role of govemment with more govemment services being provided under economic rather than public friterest objectives, is producing undesirable consequences. Outcomes that are undesirable, within the meaning of social equify and values, have the capacity to change the definition of public interest upon which governments base their franchise. To cater for the collective majorify at a predetermined standard which assumes that all citizens are alike is not the accepted Ausfralian democratic ethic.
5.6 Conclusions
Just as the govemance of any nation represents an amalgam of social, political and economic values, so does the operation of economic markets. Markets are imbedded in a network of social and political institutions which give them values and priorities (Self, 1993). In this respect markets are inter-related systems which are reliant on values which cannot be mediated by the classical economic incentive of price. The relationships of trust, commitment and cooperation are part of contractual commitments. The self-interested operation of markets cannot be considered in isolation from their operation within the broader context of sociefy's value systems.
Powell contends that institutional pattems of change are
neither frequent nor routine because it is costly and difficult. When change occurs, we contend, it is likely to be episodic, highlighted by a brief period of crisis or critical intervention, and followed by longer periods of stability or path dependent development (Powell, in DiMaggio and Powell 1991, p. 197).
The reform era in Ausfralian govemance fits this description. When the dominant ideology in vogue until the 1960's provided little assistance for the declme m economic prosperity, a new order forced change in govemment. The economic crises of the 1970's and 1980's provided a fertile ground for change with the private sector being held up as a model to be emulated. The govemment in Ausfralia remains committed to public choice ideas espoused by a national program of infroducing 216
contestable markets for all govemment operations. The costs of making this paradigm shift have been significant with the govemment now set on a 'path dependent' development route.
The conceptual misgivings expressed in relation to the reform agenda do not defract from the politically atfractive propositions of economy, efficiency and the role that market mechanisms play in providing choices. However, theory takes little account of inequalities of bargaining power and the actual institutions and stmctures through which markets operate (Self, 1993). The market system does not have all the answers. In govemment adminisfration a silent electorate does not equate to 'satisfied customers'. The abilify to be able to determine costs, efficiencies and effectiveness in the long-term social equify environment of govemment has received scant attention by govemment.
Chapter six provides a detailed examination of public sector reforms for Victoria. The particular focus of this chapter is the outcomes of govemment reform during the period that Jeff Kennett was in govemment, from 1992-1999. The rise in the importance of state governments as a consequence of economic pressures has provided a fertile ground for reform initiatives. The ways in which reforms were achieved and the subsequent political and electoral outcomes provide an illustration of the consequences of a redefined role for govemment within an economic rationalist agenda. With an initially sfrong electoral endorsement the Kennett Govemment infroduced a massive program of privatisation and confractualism into Victoria. While many of the initiatives were not a new phenomenon, the significance of the Victorian experience lies with the concerted attack on principles of accountability and democracy as a means of silencing critics of reform. 217
CHAPTER SIX
VICTORIAN PUBLIC SECTOR REFORMS
6.1 Introduction
The state of Victoria will be used as a case study to illusfrate how economic theories, contextual elements and interest groups have shaped the development of economic reforms. Victoria is a state which had a population of approximately 4.7 million hi 1998^ making it the second most populated state of Ausfralia. Ausfralian states are large and powerfiil units of govemment which share similar institutional stmctures with the Australian Federal Govemment. It is therefore possible to examine govemment reform through comparative analysis of similar units of govemment as they move through different developmental stages (Halligan 1996, p. 80). Victoria has had a period of rapid reform made possible by the large electoral majority enjoyed by the Kennett Liberal Governments of the r990's. The reforms were more radical than the path taken by the Commonwealth Govemment with Victoria being considered a social laboratory producing outcomes that potentially could be adopted in the rest of Ausfralia (King and Maddock 1996).
Jeff Kennett, the Liberal Coalition^ Premier of Victoria between 1992 and 1999, had the greatest influence on reforms in his state. The Age editorial (23/10/99), reflecting on the Kennett Government's election defeat in October 1999, observed that
measured by any economic yardstick, the Kennett Govemment was the most radical any Australian state has known since Worid War II. It's privatisation program, restmcturing of the pubhc service and commitment to competition pohcy have completely changed the relationship between govemment and its citizens.
Costar and Economou (1999, p. vii) described the Kennett years in govemment as
At this time. New Zealand's population was 3.8 million. ^ The coalition consisted of the Liberal Party and the much smaller National Country Party. 218
the most activist, controversial and ideological administration in twentieth- cenfriry Victoria. This has been particularly so in the realm of public policy, where the government's relentless application of neoliberal economic theory constifrites a clean break from Victoria's long tradition of social liberalism.
The Federal Govemment essentially paved the way for Victoria's economic reforms by promoting a national approach through National Competition Policy legislation, whereby state governments all agreed in 1995 to infroduce reform measures that were the precondition to additional Federal Govemment funding.
Victoria's major reform initiatives under Premier Kennett commenced after those of New Zealand and the United Kingdom, both of which provided a range of reform instiiiments that could be adapted for Kennett's own particular reform program. The progressive infroduction of economic reforms in Victoria made greater use of market mechanisms in areas that have traditionally been regarded as core public sector activities. The previous, clearer distinction between public and private sectors is now much more obscure with even those activities that have not been privatised now permeated by the contracting and outsourcing techniques followed by the private sector.
During any period of major stmctural change in govemment, the existence of both a powerfiil ideology and a sfrong leader is required to provide the necessary impetus for action (Self 1993, p. 71). The United Kingdom had Margaret Thatcher and New Zealand had a group of powerfiil public servants from Treasury with an affinify for public choice theories (in particular the finance minister Roger Douglas). Kennett's significant electoral victories in 1992 and 1996, which gave his party sfrong majorities in both houses of parliament, meant that he was able to reform more rapidly and radically than, for example, the Federal Govemment. Therefore, the checks and balances that a bicameral system of govemance normally provides were mostly rendered ineffective. Policies were infroduced with speed and limited
^ In the State election of 1992, the Liberal-National Party Coalition won 61 seats out of 88 in the Legislative Assembly, while the ALP held only 27 seats. In the Legislative Council the Coalition held 30 seats out of 44 seats and the ALP held 14 seats (Mathews and Grewel 1997, p. 470). In the 1996 election, despite a swing of 2.8 percent to Labor, only three seats were lost by the Keimett Govemment in the Legislative Assembly and four seats in the Legislative Council (Costar and Economou 1999, p.lOO). 219 consultation while dissenters had very limited avenues for havmg thefr views heard. Premier Kennett's dominant autocratic sfyle contributed to a reputation for getting the job done.
6.2 The Historical Context for Victoria before the Kennett Reforms
Victoria became an independent colony in 1851, with tts own constitution m 1855 and its own pariiament since 1856. Hi 1901 tt became part of the newly federated Ausfralian Nation with the Commonwealth Constitution"^ providing for specific powers to be exercised by the Commonwealth (section 51) with other residual powers of govemment resting with the states (Nicholls 1991). Federalism contiibuted to the development of Ausfralia as a nation by reducing disparities between parochial state interests and promoting equity for all Ausfralian citizens. The Constitution established the importance of the Federal Govemment as the primary revenue-raising agent via taxes on citizens. A consistent approach to taxing and excise policies, the coordination of war effort during World Wars I and II, the development of a social welfare system and a long post war boom saw an ever increasing cenfralisation of revenue raising power and Commonwealth dominance over the states. This created a fiscal imbalance between the Commonwealth and state revenue raising capabilities with state governments being heavily reliant on financial assistance from the Commonwealth Government.^ The stmcture has generated a sfrong cenfralist govemment with the ability of the Commonwealth Govemment to implement national policy by virtue of its abilify to manage state govemment fiinding allocations (Mathews and Grewal 1997). By the 1970's this domination was described as leaving state resources at a level which was "quite inadequate to enable them to discharge their constitutional responsibilities adequately and effectively" (Mathews and Grewal 1997, p. 24).
In this section the 'Commonwealth Government' and 'Federal Government' are used interchangeably. ^ Kouzmin and Scott (1990) provide statistics that show that Commonwealth Govemment revenues represented 41% of total govemment revenues with all states and local govemment making up the other 59% in 1901-1902. The vertical fiscal imbalance between levels of govemment was at its highest in 1949 with the Commonwealth having 85% of revenues and the states 15%. The frend since 1949 has been for a marginal but progressive increase in state revenues to 27% of total govemment revenues in 1985-86 and 40% in 1991-92 (Bureau of Industry Economics, 1994, p. 22). 220
With Commonwealth Govemment revenues declining during the economic downtum in the 1980's state governments had to become more proactive m finding altemative sources of revenue. Thus, the imposition of payroll tax, bank taxes, gambling taxes and stamp duties provided the means to achieve a level of autonomy in serving the needs of citizens. Galligan (1990, p. 25) agreed that "(f)rom a high point of fiscal dependency in the mid-1970s owmg to the impact of the Whitiam Labor Government's centralist policies, the frend has been steadily towards more state self reliance". Murray and White (1992, p. 135) considered that
(t)he 1990s saw a more searching critique of the nature of State Govemment throughout Australia. The States seemed likely to remain the chief level of Govemment in people's lives and atfract greater attention and scmtiny than had been typical since 1945, when the Commonwealth had become so dominant. By the 1980s, the public mood had swung away from the tmst in Canberra govemment so typical of the post-war era.
From the time of federation to the 1970's the dommance of the Commonwealth Govemment over state affairs meant that Victoria^ experienced little dramatic change in the political landscape.^ When pressures for reform began to mount, the concems were driven by economic considerations. Reforms commenced in a tentative way under Labor Governments in the 1980's and advanced at a frenetic pace to produce, in the 1990's, the most confroversial period of govemance in Victoria to date.
6.2.1 The Economic Context for Victorian Reforms
For Victoria the 1970's was a period of declining global economic fortunes. The state commenced the decade with drought affecting the rural economy and a heavy dependence on an obsolete, inefficient manufacturing sector reliant upon textile, clothing, footwear and fransport industries. A period of falling levels of tariff
Victoria is one of the two states, New South Wales is the other, which has historically dominated the Ausfralian federation. Change of the type that would cause a paradigm shift in the role of govenmient rather than political manoeuvring and party conflicts that caused the rise or fall of governments. This period coincided with a period where "we have been stmck by the paucity of serious analytical writing on post-colonial Victorian politics" (Hay and Warhurst 1985, p. xii). This deficiency in the literature dealing with state politics is perhaps not surprising, in an era where policy was dominated by the Federal Govemment. 221 protection served to emphasize weaknesses fri the economy with the heavily protected manufacturing sector suffering the most serious economic pressures as a consequence of exposure to competition from intemational markets. Compared with other states "Victoria's share of national manufacturing tumover is higher than average in Textiles, Clothing and Footwear and Transport equipment. These industries receive high levels of govemment assistance and were heavily affected by the restmcturing of the 1980's" (Bureau Of Industry Economics 1994, p. 43). This decline in the importance of clothing and footwear continued into the 1990's.
Also of concem in the early 1980's was the condition of Victoria's public finances. Victoria's debt levels rose significantiy through the 1980's and by 1991-92 far exceeded that of any other state or territory govemment. In 1994 the Bureau of Industry Economics (1994, p.46) concluded that the "debt to GDP ratio of 35 percent is the second highest for a state, after Tasmania ... Victoria will come under pressure to raise taxes and/or cut expenditure fiirther during the 1990's to service that debt". The level of state govemment debt rose by 30 percent from June 1989 to June 1992, during the time when the Cain/Kimer Labor Governments^ were experiencing major financial disasters in the public sector (discussed below).
For much of the twentieth century the Victorian economy had fravelled a path similar to that of the national economy with a period of economic growth in the post-war period and a general slowing of the economy by the 1980's. The post-war boom had been fuelled by cheap oil and immigration policies that allowed for skilled labour to contribute to economic growth. The three-fold increase in oil prices^", together with the 40 percent rise in real wages between 1968 and 1975 emanating from govemment policy, in particular holiday loadings and equal pay for women, made the confrol of govemment expenditure difficult (Murray and White 1992, pp. 34-35). The expansive policies of govemment in the 1970's could not continue into the next decade. Economic consfraints meant that aU factional interests could not be satisfied. These problems were compounded when the Federal Govemment faced world conditions that began to undermine its economic sfrategy. The Hawke Government
^ John Cain was Premier from 1982-90 and Joan Kimer was Premier from 1990-92. "* The first substantial increase was in 1974, then in 1979-80 and again in the eariy 1980's. 222
(1983-91) cut state govemment credtt, restricted revenue to Victoria and fransferred some of its own responsibilities to the state, thereby addfrig to expenditure pressures (Considine and Costar 1992; Garden 1984).
A significant portion of Victoria's economic woes, however, were of its own making. The failures of the Victorian Economic Development Corporation, the collapse of Tricontinental Holdings (a subsidiary of the State Bank of Victoria) and the Pyramid Building Society were significant events which left the state economy in turmoil (NichoH's 1992, p.S7). This allowed the Opposition to campaign for the next election on the basis of the financial mismanagement of the Labor Govemment.
The Victorian Economic Development Corporation (VEDC) was initially an initiative of the Liberal Hamer Govemment (1972-81) to promote economic recovery in business by the provision of financial assistance. Its successor Labor Govemment, headed by Premier John Cain, presided over the period when the VEDC grew rapidly to become a source of ever increasing loans for enterprises with questionable potential. VEDC loans of $11 million in 1981-82 had increased to $200 milHon by 1985-86. Some indication of the policy that determined the operations of the VEDC can be gauged from a promotional brochure.
The Victorian Economic Development Corporation is a unique financial institution in that its general lending policy is a calculated compromise between the level of security required by banks and of the higher interests rates charged by finance companies. Consequently, the Corporation is prepared to contemplate assistance to companies involving higher associated risk than that normally accepted by other financial institutions (quoted in Murray and White (1992, p. 47).
The VEDC operated differentiy from other forms of business assistance schemes in that the VEDC was prepared to take up equity in the businesses tt supported. While the govemment owned the VEDC, the board was confrolled by businessmen who were given lending targets to achieve in a manner consistent with contemporary management practice (Murray and White 1992). With the stock market crash of 1987 many businesses that had benefited from financial support by the VEDC were generating losses and bad debts. The decline in property values and shares prices meant that much of the collateral offered for loans was deficient as security. Increasing concem about the state of the VEDC finances prompted the govemment 223 in December 1988 to commission Fergus Ryan, a partner of a chartered accounting firm, to conduct a limited inqufry into the affafrs of the VEDC. The Ryan Report (as the report became known) criticised management for acting outside thefr authorify and for inappropriate management practices, ft also complained that
(s)ubstantial amounts of money were advanced, without the full Board considering complete and detailed information about the viability of the business ... Reassessment procedures became less and less rigorousan d there was a tendency to throw good money after bad (4.3.4). The VEDC's assessment and monitoring procedures were inadequate and ineffective (4.3.8)(Ryan, 1988, p. 5).
In conjunction with the criticism of VEDC management were criticisms of govemment ministers for not being more aware of VEDC activities and for not providing policies for the qualify control of loans which had allowed the govemment to assume a position of risk by taking up equify in questionable entities (Ryan 1988, p. 31).
The Cain Government's financial and political difficulties were greatiy compounded with the collapse of the state's own bank in 1990. The State Bank of Victoria (SBV) had originally been a savings bank used to provide mortgage finance for qualifying customers. It had progressively diversified since the late 1950's to include fiill retail banking services and aspired to take advantage of the financial deregulation opportunities that were being infroduced by the Federal Govemment. Changes in the intemational monetary system had prompted the Federal Govemment in 1979 to conduct an inquiry into the deregulation of the finance industry (known as the Campbell Committee). The inquiry resulted in the Federal Hawke Govemment deregulating the finance sector in the mid 1980's, causing the market position of the existing players to be undermined. The effects of deregulation were keenly felt by the SBV.
When the Labor Govemment came to power in 1982 SBV^^ owned 25 percent of a merchant bank known as Tricontinental Holdings (Trico). Although SBV was conservative in its lending policies, with fraditional sources of funds, there were
The Savings Bank of Port Phillip was first opened in 1842 and became known as the State Bank of Victoria in 1896. 224 pressures to improve performance. Prior to the Victorian Govemment acqufring its interest in Trico, it was known that Trico operated at the riskier end of the money market (Armsfrong 1992) where retums were greater. Thus the potential for higher retums prompted the SBV to acquire an interest. When problems surfaced in relation to Trico's poor qualify loan books the dfrectors of SBV decided to buy out the existing unhappy partners to acquire fiill ownership of Trico in 1985. The choice of trying to build up the entify with future business in a broader growth sfrategy seemed preferable to winding operations down or trying to sell Trico outright (Murray and White 1992, p. 61). Govemment approval for this was given with little knowledge about the quality of the investment. The SBV operated independently of govemment with no detailed information being made available to the govemment through its Department of Management and Budget, because of concems about commercial confidentialify. SBV found that with full ownership, rather than reining in the lending policies of Trico, the status of Trico had been enhanced as a subsidiary of SBV with govemment backing. The aggressive lending department of Trico took advantage of this new level of confidence by stepping up tts speculative lending. In a climate of increased competition, lending was extended to enfrepreneurs and developers with second-rate securify, in the form of shares, often being accepted as collateral. Lending consequently ballooned, as did the government's exposure to commercial risks. Prior to fiill confrol of SBV in 1985 Trico had lendmg of $1 billion. By mid 1988 lending had exploded to more than $4 billion (Murray and White 1992, p. 62).
The SBV's emerging problems were compounded with exposure to the hospitality and tourism sectors as a consequence of the airline pilots stiike of 1989 and the Tiananmen Square massacre in June 1989 in Beijing, both of which created an environment of hesitancy in worid markets. Hi Ausfralia, the depressed environment for invesfrnent and employment continued to take thefr toll on busmess confidence (Armsfrong and Gross 1995, p. 213). A combination of rising interest rates, depressed property values, and the sudden coUapse of two large borrowers of fimds, the Christopher Skase Group owing $202 million to SBV and Alan Bond owing $300 million, contiibuted to the subsequent collapse of Trico in late 1989. The Royal Commission established in 1992 to investigate the coUapse of Trico concluded that 225 govemment loses of $1.7 billion (Murray and White 1992, p. 68) were the consequence of poor management and unsound business practices. Murray and White (1992) contended that members of the board of the SBV were generally inexperienced and that the govemment had not taken sufficient interest in monitoring the activities of what amounted to one of the largest financial interests of the state. It is interesting to note that John Cain (1992, p. 267) defended his government's handling of this financial debacle by pointing out that the Royal Commission into the Trico collapse had found that losses did not result from govemment failures or incompetent bureaucracy. While the govemment and ministers may have been cleared of any blame by the Royal Commission, the public would be reminded of the financial catasfrophe by the Kennett Govemment which took undisguised delight in blaming for many years the state's financial mess on the Cain and Kimer Goverrunents.^^
The reputation of the Cain Govemment was further famished by the collapse of the Pyramid Building Sociefy in June of 1990. Murray and White (1992, p. 68) suggest that the "State Bank crash intimately affected, if tt did not cause outiight, the closure of the Pyramid building society group". Rumour had caused a run on the building society deposits with some $1.3 bilHon in unsecured depostts from 200,000 depositors being frozen. The Treasurer Rob Jolly and the Attomey-General Andrew McCutcheon had tiied to avert further loss of confidence by making a public statement to assure deposttors in Febmary 1990 that they should feel safe and secure about their investinents in Pyramid. The Cain Govemment was reluctant to provide funding to prop up Pyramid so soon after the massive losses of Trico. The Victorian Labor Government's touted reputation for competence, rectitiide and sound management was in tatters. When Pyramid closed its doors in June 1990, the assurances given by the govemment were subsequently used by bitter depositors to secure a partial govemment assistance package. This assistance offered by
'^ During debate in pariiament in the eariy 1990's the Liberal Party in Opposition refened to the evidence of financial mismanagement in organisations like the VEDC, the State Bank and Tricontinental Corporation Ltd, indicating that the govemment was tiying to hide something m a 'budget fiddle'. They also predicted that "(t)he people of Victoria would throw the govemment out of office and would not let the Labor Party back into govemment until after the year 2000" (Second reading of the Public Account Bill, Hansard 8/04/92, p. 18). This proved to be a reasonably accurate prediction. 226
govemment was criticised by the finance mdustiy (Armsfrong 1992). It was considered that private investors should assume responsibilify for thefr own risks and the govemment should not have bailed out those who had enjoyed the benefit of higher retiims in recognition of risk. Consumer confidence and spendmg plummeted in Victoria when the economy was already in decline. ^^
At the time that the Victorian Labor Govemment was being soundly rebuked for what the electorate perceived to be its fmancial incompetence, Victoria entered a period of spectacular corporate failures in the private sector. Many significant business enfrepreneurs, such as Alan Bond, Christopher Skase, Russell Goward, Laurie Connell, Abe Goldberg, George Herscu and John Spalvins, had gone from being heroes to villains in the corporate worid. These enfrepreneurs were supported by a wealth of financial expertise yet still managed to fail in business (Clarke et al 1997). The stock market crash of 1987 which precipitated the fall of high profile businessman also contributed to massive corporate bad debts in 'blue chip' companies and many banks, as a consequence of the collapse of properfy values and interest rate increases. Contributing to the Cain Government's poor management reputation was the lack of real confrol over large sectors of the labour force involved in key industries. The govemment needed to have confrol over these sectors to advance reform processes.
6.2.2 The Social Context for Victorian Reforms
Traditionally, the relationship between Labor Goverrunents and unions had been perceived as a political asset. This may have been tme of the early part of John Cain's Govemment but by the end of Labor's term in office the association with unions had deteriorated to the point where they had become a liabilify. With large statutory authorities, particularly the State Electricify Commission and Vicrail, and powerfiil public sector unions having confrol over large groups of workers the govemment had limited confrol over industrial relations. The abilify of striking
During the Pyramid saga the Federal Govemment, that had been critical of Premier Cain's economic strategies, refused to assist with Victoria's financial problems by helping Pyramid to frade out of its difficulties (Armsfrong 1992). 227 workers to shut down essential services put the unions in a powerfiil position. In the first half of the decade unions had been able to secure pay increases, job security and govemment expenditure on services. The power of uruons within statutory authorities meant that Labor Governments could only infroduce reform initiatives if union interests were not damaged. In one case the govemment "carried out a major reorganisation of the transport authorities in 1982-83, in a large-scale consultative process, with relatively little friction. But, as the required reforms began to adversely affect the job securify, conditions, job definitions and union coverage of the public sector employees, which was increasingly the case after 1985, the govemment encountered union resistance" (Alford 1992, p. 154). Consequently, fransport unions were no longer as willing to negotiate with govemment about fiirther reform policies. "The idea of frade-offs and bargaining multi-issue packages was quite foreign to this scene" (Alford 1992, p. 149).
John Cain slowly changed the climate of union antagonism to reform by ffrst puttmg the machinery into place to secure govemment-wide confrol of pay and conditions in the early 1980's and then proceeding to make legislative provision for employee representation and consultative rights in major agencies. In 1982 and 1983 the Cain govemment created an Industrial Relations Task Force which encouraged union applications for industry agreements, secured site agreements prior to the commencement of constmction projects, appointed conciliators known as 'industrial liaison officers' and supported wage indexation and the sharing of productivify increases (Alford 1992, p. 150). The govemment successfully laid the groundwork for the use of concessions in bargaining as levers to induce unions to participate in reform implementation. However, with increasing budget problems and the need for financial resfraint, relations between the Labor Parfy and the unions began to sour in the latter half of the 1980's. The Labor Govemment was not able to use the foundations established to advantage, with the payoffs unfortimately coming much later to the benefit of the succeeding Liberal Govemment when fiirther restiiicturing facilitated the corporatisation and subsequent privatisation of many govemment utilities (Alford 1992, p. 157). 228
By 1986 budget problems and the rise m disputes associated with efforts to rationalise and restiiictiire in the areas of health, the railways and education had created a climate of mutiial distiiist between govemment and unions. Relations between the govemment and unions deteriorated significantly, the 1980's finishing with a damaging confrontation over the unpopular MetTicket in 1990. The infroduction of machine generated tickets for public fransport users was not supported by either the users or providers of fransport services. The unpending Federal election campaign in March 1990 and the mtervention in the dispute by the Federal Minister for Transport, Gerry Hand, caused the govemment to back down on the infroduction of machine generated tickets.^'*
Other policy initiatives implemented during the period of the Cain Govemment, which were perhaps weakened by the need to get legislation through the Legislative Council where the govemment did not have a majorify, provided greater freedom of choice and recognition of the interests of citizen groups, together with broader communify quality of life issues. Reforms to the regulation of liquor licensing with the infroduction of the Liquor Control Act 1987 allowed for cafes and restaurants to compete with hotels in the provision of liquor. Tighter control over firearms was achieved amid a concerted attack from the gun lobby. ^^ The consolidation of traffic accident and workers' compensation schemes under the umbrella of Workcare in 1985, the provision of legislative backing for equal opportunify practices, particularly for women in the Equal Opportunity Act (1984), and a concem for the environment with the creation of an Alpine National Park in 1990, a Code of Practice for the timber industry in 1990 and for the amalgamation of previously fractured responsibilities under the umbrella of the Departinent of Conservation and Environment in 1990, were all of substantive benefit to Victorians. Although the Cain Govemment did undertake many innovative policy initiatives, its poor
Machine generated tickets were subsequently infroduced in 1998 by the Keimett government. The Kennett govemment was able to ignore any opposition by virtue of a clear majority in the Legislative Assembly. '^ The Hoddle Sfreet and Queen Sfreet shootings in 1987, in which several people were killed by a deranged gunman, generated considerable public support for the tightening of firearm confrols, despite powerful resistance and the sympathetic positions adopted by the National and Liberal Parties. By 1988 the controls over the regisfration and licensing of particularly semi-automatic firearms were "the strictest in Ausfralia" (Considine and Costar 1992, p. 131). 229 economic management record overshadowed these initiatives, leadmg to the electoral downfall of the Labor Govemment.
6.2.3 The Political Context for Victorian Reforms
Victoria has been characterised by Staley (1970) as having discrete time frames where developments in politics can be clearly delineated. He refers to the period up to 1955 where governments 'feU like nine-pins'. From 1924-55, for example, there were eighteen governments formed, eight of which lasted a year or less, and another eight that did not go to full term (Staley 1970, p. 21). Up to the election of the Henry Bolte in 1955, governments were dominated by factional interests and changing allegiances with no unifying political party stmctures to ensure a majorify govemment could be formed (Holmes 1976; Hay et al, 1985). Staley suggests that these disorganised governments had no real policy platforms because of a "particularly important bundle of complications ... involved in the confusion of responsibilify inherent in the federal-state division of powers, and the infra-state complexities of responsibility involved in state and local govemment operations" (Staley 1970, p. 10).
The Liberal^^ Govemment elected in 1955 settled down to a period of stability for the next twenty-seven years with Henry Bolte as Premier from 1955-72, followed by Rupert Hamer from 1972-81 and Lindsay Thompson from 1981-2. More importantly, between 1955 and 1999 there have been only three changes of govemment. The Labor Party has enjoyed only one extended period of mle for most of the post-war period, from 1982-1992. During the long period of conservative politics, with the Botte Govemment making clever use of independent commissioners and federal-state relations to diffuse any emerging political
'^ The Liberal Party is the main right-wing or conservative party with support for private enterprise within a welfare state. It tends to appeal disproportionately to the middle-classes and finds a solid support base in residential areas. With two thirds of all Victorian citizens living in mefropolitan Melboume, Victoria is highly urbanised and centralised (Bennett 1973). The significance of the Victorian Liberal Party to Ausfralian Federal politics also lies in the fact that all but one of Ausfralia's Federal Liberal Party leaders came from Victoria (Hay et al 1985, p. xi). 230 confroversy^^ it was easy to blame the Federal Govemment for fimdmg allocation problems. Whenever an issue threatened
the Premier often move(d) swiftly to appoint an ad hoc commission "to investigate the problem" thus effectively silencing debate in the Press and Parhament until a cool, "rational", decision is handed down. By this time the issue has largely evaporated, as has the direct responsibility of the Govemment, which has nonetheless shown its interest in the problem by "doing something about it" (Staley 1970, p. 17).
The abflify to difftise political crises in a way that appeared to be decisive, despite resolution being achieved through lengthy hearings, no doubt contributed to the conservative, stable image of the Botte Govemment. The fact that the era of Liberal hegemony also coincided with sustained economic growth as a consequence of the post-war boom tended to still criticism and limit any impetus for change. However, Bolte's mle during the 1960's saw the beginnings of a mmble of discontent that began with the inability to hold govemment to account for its"actions. Bolte's sfyle of leadership, which showed sfrength in adversity and the abilify to mle cabinet and use power to get what he wanted, seemed initially to be popular. By the late 1960's this same style generated animosity with teachers, waterside workers and railway and electrical unions. Complaints grew about executive confrol over govemment and the way in which parliament was excluded from govemance. Wright (1992, p. 210) suggested that as
Bolte's cabinet authority grew ... his confidence hardened into truculence, then so did the members feel a corresponding loss of parliamentary sovereignty. Why was it, they asked, that the govemment policy initiatives were so often announced in the premier's press conferences rather than in parliament? Why were questions on notice to ministers so often ignored? Why was the government's primary policy tool regulation, which did not require parliamentary approval, rather than legislation, which did?
With the retirement of Bolte in 1972 the criticisms continued, despite Rupert Hamer's accommodating, conciliatory and reserved style of leadership. It is
'^ Victorian premiers have consistently argued since 1942 that the ratio of tax taken compared with that returned to the state by cenfral govemment is the lowest compared with the ratio in other states (Holmes 1976, p. 181). Bolte tried to work around this problem by imposing a stamp duty on receipts in 1968 which incuned the ire of the Federal Govemment which threatened to cut general revenue grants by the same amoimt as the revenue gained. Despite the High Court also declaring the stamp duty invalid in 1970, Victoria was finding federaVstate relations a shackle, preventing the state from following its own path. 231 interesting, however, that even in the Bolte era, without a majorify in the Upper House of parliament, the govemment was obliged to consult with the Opposition parties before major bills were infroduced. Electoral boundaries before a 1965 electoral redistribution favoured Country Parfy candidates, thereby making it virtually impossible for Labor to gain a majorify in the Upper House. Where proposed poHcies were unpopular in their initial format the Country and Labor Parties were able to unite and prevent the passage of legislation. This meant that bills had to be negotiated. This established a procedure of negotiated legislation, despite attempts by certain Labor ministers (particularly J.Galbally and W.Landeryou) to rid the parliament of the upper house. Galbally argued that the resolution of issues before the upper house on party lines was a clear indication that the house of review in a bicameral system was ineffective and should be abolished (Wright 1992). This fhisfrated attempt to change the bicameral system did not succeed, forcing Labor to make the most of negotiated outcomes to curb the "more exfreme ambitions of the Liberal executive" (Wright 1992, p. 212).
Power and Low (1985) suggest that the consultative leadership sfyle of Rupert Hamer laid much of the groundwork needed for govemment reforms to commence. Hamer's policy-making decisions followed a common partem. Information was gathered from both inside and outside of the public service, it was weighed up and a firm decision was taken (Holmes, 1976). This enabled a multitude of voices to be heard and interest groups were at least given the opportunify to provide their point of view. Power and Low (1985, p. 62) suggest that "without Hamer's skilfiil preparation of a sympathetic environment, it is doubtfiil if the Cain govemment could have proceeded so speedily in its adminisfrative and policy reforms". However, tt was unfortunate for Cain that his innovations in public sector management and adminisfration were buried beneath the economic consequences of the VEDC, Trico and Pyramid disasters.
In line with the report commissioned by the Parhamentary Public Bodies Review Committee in Victoria 1981 by Touche Ross, the Report on a Study of the Audit and Reporting Responsibilities of Public Bodies, Premier Cain continued to rem-in the previously highly autonomous public utilities and place them under closer ministerial 232 control. He also restiiictiired the public service so that mfrusters were more accountable for performance. Managerialism and greater govemment confr-ol was at the heart of the economic sfrategy of govemment. The Labor Party's economic sfrategy sought to foster industiies that would add to Victoria's competitive sfrengths. Economists in the Federal Govemment were critical of this approach knowing "that tt involved a direct assautt on the dominant neo-classical paradigm because it gave an important role to govemment in identifying and enhancing the state's portfolio of competitive sfrengths" (Davidson 1992, p. 32). The Cain Govemment seemed to be going in the opposite theoretical direction to that which was becoming popular overseas and in Federal Govemment. ^^
6.4.4 The Administrative Context for Victorian Reforms
The inabilify of private owners of capital to marshal sufficient resources to provide for infrastiiicture in the latter half of the nineteenth century put Victoria on the path towards state socialism. Independent corporations and boards were originally set up to avoid political pafronage that was characteristic of the factional, disorganised, personalify (rather than party) based governments that were evident in the early nineteenth century (Holmes 1976; Murray and White 1992). Together with many state-owned enterprises that provided water, electricify, fransport and other public utilities, there were many other independent authorities^^, thereby sfraining the fraditional conventions of responsible govemance.^° Wettenhall (1985) suggests that the operations of public corporations in Victoria leading up to the 1980's were on such a scale that they overshadowed those of cenfral govemment departments. Davies, as quoted in Wettenhall (1985, p. 29), claims that "the relations of the cenfral
Cain (1992) admits to following a Keynesian line to policy and made it clear that the Federal Treasury were opposed to the Cain Govemment approach from day one. '^ Holmes (1976, p. 57) provides a list of 157 independent authorities responsible to ministers. Other than public utilities, some of the most notable were the Housing Commission, National Parks Authority, Grain Elevators Board, Dairy Produce Board, Council of Adult Education, Country Fire Authority, Police Services Board, Workers Compensation Board, Conmiission of Public Health, the Country Roads Board and the Environment Protection Authority. ° This point was also made clear in the Report on a Study of the Audit and Reporting Responsibilities of Public Bodies in Victoria 1981 by Touche Ross. The report claims that "(t)he number of Victorian public bodies is so excessive that the task of managing, confrolling, auditing and reviewing the achievements, efficiency and effectiveness of the public body sector is beyond the capacity of the Victorian Govemment" (p. 24). 233 adminisfration to the State utilities suggests the unage of a dwarf m confrol of a froop of giants". These comments make tt clear that the govemment of Victoria did not have confrol over a substantial part of communify resources.
The lack of effective confrol by govemment over significant sectors of the economy that was characteristic of Victoria until the 1970's meant that Rupert Hamer, m 1972, inherited a system of govemance at odds with the fraditional Westinfrister system of ministerial responsibilify to parliament. Very little institutional power lay with the office of each individual minister and the coHective responsibilify of cabinet was a fimction of the Premier of the day. Hamer acknowledged that the fraditional ad hoc natiire of policy formulation needed to be replaced by more formalised processes. This required a different type of adminisfrative support stmcture. Holmes (1976, p. 197) suggested that "Mr Hamer has probably been at his most effective as a state Premier in tackling the adminisfrative reform of some of Victoria's ramshackle stmctures of govemment". Hamer commissioned Sir Henry Bland to conduct an inquiry into the Victorian Public Service and make recommendations for reform. Bland, reporting in 1974 and 1975, was highly critical of Victoria's
statute books which had spawned the commissions, boards, authorities, committees, councils, corporations and other agencies, and recommended that in fiiture, the fimctions of govemment in Victoria should be discharged only by a department and a minister (Bland, as quoted in Homes 1976, p. 41).
Bland suggested that the fragmented nature of Victorian Govemment stmctures exacerbated contemporary dilemmas in formulating public policies. Armed with recommendations to rein-in power to the govemment, Hamer commenced a typically 'big government' Keynesian campaign to reduce the freedom of independent agencies. However, Holmes (1976, p. 42) recognised that in the 1970's
(t)he paradox of statutory corporations in Victoria is that while they are a significant part of the state bureaucracy, they have for the most part stayed out of the mainsfream of politics. Today the political climate is less sympathetic to the independent stmcture of the administrative corporation as broad community priorities assume an increasing importance, and political leaders are more reluctant to risk being unable to respond to social demands by the electorate because the relevant power is vested in an independent authority.
Hamer established in March 1980 an all party Pariiamentary Public Bodies Review Committee (PBRC) to deal with the claims that public bodies were inefficient. A 234 report commissioned by the PBRC suggested that, if carefiilly managed, public bodies could be bought back into the cenfre of policy and create the right environment for economic growth. The fragmented natiire of political agencies was only part of the inherited govemance stiiictures that made admuiisfration appear to be conservative and unresponsive. Murray and White (1992, p. 19) have claimed that
(u)ntil the late I970's Victoria had had a fine fradition of a neufral, if at times stodgy, public service. Public servants mostly joined as junior clerks and over decades worked their way through the ranks to middle and senior management. For most it provided a comfortable life, predictable job and financial security.
The Victorian public service' reputation was consistent with Federal admirusfrative stiiictures that had matured during the boom years of the 1950's and 1960's when govemment expenditures were expanding. As departments grew larger they became ever more hierarchical and regimented with stiict 'pecking orders' observed for promotion. Hamer infroduced tentative steps towards reform by ensuring that departinents recmited graduates to provide a new pool of expert advice for policy making. Promotion in public service ranks was to be tied to efficiency and aptitude for the discharge of the duties of office, rather than seniority. He also commenced appointing outsiders to senior positions to inject fresh ideas into the policy process.
When John Cain Jr^^ came to power in 1982 it was thought that the adminisfrative stmctures, after 27 years of Liberal govemment appointments, were too attuned to the Liberal party ways of thinking and operating. This distmst of the public service culminated in a policy of extemal recmitinent that changed the nature and culture of the public service. The new breed of advisors often had no public service experience and had factional and party loyalties. The long-term consequences of the politicisation of the public service, when compared to the apolitical career
'^' John Cain senior was the Labor leader from 1937-1957 (Munay and Whitel992, p. 8). ^^ Munay and White (1992) have suggested that it was unfortunate that the British television program 'Yes Minister' was popular around the 1980's, adding to the poor image of bureaucrats. This same television program was also refened to by the editor of the Sydney Morning Herald (SMH), who suggested that policy advice from senior bureaucrats was questionable in view of the need to safeguard their personal interests because of their employment confracts (Gittens, SMH 2/08/99). Thus, fraditional career bureaucrats and confracted public servants were cast in the same mould nearly 20 years apart. Those with a long association with a government in office and those with vested interests were depicted as unwilling to 'rock the boat'. The notion of independent and impartial advice provided by public servants continues to have a credibility gap. 235 bureaucrat, has been the subject of much speculation. Corbett (1996), Alford and O'Neill (1994) and John Cain (in the years after retfrement) considered that the independence and objectivify of advice from confracted public servants was questionable, particularly if employment confracts had performance clauses. Jan Wade, who had a long career in the Victorian Public Service before being elected as a state Liberal MP and becoming Attomey-General, criticised the managerial change for becoming an end in itself, with public servants forgetting that they are serving the public and not a political party. She observed that "(t)he emphasis in the public sector had moved from the provision of services to the provision of information to head office and an accompanying concem on the part of management that the information provided not lead to any undesirable consequences for the person providing if (quoted in Murray and White 1992, p. 28).
The new corporate approach to running the govemment assumed that if a person could manage a product, industry or service outside of govemment then that person could also manage any department or division in the public service. Cain advocated a public service stmcture that was devolved, more accountable and coordinated in line with ministerial departments and govemment policy. However, the new approach to adminisfration created morale problems for public servants that saw their career paths dismpted and often usurped by younger, less experienced staff. Prasser (1990, p. 195) suggests that that Victorian approach to adminisfrative reform was able to solve the inter and infra-departmental coordination problems by adopting a 'policy driven' approach. This involved "changing adminisfrative processes and stmctures to fit into an overarching poHcy sfrategy". Keflow (1993, p. 115) claims that the Cain govemment should be remembered for the "very real achievements in reforming the public service in Victoria". The changes, although overdue, were perhaps carried out too quickly in a period where the government's reputation for financial management was poor. The reforms, nonetheless, provided a framework for the radical fransformation of the Victorian public sector by Premier Jeff Kennett.
^^ It is interesting to note that the Federal Labor Party had looked upon John Cain's adminisfrative reforms with favour. A party document published before the 1983 federal election Labor and the Quality of Government, was quoted by Olsen and Peters (1996, p. 81) as claiming that "(t)he Task Force has been closely monitoring the experience of the Cain Govemment in Victoria ...(it) has been conspicuously successfiil to date in its adminisfrative performance, at both cabinet and official level, and we have leamed much from that experience". 236
Throughout the periods of reform ui the last two decades of the twentieth century the Federal and Victorian Governments reHed heavily upon the writings of prominent theorists to cohere and justify their policies. Especially influential were the works of the public choice theorists James Buchanan and Gordon Tullock and others. Public choice theory was used by westem countiies as a theoretical impetus to tiie commencement of an era of govemment reform. The following section will consider the relevance of public choice theory to the Kennett Government's reforms as an example of the way in which the public interest has been articulated in Ausfralia.
6.3 The Victorian Kennett Government Reforms
"The failure of the coordinating devices of the 1970's set the stage for governments to seek stronger means of confrol in the 1980's. The Victorian Government was stiU faced with the taunt that Victoria had the most fragmented adminisfrative system in Ausfralia" (Wettenhall, 1985, p. 45). The Cain govemment had commenced to tackle the fragmentation problem that the autonomy of powerfiil public corporations and utilities had created. However, it was when the Kennett Liberal Govemment swept into power in 1992 and later sold these public bodies to private operators that previously dominant public sector interest groups were removed from positions of significant political influence. The govemment under Kennett effectively took back confrol over Victoria's economic stmctures by passing the problem of coordination and confrol of utilities to third parties. This was achieved at a time when there was a national frend to reduce the size of the public sector and to increase the use of competitive tools to enhance economy and efficiency in the adminisfration and delivery of govemment fimctions.
The Cain approach to govemance had been an example of the fraditional model of govemment intervention (stimulation) in the Keynesian mould (Galligan 1985). The subsequent Kennett Govemment appHed very different principles of micro-economic reform that were now popular in the national policy agenda and were increasingly applied intemationally. Alford and O'Neill (1994, p. 12) suggest that
(t)he UK and NZ experiences have had a significant influence on key figures in the Kennett Govemment, particulariy Treasurer Alan Stockdale. Victoria's reforms have 237
borrowed heavily from the UK's "Next Steps" framework, and from New Zealand's State-Owned Enterprises Act and State Sector Act.
The reforms infroduced during the 1990's recognised the persuasive frifluence of Osbome and Gaebler (1992) who advocated that governments should be engaged in 'steering' rather than 'rowing'. This approach assumes that competitive market forces, rather than the govemment, can provide public goods and services more efficiently. By allowing market providers to supply public goods and services the govemment can then concem itself with policy making. This approach to govemment reflects the influence of various economic theories, in particular public choice and agency theories (see chapter two), which embrace confracts as a means of confrolling the behaviour of self-interested parties. From public choice theory comes the notion that there should be separation of policy making from the delivery of policy decisions because politicians and bureaucrats cannot be relied upon to always pursue the public interest above personal interests. From agency theory, comes the notion that confracts, between purchasers and providers, should clearly define outputs and provide incentives for performance. The underlying philosophy of these two theories was combined with an ideological preference for market solutions to govemment problems as the basis for govemment reforms.
Alford and O'Neill (1994) suggest that the evolution of post-war government in Victoria was made up of three stages. The first stage of thirty years, a period of relative economic growth and prosperity, was the conventional model represented by bureaucracy, hierarchical stiiictures and standardised procedures. The second stage was the managerialist model that was developed by the Cain Govemment during the 1980's. This stage attempted to shift the focus from mles to delivering results and sought to fransform the means of confrol from process to outputs. The third stage, initiated by the Kennett Govemment in the early 1990's, is referred to as the confractual model. The use of various forms of confracts, for example employment confracts, between govemment departinents and between govemment and third parties, has redefined the way in which govemment conducts the affairs of state (Alford and O'Neill 1994, pp. 2-3). This third stage will form the basis of analysis for the Victorian case study. 238
6.3.1 The New Leader - Jeff Kennett
In October of 1992 the Victorian Liberal Parfy, led by Jeff Kennett, was elected to govemment in Victoria with a landsHde victory resultfrig m majorities in both houses of parliament. This was to be the first of two successful elections that allowed the Kennett Govemment to implement a radical program of economic and public sector reforms in the State of Victoria. Kennett's first term in office was said to be a consequence of the financial and political crises which had been unleashed on Victoria, rather than because the Liberals were more desfrable (Donovan 2000, p. 89). The financial decline that the Labor Parfy had presided over had made Victorians keen to replace the old order. They did so by giving the Kennett Govemment a 34 seat majorify in the Legislative Assembly on 3 October 1992, the second biggest in the state's history. Polling just as sfrongly in the Legislative Council, the Kennett Govemment ended up with 70% of the seats, thereby giving the govemment an overwhelming majorify.
Within weeks of taking office it was evident that Jeff Kennett had been preparing sfrategies for implementation prior to the election victory. Donovan (2000, p. 90) claims that it became clear that what had been promised in the election campaign was being followed by something very different. "We all understand that a Kennett revolution is supposed to be taking place in the workplace but it would help to have a few signposts." By the end of November 1992 the new govemment had pushed through parliament a number of important pieces of legislation in a sfyle reminiscent of the reforms infroduced in New Zealand. The obvious haste and lack of consultation required many subsequent amendments, also a notable feature of Prime Minister Thatcher Governments in the United Kingdom. The Public Sector Management Act was tabled on 30 October 1992, the second reading on 4 November and fmalisation in the lower house was subsequently endorsed on 11 November, despite considerable protest by the Opposition at the haste. Joan Kimer (the leader of the Opposition) stated that
(t)he Bill provides for radical change in the Public Service ... Neither members of the opposition nor the people in the community have had an opportunity to examine the Bill prior to today. The opposition considers that a Bill of this importance requires considerable debate (Legislative Assembly Hansard, Public Sector Management Bill Second Reading, 4 November 1992, p. 356). 239
The Premier justified the speed of proceeding by referring to the economic crises of the state, claiming that "we must move quickly to stop the haemorrhaging of public finances that is currentiy taking place" (Legislative Assembly Hansard, 4 November 1992). There was little doubt the public were aware that Victoria's economic problems needed decisive action. However, the speed and lack of broad exposure before passing through parliament made the reforms unpopular with affected interest groups. "Kennett insisted that his govemment was prepared to withstand interest-group resistance and even electoral backlash to capture the benefits of reform" (Shamshullah 1999, p. 4). Despite criticism of the processes employed to implement reform, the mandate granted to the Kennett Govemment was conclusive. Any legislation the govemment wished to have passed could be achieved on majorify parfy lines. With majorities in both houses of parliament, the parliamentary process was a parody of a unitary govemment.
Jeff Kennett, when he was only in his mid thirties, first became the Liberal Party leader in 1982, succeeding Lindsay Thompson. His leadership was challenged five times between 1985 and 1989. His success in retaining the leadership of his parfy was said to be more a function of a lack of viable altematives than an appreciation of his leadership qualities (Shamshullah 1999). Kennett has been variously described in the press as ebullient, popularist, larakin, swashbuckling and by others as arrogant, aggressive, authoritarian and abrasive (The Age, 23/10/99; Parkinson 2000, p. 5; Donovan 2000, p. 64).^^ The West Australian referred to him as a "slick but brash former ad-man" (26/09/97). He was essentially an autocrat who benefited from having a clear electoral majority. The support for Kennett from within his own parfy was sfrong enough to ensure that he was the dominant figure in the Liberal Govemment.
ft is clear that Premier Kennett had a certain presence that exuded confidence and presented a very positive attitiide. Little (1999) and White and Economou (1999)
^'* It is interesting to note that Tony Parkinson was a writer for The Age newspaper and a known supporter of Jeff Kennett. The Premier often used Parkinson to make political comments. Parkinson had been a media advisor to John Cain and later to John Bmmby. On the other hand Bany Donovan and Jeff Kennett were adversaries. Both of these men have written books that deal with the Kennett era which represent partisan views of events. 240 have suggested that Premier Kennett knew how to use the media to his advantage. The way in which tiie Premier actively promoted the government's initiatives was reminiscent of the American sfyle of politics m election mode. He singled out those media that would present him in a positive tight and then favoured those particular media outiets over others. White and Economou (1999) suggest that because media interests were undergoing a state of tiirmoil, with cross media ownership legislation infroduced by the Hawke Govemment preventing consolidation of ownership, the downsizing of the AusfraHan Broadcasting Corporation, an abortive attempt by Warwick Fairfax Junior to gain confrol of the family's media interests and Kerry Packer's share raids on the stock market, there was much antagonism between and within many media interests. It was clear, however, that "poor relations between the govemment and the Age ... have been a constant theme in Victorian politics since the coalition's election in 1992 (White and Economou 1999, p. 31). So great was his displeasure at the constant criticism his govemment received from joumalists at The Age that the Premier suggested that if The Age were taken over by Kerry Packer, with whom he had favourable relationships, "he would take deHght in issuing dismissal slips to joumalists" (White and Economou 1999, p. 31).
There was considerable discussion about whether the Kennett Govemment was exercising power over the media by the selective and favoured access to govemment information in which the public have an interest. White and Economou (1999, p. 32) suggest that there were sufficient other media outlets which were able to provide a balance to the "quality access" the govemment provided to certain radio and press outlets. The way in which the media were actively used by the Premier could be described as blatant. However, his approach was consistent with his style of leadership and personalify which favoured a very dominant presence for Kennett.
A major Kennett ally and supporter of the need for govemment to be less timid in its approach to rectifying the state's problems was the Treasurer, Allan Stockdale. Stockdale was Treasurer for the first five years of the Kennett Government's term in office and "has been credited then and since with providing the intellectual force that
Ernst (1994, p. 103) also supported the notion that Kennett Govemment engaged in "media management" to illicit the community support for his policies. 241
drove the Liberal Party's shift to a neo-liberal economic philosophy" (Parkfrison 2000, p. 76). Kennett was the public face while Stockdale engineered big stincttwal reforms and had a tough minded approach to budget savmgs which eamed him the respect of the business communify. Stockdale has been described as "dour and assiduous", providing the ideal foil for Kennett who had little tolerance for potential chaUengers to leadership. The pace and style of public sector refonns were a product of the Kennett and Stockdale team.
To provide stmcture to the many achievements and contentious poHcies of the Kennett Govemment, the contextual template used thus far for the analysis of govemment reforms will be again employed. The effect of govemment initiatives on the economy, the social environment and the adminisfrative machinery of state are considered under separate headings. It is not intended that this be an exhaustive history of all matters pertaining to the mnning of the state, but rather a review (with hindsight) of the Kennett advocacy for a radical competitive approach to state govemance. The Victorian economy, as already established, presented an environment that called for major change to rectify the state's problems. The electoral majority held by the Kennett Govemment meant that policies implemented received only mdimentary debate without any real concessions or variations to bills put before parliament. The apparent haste and desire for specific outcomes revealed a disdain for due process, fransparency and accountabilify for the way in which results were obtained (The Age, Editorial 3/10/97). Chapter seven will discuss the implications of the reforms for accountabilify, in particular the changes to the Victorian Audit office under the Kennett Govemment.
6.3.2 The Economic Context for the Kennett Government Reforms
Within six days of taking office the Kennett Govemment commissioned a review of the conditions of the state's finances. The Victorian Commission of Audit (VCA) (chaired by Melboume Universify Business School academic. Professor Bob
AX • ^ Two bills that passed through parliament with particular speed were The Employee Relations Act 1992 and The Public Sector Management Act 1992. These are discussed in the next section. 242
..27^ Officer ) reported in May 1993 at length about Victona's financial position and also made recommendations about the how the public sector could be managed in the fiitiire. The letter accompanying the report addressed to Premier Kennett by the commissioners specifically endorsed the government's approach smce taking office by stating that
(t)he magnifride of the budgetaty problems facing the State and the broad thmst of our recommendations in relation to a solution to these problems is consistent with the general approach your govemment has taken to date. We believe this reflects the very limited options open to any govemment faced with the problems of the State of Victoria (Victorian Commission of Audit 1993, Volume 1, p. i).
The report made it clear in the executive summary that during the 1980's the Labor Govemment had "wfllingly exposed ttself to an mcreasing amount of financial risk" (para 2, p. ii), that Victoria's public finances were "highly vulnerable to almost any adverse developments" (para. 3, p. ii) and that the actions of govemment "has brought the state to the brink of a debt spiral" (para. 4, p.ii). These comments cleariy reflected the financial consequences of govemment involvement in the VEDC, Trico and Pyramid disasters. To remedy this situation the VCA provided a clear endorsement for the use of competitive markets. The commissioners concluded that the
govemment should see itself as having a responsibility to purchase services on behalf of the community, rather than necessarily providing those services itself Accordingly, the Victorian public sector should be fundamentally restmctured in accordance with three broad principles:
Policy-making and regulatory functions should be clearly separated from service-provision fimctions, so as to minimise the opportunities for 'capture' of govemment decision-making by interests associated with services-providers. Services should be provided by distinct, accountable organisations on the basis of explicit confracts with govemment departments.
The govemment should fimd its activities and services to the community on the basis of outcomes (results), purchasing designated outputs (goods and services) from departments and service-providers, rather than funding inputs such as salaries and operating expenses.
TT Other members of the commission were businessman David Christensen and a member of the auditor-general's office Russell Walker. Saul Eslake, an economist, acted as the executive officer and was credited by the commissioners for his extensive input. 243
- The Victorian Govemment should foster competition between potential supplier organisations wherever possible (Victorian Commission of Audit 1993, pp. iii-iv).
By supporting the relevance of public choice and agency theory to govemment the Commission provided the Kennett Govemment with sfrong endorsement for the competitive business-like foundation upon which public sector reforms were to be stiiictured and justified. The fact that this view was consistent with the way in which the Federal Govemment was moving and that competition was viewed as necessary to promote efficiency, meant that the Kennett Govemment was (initially) given broad-based support for the way it intended to reform the state.
Hayward (1999) contends that the VCA gave a deceptive and incomplete view of Victoria's finances. He argues that, for example, the state's debt was not reported in the overall context of a general recession, reduced Commonwealth financial assistance grants and a commitment to not raise taxes. He claimed that
(t)he Commission of Audit's conclusions are strong and unambiguous, but they sit uncomfortably with its analysis, which is both partial and highly inconsistent. The commission went to great lengths to estimate the value of state debt, but made only the most flimsy attempt to estimate the value of the state's assets (Hayward 1999, p. 138).
Hayward also suggests that the findings are primarily a product of the views of right- wing think-tanks which had previously acted to provide the Liberal Party with policy advice when they were in Opposition. The chairman of the Commission of Audit, Bob Officer, the executive officer, Saul Eslake, and the economic analysis supporting the commission's findings, conducted by Access Economics, all supported an economic rationalist viewpoint. Hayward (1999) shows no surprise that the findings were so positive in their endorsement of the government's view of how to remedy the financial problems in Victoria.^^ It is clear that a financial crisis did exist. However, it is not improbable that the extent of the problem could have been exaggerated so that subsequent improvements could be viewed as greater achievements for political advantage (The Age, 14/09/99).
^^ Hayward (1999) goes on to claim that the state's debt crisis was exaggerated. The Commission of Audit (1993, p. 149) suggests that state's AAA credit rating was unlikely to be restored for a least a decade. The fact that the govemment was able to reduce state debt and create budget surpluses within five years (The Age, 18/05/94) did not support the depth of the debt crisis which the Commission and the govemment had claimed existed when the Liberal coalition took office in October 1992. 244
The VGA's advocacy of market-based solutions to govemment problems was supported by a report by Don Nicholls (deputy secretary to the New South Wales Treasury), commissioned by the Treasurer of the Labor parfy in 1992 (State Finance Victoria, Independent Review of Victoria's PubHc Sector Finances, September 1992) before the election of the Kennett Govemment. It provided the same endorsement for the greater use of market-based modes of delivery iti govemment operations. This was consistent with the economic rationalist agenda that was now popular in westem economies but had not yet been embraced in Victoria. For example, in Chapter 11, the Review recommended
Promotion of competition: The stmcture and status of the state's legislative monopolies should be reviewed by govemment with a view to eliminating unnecessary barriers to competition and reducing monopoly power to a level consistent with maximum efficiency. Similarly, the current immunity of the state's public authorities from the provisions of the Commonwealth Trade Practices Act should be reviewed (Nicholls 1992, p. 350).
It was clear that Victoria's financial position was poor and that the priority of the incoming govemment would be to reverse the decline. Armed with an immediate financial crisis to solve, and the precedent provided by the adoption of market initiatives by governments in the United Kingdom and New Zealand, Jeff Kennett was able to apply a business approach to the mnning of the state. The endorsement of this approach by Nicholls and the VCA, one before and one after election, provided Kennett with additional credibilify to continue the course he had envisioned as the solution to Victoria's economic problems. NCP also provided a very strong legitimisation tool for Kennett's radical reforms. NCP had removed the shield of the crown and required that all govemment operations be contested unless it was in the public interest for a certain fimction to retain a monopoly (NCP Principle 5, Victorian Government's Guide to National Competition Policy 1995, Section 1).
It is interesting that the Hilmer Report, upon which NCP was based, which highlighted the need for increased competition withfri govemment, was commissioned in October 1992 as a consequence of the November 1991 Premier's Conference. This was only one month before the formation of the Kennett Govemment. The initial msh of legislation through parliament very soon after taking office, notably the Employee Relations Bill, the Public Sector Management BiU, the 245
State Owned Enterprises BiU (these three biUs were tabled and passed m the ffrst six weeks in office) and the Local Govemment (General Amendment) Bill, indicate that Kennett had anticipated with great prescience the contents of the Hilmer Report. All this early legislation would have required considerable tune and effort to prepare and draft while Kennett was still in Opposition. Thus, his major thoughts on policy direction would have been clear well before the Hilmer Report was even commissioned in October of 1992.
The Employee Relations Act 1992 (ERA) heralded a reduced role for cenfralised wage regulation, promoted individual employment agreements and harmed compulsory unionism for all employees. This Act repealed the previous Industrial Relations Act 1979, thereby significantly reducing the role of unions, the notion of collective bargaining and the abilify for employment conditions to be scmtinised for faimess or equify. The enactment of Public Sector Management Act 1992 (PSM) then proceeded to provide the foundation for radical change in employment conditions for public sector employees. Under the jurisdiction of the ERA, a private sector industrial relations model was applied to the public sector. This effectively allowed the govemment to restmcture the public service by abolishing State awards and replacing them with employment confracts containing performance criteria.
The pressure by government to subject public functions to competition was given considerable momentum by the infroduction of Compulsory Competitive Tendering (CCT) on 1st October 1994. The Competition Code (Part FV of the Trade Practices Act (1974) Commonwealth) was to apply to local governments as from 21 July 1996. Rather than encouraging local govemment to pursue more competitive options for service delivery, the Kennett Govemment chose to make it compulsory by using predetermined criteria. CCT was infroduced as a means of improving efficiency by securing savings in the provision of public services. In a report on the progress of CCT, the minister for Local Govemment, Roger Hallam, stated that before the implementation of CCT the Local Govemment Board had
^^ In accordance with the National Competition Principles Agreement the Federal Govemment agreed to provide a 'competition dividend', conditional upon states "meeting an agreed timetable for the effective implementation of National Competition Policy reform initiatives" (Victorian Government's Guide to National Competition Policy 1995, Section 1). Section 4 of the same report details that the 'competition payments' will form a pool separate from other govemment funding. 246
(c)onsulted widely on the most effective way of introducing CCT. It was particularly interested in an approach put forward by local govemment itself Rather than follow the British and New Zealand models where specific services have been nominated for CCT, a performance based model was proposed. This gives councils the ability to decide which services to put to tender, subject to an overall expendifrire target being met (Victorian Govemment - CCT, 1995, p. 4).
Hi the report on CCT the minister suggested that overseas experience mdicated there was the potential for cost savings of between 10% and 30% fri fimctions that have been subjected to competition.^" The minister also clahned that there was no general evidence to support allegations by critics of CCT that cost savings were due to deteriorating service qualify. Emst (1994) questioned the potential for outsourcing confracts to deliver cost savings. He believed that
(t)he question of whether part of the savings, conventionally attributed to competitive tendering, have less to do with efficiency improvements per se than the way that the principal-agent fransaction costs - in the form of information provision, compliance monitoring and service evaluation - have in many instances been kept to an imacceptably low minimum (Emst 1994, p. 129).
The leader of the Opposition, John Brumby, was also critical of CCT. He claimed that
(t)he doctrinaire and inflexible implementation of CCT, more than most other elements of the coalition's local govemment policy agenda, threatens the nature and value of services provided by municipal govemment in Victoria. It does this because it indiscriminately requires services to be tendered on the assumption this will drive the cost of services down, and disregards other important aspects of council services such as quality, reliability and appropriateness (Legislative Assembly Hansard, 11 October 1995, p. 589).
The targets set in CCT legislation obliged local councils to subject to competition at least 20 percent of the value of their total budget in 1994/95, 30 percent in 1995/96 and 50 percent in 1996/97 and thereafter. These targets were applied across the board without consideration of whether council services were contestable or whether the competition resulted in a monopoly or oligopoly supplier as a response to the
This was subsequently verified by the Public Accounts and Estimates Committee (PAEC) m Report 34 (March 2000). The PAEC refened to the work of the Productivity Commission, which had established that on-going savings in the range of between 10 and 30 per cent could be obtained by outsourcing. However, "(w)hile submissions made to the inquiry provide many examples of cost savings having been achieved, no indication was given in those submissions as to the manner in which those cost savings were derived" (PAEC Report 34, 2000, p. xxviii). 247 unposition of targets. In the UK, CCT was also infroduced fri a heavfly prescriptive manner. However, the UK govemment did not apply CCT to local govemment social services. The distinctive featiires of the Kennett approach to CCT lay in stipulating the parameters for the legislation, in terms of the compulsion to attain a percentage of their operational budget, while giving the local authorities the flexibilify to decide how and where to apply CCT. As the mandated percentage rose tt necessarily meant that councils needed to include social services m order to meet targets. This approach avoided the political outcry that may have come if govemment stated a clear intention for social services to be subjected to CCT. Rather it was infroduced by stealth as the need to meet targets cast a net much wider than the initial application of competitive criteria.
Another unusual move made by the Kennett Govemment in 1993 was to use legislation to effectively sack many democratically elected councillors and appoint, by govemment fiat, new managers to mn local govemment councils across Victoria. Govemment appointed individuals, with no loyalfy to the local electorate, proceeded to follow govemment directives without any real affinify for public needs. They were required to oversee the redistribution of council boundaries with the amalgamation process involving significant a reduction in the number of councils. Often several council offices, assets and employees were rolled into one entity. The passing of the Local Govemment (General Amendment) Bill on 29 April 1993 allowed for council boundaries to be redefined whilst also removing the right of appeal under the Constitution Act 1975 against the minister or members of the Local Govemment Board for decisions made affecting municipal rights. The right to dismiss councillors and replace them with commissioners who were chosen and appointed by cabinet continues to remain with the minister. Local councils after the Kermett Govemment reforms continue to be primarily accountable to the state govemment rather than to the local community. The minister has the right to restrict the revenue raising capacify of councils, which minister Robert MacLellan did by freezing annual rates
The Bracks Labor Govemment (that replaced the Kennett Govenmient and still holds office) made changes to the Local Government Act in 1999 to abolish CCT for local govemment. Instead, councils now have an obligation to ensure that councils seek the best value in providing services (PAEC Report 34 2000, p. xxii). Evidence of the continued determination of govemment ministers to use such power is evident in the dismissal of the Darebin council in 1996 and the suspension of the Nillumbik council in 1997. 248 in 1996, to dictate policies and processes and to significantly affect planning criteria under wide state planning definitions. The fragilify of local democracy under such a regime is becoming clearer (Kiss 1999, p. 120). Kiss suggests that local councils are moving away from being regarded as a third level of govemment to the lesser role of admuustrators of state govemment policies and dfrectives. The adverse effect on democratic processes and the concenfration of power at the level of executive govemment has been increasingly evident. Kiss concludes that
(i)t is quite clear that local govemment has been not only weakened but comprehensively undermined. There has been an effective fransfer of authority out of the hands of councillors into those of senior managers and, even more clearly, into the hands of the state govemment and particularly the Minister for Planning and Local Govemment (Kiss 1999, pp. 119-120).
The Labor Opposition leader, John Brumby, agreed with this sentiment by suggesting that the changes being made in local govemment adminisfration had resulted in "sweeping attacks on local democracy ... imposed against the wishes of the communities" (Legislative Assembly Hansard, 11 October 1995, p. 589).
More broadly speaking, there are other potential costs to democracy of competitive tendering. The tme principals in any area of govemment are the members of the community with elected representatives acting as their agents. The infroduction of a confractor introduces another layer of responsibility, thereby fiirther distancing the public from the scmtiny of policy implementation. This becomes particularly evident with the use of commercial-in-confidence clauses in confracts which limit public access to documents through the Freedom of Information Act 1983. Report 35 of the Victorian PAEC (March 2000), Commercial in Confidence Material and the Public Interest, made a number of observations and conclusions about the use of secrecy provisions in confracts. The PAEC considered that
open and accountable govemment can be undermined by the constant use of commercial confidentiality reasons to deny access to information to the public ... The committee found that the impetus for classifying information about commercial dealings as commercial in confidence had not come from the private sector, but from within govemment. The committee finds this practice totally unacceptable and confrary to the spirit of the Westminster system of govemance (Report 35 2000, pp. 143 and 146). 249
The PAEC Report, which had been initiated in 1997, provides a clear indication that the Kennett Govemment chose to invoke secrecy provisions to suit its own, rather than the commercial entity's, uiterests ahead of the public right to open and fransparent govemment.^^ FunneU (2001, p.l91) came to the same conclusion witii respect to the state of New South Wales by suggestmg that appeals to secrecy "have more to do with political self-preservation than with a disinterested concem for the public interest". Without access to information which freedom of information rights gives to citizens, people cannot adequately exercise scmtmy of private confractors which effectively diminishes the accountability of govemment to the public (Canberra Times 01/08/98; Funnell 2001, pp. 177-200). ^^ The concems expressed by the Victorian Auditor-General about the effect of commercial-in-confidence provisions on the work of the audit office form part of a more detailed discussion of govemment policy on accountabilify in chapter seven.
As a means of reducing the size of govemment (and paying off debts) the path towards the divestment of govemment assets was made considerably easier for the Kennett Govemment with the infroduction of enabling legislation a month after taking office. The State Owned Enterprises Act 1992 facilitated corporatisation by allowing cross subsidies and communify services obligations to be removed, thereby increasing the commercial viabilify of govemment business enterprises (Woodward, 1999, p. 152). The intent of the bill described in the second reading by the then Treasurer, Alan Stockdale, was
to provide an umbrella framework for the reorganisation of specified businesses conducted by the State in accordance with a modem corporation model, while still retaining sfrong accountability to the govemment. The Act can be applied to existing or new entities. In some cases the framework will allow corporate restmcturing as a
" Barton (1999b) also concluded that the indiscriminate use of commercial-in-confidence contracts not only provides an impediment to effective accountability but can also conceal adminisfrative incompetence. ^'^ The Age 06/09/95 suggested that the use of commercial-in-confidence secrecy provisions are "a fig leaf to hide lack of accountability". ^' Two decades earlier govenmient had been criticised for the many independent authorities and commissions operating in Victoria because "the political climate is less sympathetic to the independent stmcture of the adminisfrative corporation as broad community priorities assume an increasing importance, and political leaders are more reluctant to risk being unable to respond to social demands by the electorate" (Holmes 1976, p. 42). This perception appeared to have no place in the new climate of the 1990's. Rather than govemment having greater confrol over govemment business enterprises in order to be responsive to electoral needs, the new direction appeared to be the divestment of all responsibility for the services such enterprises provided. 250
step to partial or fiill privatisation (Legislative Assembly Hansard, 4 November 1992, p. 634).
Alan Stockdale also noted that the govemment had as a priorify the desfre to commercialise the provision of services so that the advantages of confracting out could be achieved (Legislative Assembly Hansard, 10 November 1992). He considered that reorganisation would "establish the basis to privatise relevant operations where public benefit wfll follow". The Opposition viewed this legislation as
a Trojan Horse for privatisation that invites Parliament to surrender its remaining power to control the destiny of State-owned enterprises by transferring it to the executive. The Bill provides the govemment with the power to sell off any of its stattitoty authorities without coming back to Pariiament for fiirther approval. It is a disgracefiil example of Pariiament being asked to surrender its position as the custodian of State-owned assets. If the legislation is passed Pariiament may have no fiirther role to play in determining the fiifrire ownership of these authorities (Legislative Assembly Hansard, 13th November 1992, p. 940).
The legislation effectively removed state-owned enterprises from the scmtmy of pariiament, thereby allowing the govemment to corporatise and sell the entities at its own discretion. Debate prior to privatisation was stifled, as was debate after privatisation, by the use of commercial-in-confidence secrecy provisions (The Age 08/07/95, 08/09/95)^^ By the sheer weight of the govemment majorify, parliamentary debate and discussion about the merits of corporatisation and privatisation had been all but eliminated and Premier Kennett was able to continue with his program of asset disposals.
6.3.3 The Social Context for the Kennett Government Reforms
One of the Kennett Government's first tasks was to cut expenditure in all major budget areas. The VCA estimated that Victoria spent 12% "more than was required to provide the same range and quality of services as all states and territories. This difference is accounted for by 'excess' spending on education, health, public fransport and debt charges" (VCA 1993, p. ii). The VCA suggested that the
^z " —-— In particular. The Age 26/06/95 details how "3000 protesters gathered at the steps of Pariiament House yesterday to oppose the State Government's sell-off of public utilities. Organisers called for a referendum on the privatisation of electricity, gas and water". 251 govemment could achieve savings by benchmarking agamst standardised per capita expenditure figures (McGuire 1994, p. 80). The VCA also stated that
(i)t is important to recognise that the fact that the Victorian Govemment has spent considerably more than the CGC's (Commonwealth Grants Commission) assessment of the amount required to provide a standard level of service does not necessarily mean that Victorian's have enjoyed an above average range or quality of services. At least some of the additional spending may have been absorbed by a lower level of efficiency in the provision of public services than in other States (VCA 1993, p. 85).
This implied that inefficiencies were the cause of over spending and that changes needed to be implemented which would induce efficiency in the use of the state's resources. The way in which the govemment chose to achieve this was based on the alleged benefits of the market. The Kennett Govemment embarked upon a program of outsourcing, corporatisation and privatisation as a means of reducing public debt, decreasing the size of govemment and promoting Victoria as a tourist venue. The reliance on confract-based service agreements for the achievement of increased contestabilify in govemment operations allowed for a split between the purchaser/funder and provider. Confracts allow the identification of objectives and the inclusion of performance measures to evaluate outcomes, which assumes that all aspects of service delivery can be captured by the terms of the confract. However, the rhetorical argument that competition would enhance service qualify and effectiveness of public services by spreading available resources across more users has not proven to be an unqualified success. In particular, in the case of equify and equalify of access to public services the benefits of competition are elusive.
In the health sector, the infroduction of health service agreements for hospitals meant that rather than deficit funding, each hospital had a budget for agreed services. Funding was changed so that the fixed costs were fimded in the form of a grant and as much as 30 percent was a variable component based on a performance-based system known as casemix funding. The fimding formula was determined by the number and type (mix) of patients freated, with an average cost and number of bed days being allowed for each service. The expectation was that hospitals would specialise and increase patient tumover by reducing the length of stay for each patient. Casemix funding did initially reduce hospital waiting lists as patients were 252
staying shorter periods. However, budget consfraints imposed had the effect of closures of regional hospitals, reduction in services and closure of beds m an effort to reduce costs. The consequence of such measures were lengthening hospital waiting lists, restiiction of access by mral communities to local hospital care, and eariy discharge of patients (based on the need for hospital beds rather than patient preference), all of which served to generate a contentious political issue (Chua 1995; The Age 12/\0/95).^^
A special investigation undertaken by the Victorian Auditor-General on health care some years after the infroduction of reform initiatives confumed that the system was under strain despite efficiency improvements. Special Report No. 56 on '"Acute health services under casemix ~ A case of confused priorities" in May 1998 concluded that
in pursuing an agenda of economic reform in a climate where demand for public services is growing, pressure points inevitably occur in various forms such as the impact on waiting times and quality of care. Whether these issues can be tolerated and managed in the best interests of the patient ... pose a dilemma for health authorities (p. ix).
Other conclusions included that "sufficient efficiencies had been achieved in terms of increased throughpuf (VAO Special Report No. 56, 1.1.10, p. 5). This conclusion was made after changes in output definitions used in the health sector and improved reporting that had initially allowed manipulation of data. At the heart of the report was the effect of reforms on the quality of health care. In the executive summary of the report the Victorian Auditor-General noted how
(i)n relation to the key objective of safeguarding quality, there is z prima facie case to suggest that the pace and breadth of change derived from the relatively narrow policy focus of achieving efficiency gains in the formative years of casemix fiinding have been factors which have adversely impacted on some aspects of quality patient
n _ , The combination of Federal and State Govemment health initiatives and the inttoduction of private operators for some hospitals has meant that the most disadvantaged segment of the Victorian public is the elderly. There is evidence that private hospitals are engaging in the practice of 'cherry picking' to ensure greater economic retums. This involves "the practice whereby private hospitals withhold beds from the elderly patients who might stay for extended periods in favour of younger patients requiring quicker procedures" (The Age 31/10/01). Despite having private health insurance, the elderly who would require extended care for multiple ailments are thus forced back into the public system to ensure the profitability of the private operators of health services. 253
care. The extent to which quaHty of care has declined is difficuh to substantiate (VAO Special Report No.56, 1.1.11).
Similar reform innovations were applied to other sectors of the economy. Education initiatives have resulted in the closure of 351 schools, mergers between schools (to encourage economies of scale) and the voluntary refrenchment or resignation of over 8,000 teachers (Costar and Economou 1999, p. 218). School principals and school councils were given control over budgets, under the 'Schools of the Future' program in 1993, that were determined on the basis of student numbers and the education programs delivered. The initiatives theoretically enabled schools to compete with each other for students by offering programs that may be more atfractive, thereby generating a greater student intake. As the education budget was cut back, limited funding meant that the discretionary decisions about the number of specialist teachers employed, the range of subjects offered and teacher/student ratios had implications for education qualify. Schools with low student numbers received less fimding which affected the variety of programs that could be sustained. This had the effect of fransferring resources from one area to another with the outcome that schools were not fimded equally in all regions. It became clear that measures to improve economic efficiency had impacted upon the standard of education (McGuire 1994, p. 94; The Age 15/07/96). PubHc concem reached the point where a petition was tabled in parliament that claimed that the education policy of the govemment would undermine the quality of education. It also condemned the lack of consultation (Legislative Assembly Hansard, 15 September 1993, p. 437). "Another symptom of the disfress in schools caused by govemment cutbacks which is exacerbating inequalify is the increased reliance of schools on fundraising. To make ends meet, schools have to rely on securing fimds locally" (Legislative Assembly Hansard, 9* October 1996, p. 373). In wealthy communities this type of funding can allow for substantial additional resources. Hi poorer or rural communities the potential for resources to be funded by fund-raising is limited, thereby further affecting resource inequalify within commuiuties. The instances of vituperative discussion (and the use of the word 'crisis') in parliament about education qualify, class sizes, student retention rates and school amalgamations, teacher shortages and literacy standards were numerous and continuous during the Kennett Government's term in office. 254
The issues that served to make health and education contentious ui Victoria were not the fiinding cuts themselves. PubHc sector reforms were common in most westem economies. Rather, it was the lack of consultation, the removal of services deemed inefficient, particularly in rural communities that were slowly being deprived of necessary infrastmcture by both the govemment and the private sector, and the inabilify to capture communify needs in confractual relations. McGufre (1994, p. 97) summed up the real issue by suggesting that
(t)he underlying values (of competition) are efficiency and minimising the size and scope of govemment. In confrast, the logic of public interest is redistribution (sharing) to meet community service obligations. The values are public provision to achieve access, equity and distributive justice.
The application of confractual relations to the provision of social services, as noted by McGuire, has substantial implications for social equity and justice which form a major part of citizen/government relations. Emst (1994, p.l29) suggested that the desire by the Kennett Govemment to empower the consumer by radical change has meant that "(a)s with Shylock, the surgery itself may only be directed at an ostensibly small part of the body mass, but it could cut away at the very heart and life-blood of the public sector". The tendering of Meals on Wheels services to the elderly was particularly mentioned in a sitting of the Legislative Assembly on 11 October 1995 where the Competition Policy Reform (Victoria) Bill was being debated. The Labor Opposition commented that
(w)e know about the services that used to be provided where people would knock on the door and go in and talk to the citizens concemed. Because of CCT they (contractor for Meals on Wheels services) knock on the door or ring the bell and if no-one answers they leave the meal on the doormat. All of the value and benefit that used to be there to care for the elderly people in the community has been removed because of CCT (Legislative Assembly Hansard, II October 1995, p. 585).
The delivery of a Meals on Wheels service to the elderiy by contractors, as an underlying motivation, has a need to be profitable. The effect has been that the provision of food, human contact, a concem for the well being of the elderly and a sense of community have been replaced by the need to deliver meals on a schedule to meet performance criteria. However, the implication for social welfare cannot be quantified in dollar terms and it is difficuft to embody in confractual relations. The executive director of the Victorian Council of Social Service, as part of research 255 before the confracting out of social services became popular, claimed that service qualify also suffered because of the huge increases in adminisfrative paper work to satisfy agency requirements. He claimed that
one of the biggest mistakes that governments have made in confracting out community services is that at the same time, they cut their departments capacity to monitor and evaluate services provided ... so there was vety little quality confrol and the main focus moved to fiscal accountabiHty on how much money was spent (The Age 23/09/92).
In addition to concems about the quality of services being provided, criticism was directed to the redistiibution of employment away from the immediate area of service provision. Parliamentary debate suggests that CCT initiatives made unreasonable demands upon local govemment to meet performance targets. These demands caused communify services to deteriorate, with jobs in local communities being fransferred to large confractors based in other major provincial cenfres. If a tender for council service could be obtained more cheaply in another town, then the employment was fransferred out of the local area. This provided economies of scale to private operators but nothing for declining employment in rural communities. The sense of communify with known faces delivering social services, thereby, diminished. These indirect consequences of CCT contributed to alienation of mral voters which proved to be a significant factor in the downfall of the Kennett Govemment in 1999 (Parkinson 2000, p. 441; Donovan 2000, p. 180; The Age 4/10/99, and The Age editorial 23/10/99).
The ire of the communify was also raised by the many instances where due process had been ignored by the Kennett Govemment in its confractual relations with the private sector. In many cases, subsequent deficiencies in confractual terms and conditions became highly publicised because of the perceived injustices confracts that imposed on the Victorian public, the partisan political interests often involved and the cost to the public of poor contact design and management. Hi December 1999 the Bracks Govemment commissioned a report to review govemment confracts established under the Kennett Govemment for projects and services which had been fransferred to the private sector and are no longer delivered by the govemment. In May 2000 the review panel concluded that 256
(f)rom a financial and economic standpomt, the confracts brought vety substantial benefits to Victoria. ... On the other hand, the previous govemment seriously neglected important aspects of the social, environmental and regional impacts of its confracting activities. Remedial work will be needed to overcome problems in this area (Victorian Govemment, Audit Review of Govemment Contracts 2000, p. 1).
The panel reviewed a number of specific issues as case studies to gain information about the efficacy of confractual dealings by govemment. The case studies mcluded the Crown Casino, which the review panel concluded had produced significant undesirable gambling related social consequences (Audtt Review of Govemment Confracts 2000, 2.5.4, p. 21). The fact that the operator of Crown was a close associate of the Premier added to the speculation that there was some form of partisan freatinent afforded to Crown (McKay 1999, p. 187). Meanwhile, in its review of Cifylink, a privately fimded road project which raised public enmify in numerous suburbs, the Review panel found that bottlenecks on roads where vehicles try to avoid tolls, special contractual concessions forcing the closure and narrowing of altemative roads and indexed toll charges allowing for increased charges every six months were not in the public interest (Audit Review of Govemment Confracts 2000, 2.5.3, p. 21). By effectively locking the state into significant long-term obligations for a tollway for which outcomes are uncertain, the Victorian public is, to a significant extent, at the mercy of private operators protected by the govemment.
Several of the case studies carried out by the Audit Review panel were a
•10 consequence of the tendering process prior to the awarding of the confract. Perceived irregularities in the Crown casino tender had Labor members of parliament pressing for a fiill Victorian Legislative Council inquiry into the circumstances of the tender. While no royal commission eventuated for Crown, there was an investigation into the selection of the private firm Intergraph for the Mefropolitan Ambulance Service (MAS) communications tender that took nearly two years to report. The
The terms of reference for the Audit Review of Govenmient Confracts did not cover tendermg inegularities which particularly plagued the awarding of the casino confract (Crown), the ambulance confract (Intergraph) and private prison confracts (The Age 24/03/97, 01/08/98). ^' The MAS Royal Commission was established with the appointment of Mr Lex Lasry, QC, to head the commission on 8 December 1999. The commission collected evidence for ten months at a cost of approximately $10 million before the govemment changed the terms of reference for the inquiry in September 2000. The Age 12/10/00 asked in its headline "Who killed off the ambulance inquiry?" It was reported that the govemment "remove(d) the cenfral reason for the commission's existence by 257
final report of the Metropolitan Ambulance Service Royal Commission November 2001 made significant criticisms about the tendering process and about the standard of service provided by the private confractor. The findmgs uicluded illegal acts, mismanagement, and systematic cover-ups of documentation and information prior to the two previous state elections in 1996 and 1999 by the former govemment. While the findings have been criticized for the cost and the lengthy time taken to report, the commissioner called upon the Bracks Labor Govemment to establish new legislation to enhance accountabilify in the future. The Age quotes from commissioner Lex Lasry's report where he suggests that
(i)n a well organised stmcture, the objectives of the private service provider are not defined by public interest. Even where a well managed service provider is selected, the intemal management of that organisation will not, of itself, be sufficient to protect the public interest... At present there is no general principle of law or policy that makes private contractors performing public functions amenable to public accountability systems ... unless specific arrangements were introduced to supplement the contract, there would always be a loss of public accountability because the legal obligations would be defined by the contract and owed only to the parties to the contract (The Age 29/11/01).
The commissioner also concluded that "market forces did not influence the service offered by Intergraph, which was the monopoly provider to a public that used its service out of need, not choice" (The Age, 29/11/01). The confracting process had clearly placed the Victorian public in a position of significant risk. The govemment had essentially moved from a position as a monopoly provider of an essential service to a purchaser from a monopoly provider. In this instance the provider had acted improperly. The government's application of a competitive framework for a public service has clearly produced results that have been detrimental to the public interest.
The zeal with which the Kennett Govemment privatised critical infrastmcture during the 1990's placed the Victorian public at the forefront of public sector reform in Ausfralia. From a slow start, for enabling legislation and the need to 'dress assets up for sale' took some time, the govemment made rapid progress with major sales of public assets. The most significant sales were the privatisation of the Electricify Supply Commission of Victoria, the Gas and Fuel Corporation, V Line Freight and V abolishing terms of reference that were the basis of setting it up in the first place". What remains within the terms of reference is viewed as a watershed. 258
Line Passenger services. This was not an entfrely novel approach to reform of govemment. The phenomenon of privatisation was bemg used woridwide as a means of revenue raising by governments (Emst 1994, p. 109). At the same tune, as nations concenfrated on revenue from sales, the consequences of distributional friequities tended to be ignored (Argy 1998). This is clear Hi cases where public assets, built up by the consumers and taxpayers over many years, are sold (not as public floats of shares)"^" to a select few multi-national corporations. The subsequent efficiency gams which competition engenders are also then available to the same few at the expense of the public.
Aside from the more obvious economic consequences of privatisation, govemment obligations to the public for ensuring access to essential services means that the public expect consideration to be given to how the public interest is to be safeguarded when the govemment is no longer the provider of services. It is essential to clarify who ultimately has responsibilify when there is dismption to major services and who can be persuaded to act in the national/state interest when services fail. Or, better still, before failure occurs. In Victoria, a clear demonsfration of the way in which the public are at the mercy of private sector owners of essential services was demonsfrated in the May 1998 blockage of the main gas pipeline from Bass Sfrait to Victoria. A 'freak plug of ice' blocked the Esso pipeline, cutting gas supplies to Victoria. This caused major economic and communify hardship as industries were forced to close operations and households had limited, if any, gas for hot water, cooking and heating needs. The response of the Kennett Govemment to this disaster was quoted in the Australian Financial Review (AFR) (08/06/98) as "just one of those unforeseens and had nothing to do with the Govemment". Coincidentally, in the same year, other examples of disasters in infrastmcture provision by private operators abound. The AFR details how
> a power surge at Telsfra's main Sydney exchange lost the NSW TAB Ltd a quarter of a million dollars in a few hours. It also blacked out 80% of the ATM and Eftpos facihties in the city and fouled up telephone, fax and directoty assistance services for Telstra customers.
In Victoria it was only the sale of TAB (Totalisator Agency Board - a govemment agency for betting initially established for the racing industry) that was done by a public floato f shares. All other sales were sales to large corporate enterprises. 259
> Across in New Zealand the collapse of Auckland's electricity supply brought the city to a standstill for nearly a week with significantly reduced supply for a lengthy period after power was restored. The maintenance engmeers of the operator Mercury Energy were said to have taken shortcuts in thefr maintenance programs. > the contamination of the water supply in Sydney by two types of parasites meant that residents had to boil water for weeks. It was found that the private operators of the corporate utility had no contractual obligations to look out for parasites.
These events demonstrate that governments will be expected to contmue to take responsibility for essential communify services after privatisation (The Age 26/06/95, The AgQ 19/06/95)."*^ Confractual terms and the right to intervene in unforeseen circumstances should ensure that the public is not disadvantaged by the use of competitive suppliers (The Age 02/08/95, SMH Ol/OSm). The act of privatisation is one taken by a govemment on behalf of tts citizens (Canberra Times 01/08/98). "The private confractor, of course, has a powerful motivation for covering up any problems ... if tt is to maintain its relationship and its profif (The Age 06/11/97). Professor Bob Officer suggested that the "(g)ovemment had a responsibilify to the community to ensure that confracts offered to private operators (in relation to the privatisation of public fransport) included minimum requirements on safefy, hygiene and service levels" (The Age 12/03/97). He also suggested that "(b)efore you (govemment) sign on the dotted line you make sure you understand how you are going to recover the thing if the operator fails to meet their obligations. If they run a disasfrous service the communify is going to be upset, especially if there are few altematives".
The Kennett Government's record for balancing economic development with communify needs and preserving the environment is shrouded in confroversy. An example was the success of the Kennett Govemment in moving the Grand Prix from Adelaide to Melboume. This signalled the start of a swift and authoritarian approach to securing what the govemment needed to 'make things happen'. The govemment valued the venue for the Grand Prix, Albert Park, for its economic potential rather than as a public park. Despite a concerted campaign by the Save Albert Park
^ In particular The Age 19/06/95 details how "(i)n the past week (Health Minister) Mrs Tehan has blamed Intergraph for failing to follow protocols, and Intergraph has blamed Mrs Tehan because there are not enough ambulances. Blame is being shifted between the public and private sectors and, public safety has been the loser". 260 communify action group, the govemment passed special enablmg legislation that side-stepped many communify and envfronmental considerations. The Australian Grand Prix Act 1994 which gave the govemment corporate entify unmunify from paying compensation claims to affected groups ui the communify, also exempted the race confract from freedom of information laws and exempted the race and constmction work from planning confrols and envfronment protection legislation. While this event seemed to anger the communify in the immediate vicmify, and thus isolate the number of disaffected citizens, moves to build resorts and visitors cenfres at other significant tourist attractions noted for their unspoilt natural environment met with greater communify outcry. Targeted attractions were Wilson's Promontory, the Twelve Apostles at Port Campbell, Phillip Island and the Grampians. In particular the proposed commercialisation of Wilson's Promontory, with the building of accommodation and tourist infrastmcture, caused such a level of opposition that the govemment, heading into the Gippsland West by-election, backed down on the proposed project (The Age 18/03/97, Economou 1999).
The Victorian communify faced many other changes to govemment services, many of which affected some citizens far more than others. Another govemment initiative which had significant implications was the withdrawal of the right of seriously injured workers to take legal action under common law with the implementation of Workcare legislation. When the Accident Compensation (Miscellaneous Amendment) Bill was debated in parliament, the Opposition condemned it for "taking away the rights of injured workers and their human digrufy as citizens of this state" (Legislative Assembly Hansard 4/12/97, p. 1647). Changes produced not only a reduction in benefits available to injured workers but also created inconsistencies between legislation. Where a worker was injured in a fransport accident during the course of employment, his right to sue the other driver for negligence was removed if injuries were as a consequence of employment. In confrast, a private citizen not engaged in a work-related journey could sue under the provisions of the Transport Accident Commission (Donovan 2000, p. 108; Bmmby 1999).
There are numerous other instances of minorify groups bemg disadvantaged, ostensibly by the cost cutting manoeuvres of the Kennett Govemment. The removal 261 of fimding from Disabilify Advocacy Groups, the abolition of Crimes Compensation for victims of crime and weakened Equal Opportunify laws gave the impression that the govemment were prepared to ignore mfriorify groups in times of economic sfress. However, cost cutting also impacted on other larger community groups. A special law to silence teachers effectively removed the right of free speech for govemment employees. Teaching Service Order 140 prohibtted teachers, whose experience of increasing class sizes and funding cuts made thefr opinions damaguig to govemment, from making press releases, public speeches, engaging in conversations between colleagues which may be critical of govemment policies and writing letters to editors (The Age 5/7/94). The most blatant change made by the Kennett Govemment to affect the democratic right of citizens was the insertion of the following clause into many Acts of Parliament: "ft is the intention of this section to alter or vary section 85 of the Constitution Act 1975 to the extent necessary - to prevent the bringing before the Supreme Court of a proceeding or matter". Section 85 of the Victorian Constitution Act 1975 establishes the Supreme Court of Victoria as the body to which citizens have the right to appeal actions of the government.'*^ The removal of this right in as many as two hundred pieces of legislation (Rayner 1997, p.137; Brumby 1999, p. 4) placed the govemment above and beyond the safeguards of the law. Leader of the Opposition, John Bmmby, stated that the change to constitutional provisions
take away the right to appeal against or seek a judicial review of a Govemment action or decision. They take away the right to test the validity of a new law - to test whether a govemment is right or has acted correctly. They take away the right to seek compensation as a result of a Govemment decision to resume land or assets. In addition, a court can no longer be asked to decide whether a Minister has acted properly, illegally or cormptly (Bmmby 1999).
There is no doubt that the Brumby publication was a piece of election propaganda. It did not state that the Labor Govemment (prior to Jeff Kennett taking office) also made use of the immunity clauses in acts of parliament (as do other state governments).'*^ The difference in how these clauses were invoked lay with the fact
'' Waugh (1999, p. 58) points out that it is only in Victoria that the constitution protects the Supreme Court's jurisdiction to deal with "all cases whatsoever" (section 85). ^^ It is also interesting that Ausfralia's most senior judge. High Court Chief Justice Murray Gleeson, claimed that "it was entirely appropriate for governments to decide which of its decisions could and could not be reviewed by the courts" (The Age, 8/11/01). He defended the Federal Government's 262 that the Labor Govemment did not have a majorify m both houses of pariiament and had to negotiate the exemption of any proposed legislation from constitiitional protection. Under the Labor Govemment prior to Kennett, passage of Acts of pariiament provided the opportunify for debate and required the assent of both houses of pariiament which provided an avenue for the assessment of the democratic implications any legislated immunities in the system. Under the Kennett Govemment, the bills enacted in the first two years of office, during 1993 and 1994, contained the broadest immunify provisions when the govemment made its biggest and most confroversial changes. Some of the Acts which contain the immuitify provisions that limited the abilify of Victorians to take action in the Supreme Court included:
> Public Sector Management (Amendment) Act 1993 > Equal Opportunity (Amendment) Act 1993 > Planning and Environment (Amendment) Act 1993 > Police Regulation (Discipline) Act 1993 > Electiicity Industiy Act 1993 > Building Act 1993 > Health Services (Amendment) Act 1993 > Teaching Service (Amendment) Act 1993 > Land (Further Amendment) Act 1993 > Melboume Grand Prix Act 1994 > Melboume City Link Act 1995
These Acts directly affected large sections of the community and allowed the govemment to fiirther its own agenda with greatly diminished accountabilify to the individuals directly concemed, ostensibly to provide benefits to Victoria as a whole. The citizen as an individual played no part in Kennett's grand plan.
The rapid pace of change in Kennett's first five years in office eamed him accolades from business for turning the Victorian economy around but also condemnation from the communify for the social cost of the way in which this was achieved (The Age practice of limiting the judicial review of some of its decisions at a time when Melboume lawyers brought a Federal Court action against the govemment in relation to the Tampa boat people dispute. 263
04/04/96, 29/03/97, 22/11/97). Cost cutting, the lack of govemment fransparency in negotiations for privatisation, confractiial relationships cloaked m secrecy and a sense that govemment was catering to the majorify at the expense of mmorities had affected social welfare in Victoria. Criticism of govemment steadily increased. Disaffected groups became more vocal as issues of accountabilify, fransparency and attempts at luniting the power of govemment scmtmeers became apparent (AFR 02/01/98, SMH 22/11/97, 15/11/97). The passage of the Public Sector Management Act 1992 was especially important in accelerating this process of disengagement from fraditional forms of Westininster accountability.
6.3.4 The Administrative Context for the Kennett Government Reforms
The Public Sector Management Act 1992 (PSM) was passed in the initial flurry of activity in the first few weeks of the new Kennett Govemment. This document enabled the Premier to radically change the public service in Victoria. The Premier stated that the Act is "aimed at consistency of employment conditions in both the public and private sectors and infroducing standards of performance and service ...(also) to promote a spirit of service to the community to emphasise the principles of merit and responsible, competent and efficient managemenf (Legislative Assembly Hansard, 4 November 1992, p. 354). To achieve these aims the newly elected Kennett Govemment set about restmcturing the public service by abolishing the Public Service Board and replacing it with a Public Service Commissioner and by reducing the number of departments from twenty-two to thirteen.'*'* The requirement that all seiuor public sector staff be appointed on confracts or service agreements represented a sfrategic shift in the organisation and operation of the public service. Departinent heads were replaced with new confracted appointees'*^ who were given extensive powers to run their departments.'*^
Following the 1996 elections this was further reduced to eight. Hansard documents a heated debate about the appointment of new department heads to the prestigious positions of Education and Health and Premier and Cabinet. They were appointed with salary packages of $250,000 (with the details protected by commercial-in-confidence clauses) when existing heads were being paid $120,000. At a time when the govemment was advocating austerity and the sharing of the financial burden of economic recovery by imposing a $100 surcharge on every 264
Department heads were given greater operational flexibiHfy to manage thefr departments without the restiictive provisions of fraditional public service conditions of employment. This allowed the Kennett Govemment to "refrench 20,000 public servants, abolish holiday loadings for those on state awards and mfroduce employment confracts that factiitated the mfroduction of short-term or casual employment conditions into the public sector. By 1997, at least 75,000 jobs had been taken off the public payroll" (Teicher and Van Gramberg 1999, p. 162). The contraction of employment within the public sector was also mfluenced by other govemment reform initiatives. The government's privatisation program had effectively fransferred public employees into the hands of private industry. The extensive use of outsourcing and competitive tendering meant that functions previously carried out by govemment employees were the responsibilify of the private sector. The increasing contestabilify of policy advice also meant that private consulting firms were providing a fimction that was previously the exclusive domain of public servants (Donovan 2000, p. 155).
The other not-so-obvious consequences of legislation that reformed public service adminisfrative structures were the redistribution of power relationships within the machinery of govemment. The legislation effectively concenfrated power in the hands of the Premier. Previously, the Public Service Board was responsible for the classification of public service positions and pay stmctures. As the 'minister responsible' under the provisions of section 70 of the Public Sector Management Act 1992, the Premier became the employer of all chief executive officers with the abilify to terminate their employment with four weeks notice. Senior public servants were no longer the employees of the state and could be dismissed by the Premier. This same principle applied to govemment appointed commissioners who were confracted to run municipal council operations. This change in stmcture and m the relationships between senior public servants and parliament has effectively dismantled many of the characteristics of the fraditional Westminster system. The principle of an
homeovraer, the huge salary increases for department heads were considered imjustifiable by the Opposition (Legislative Council Hansard, 28 October 1992). ^ The Public Sector Management and Employment Act 1998 replaced the Public Sector Management Act 1992 and fiirther reduced disparities between a career in the public sector and a career in the private sector. 265 independent career service providing 'frank and feariess' advice to the govemment of the day according to the precept of the Wesfrnfrister doctiine was set aside. Hi its place was "the concept of a career m the public service bemg no different from a career in the private sector" (an official response by govemment to concems about the PSM bill quoted in O'Neill 1999, p. 83).
6.4 Conclusions about Victoria
Jeff Kennett's popularify declined dramatically as he implemented his version of reforms that were very different from his election platform. Withfri four months of first coming to power his approval rating was down to 28 percent (Donovan 2000, p. 89). The measures taken to rectify Victoria's fmancial position were drastic, swift and unpopular. Parkinson (2000) observed that with so much reform being undertaken at the same time, the public and unions were not able to mount a concerted attack on any particular issue. The govemment had surrounded itself with advisors, both appointed public officers and extemal consultants, who would be supportive of govemment poHcies. The Premier was very clearly the man at the top who could hire and fire senior staff should relations or advice not accord with his liking. This type of power meant that intemal criticism was limited, generating many consequences for perceptions of democratic govemance.'*^
The Premier's impatience with officialdom and red tape often extended to a resentment of the processes of scmtiny and accountabilify that are fundamental to parliamentary democracy. His responses to those outside parliament in the media, the judiciary, and the bureaucracy who insisted on the need for open and accountable govemment was frequently contemptuous and sometimes hostile (The Age Editorial 3/10/97; SMH 22/11/97; The West Australian 16/12/97; AFR 8/01/98). Attention to details, or the minority groups that may be affected by govemment policy, would
The dissent by ministerial colleagues over the proposed changes to the role of the auditor-general was perhaps the only issue where it became known in public that the Premier's position on the matter did not meet with universal approval. In particular, this issue had a significant influence on the decision of Roger Pescott to resign from cabinet (The Age 12/11/97). Another member of parliament, Peter McLellan, was also very vocal in his dissent of the proposed changes (The Age 1/08/97, 8/08/97). 266 slow processes down. The Age newspaper described Jeff Kennett's approach to govemance as "(d)emocracy is a once-in-four-years occasion, conflict of mterest a mbbery concept at best and regular accountabilify is seen as a speed hump" (The Age 29/03/97). There was a perception that Jeff Kennett had become intolerant of criticism. Public servants were wamed against engaging in political debate and teachers were banned from speaking to the media. Any govemment (or govemment fimded) body that was not supportive or critical of govemment policy became a target of political vengeance. "His pursuit of those he sees as his enemies or even simply political obstacles, cannot be underestimated. Criticism is summarily rejected" (The Age 29/03/97).
Chapter seven will review the consequences of the radical reform program implemented by the Kennett Govemment. The chapter provides an insight into how public sector reforms are changing accountabilify and audit relationships in govemment as a consequence of the increasing hegemony given to market based business tools. It shows how, according to The Age, "Kennett may have overstepped the tolerable bounds of decency by moving to weaken the role and office of Victoria's Auditor-General" (The Age 20/05/97). Following so closely the restmcturing or removal of a number of independent statutory officers of accountability, the moves to redefine the role of the only real independent accountability agent left in govemment were met with a concerted public and political outcry. The outcome of Jeff Kennett's desire to change the role of the govemment audit fimction caused a by-election, public rallies, business and academic condemnation, heated parliamentary debate and contributed to the downfall of the Kennett Govemment in 1999. 267
CHAPTER SEVEN
THE TRANSFORMATION OF ACCOUNTABILITY AND PUBLIC SECTOR AUDIT IN VICTORIA 1992 -1999
Contemporary experience shows that princes who have achieved great things have been those who have given their word lightly, who have known how to trick men with their cunning, and who in the end, have overcome those abiding by honest principles (Machiavelli, as quoted by Finn 1995, p. 228).
7.1 Introduction
By the end of the Kermett Government's period in office public support had dwindled as a consequence of mounting evidence that the govemment considered itself above accountabilify responsibilities to the public. This perception grew progressively over the Kennett Government's period in office, culminating with the removal of the most significant independent arbiter of the public interest, the auditor- general, from his fraditional role of public sector audit.
The Kennett Govemment embraced the principles of National Competition PoHcy (NCP) to support and justify policy reforms that were aimed at 'mnning the state more like a business'. The sfrong preference for market-based competitive mechanisms often gave scant attention to the broader role of govemment in sociefy to ensure social equify and justice in the communify. The need to continue along the path of economic rationalism appeared to have little tolerance for any accountabilify mechaiusms that might slow govemment reform initiatives. The continuous, politically damaging criticisms emanating from the office of the audttor-general encouraged the Kennett Govemment to find ways of reforming the public audit office in a way that would potentially minimise govemment criticism. Though no 268 other govemment in Ausfralia saw fit to apply NCP provisions to the state audit fimction, the desire to sflence a significant critic of govemment policy was legitimised by the application of economic rationalism. This chapter will detail the ways in which the Kennett Govemment progressively eroded accountabilify mechanisms in the state of Victoria, before showing that the government's justifications for public audit reform were based on flawed logic, thereby exposmg the justifications as instiiiments of political self interest and the hegemonic ideology of neo-liberalism. Although the Victorian public audtt fimction was substantially reinstated to tts former position by the Bracks Govemment in 2000, the experiment of radical reform in Victoria serves to illusfrate a progressive movement of public audit away from its origins as a consequence of govemment reforms that commenced during the 1970's.
The initiatives of the Kennett Govemment undoubtedly played a major part in restoring the state to an improved financial position. The Age 20/11/01 reports that up to 1997 large numbers of people were leaving the state. After 1997 this situation reversed with migrants taking advantage of the "sfrength of Victoria's economy, moderate real estate prices and the cify's image as a sfylish and sophisticated place to be ... (A) large part of the vibrancy and growth of Melboume today is a result of initiatives of the Kennett Govemment" (The Age 20/11/01).' The Kennett Govemment succeeded in restoring the state's AAA credit rating, produced four consecutive budget surpluses and public debt fell to around 2 per cent of the state's economy, down from 32 per cent in 1992 (Audit Review of Govemment Contracts 2000, pp. 16-19; The Age 3/05/99). Spending cuts were not the sole reason for these improvements. The govemment embarked on an outsourcing and privatisation program that resulted in an increasing number of govemment fimctions being fransferred to the private sector. As the govemment sold off state assets, they were able to apply fimds to reducing the deficit and to development projects. Building projects such as the Melboume Exhibition Cenfre (known in Victoria as Jeffs shed), the Melboume Sports and Acquatic Cenfre (known as Jeffs pond) and the Grand
It is somewhat ironic that the newspaper article refers to benefits gained by 'Melbourne' and not 'Victoria' as a whole. The alienation of country voters contributed to the Kennett Government's electoral dovrafall in September 1999. 269
Prix track at Albert Park are a few of the more notable building projects which facilitated tourism dollars going to Victoria.
The Kennett Govemment accomplished many things. However, the means employed to achieve the ends were cloaked in considerable secrecy with social issues being accorded a lower order priorify in order to give hegemony to economic concems (see The Age 26/11/94, 3/05/99, 8/05/99, 19/09/99, 11/10/99, 31/10/01 and SMH 29/10/99). "Premier Kennett was admirable in so many ways. The pity is he could never tolerate criticism" (The Age 19/10/99). As govemment policies, actions, confracts, fimding cuts and issues of equify and justice affected large and small groups within the communify, those that spoke out were undermined. His dislike for The Age newspaper and various programs of the Ausfralian Broadcasting Corporation (ABC) were well known in Victoria (Legislative Assembly Hansard, 15/09/93, p.450). In confrast, he was partial to the Channel Seven television network that was headed by a close friend of the Premier, Kerry Stokes,^ and the radio station 3AW. Despite the fact that many of the government's critics were prevented from speaking directly with the media, newspapers were able to inform the public of govemment manoeuvres by printing leaked information from politicians and other sources. The value of this means of communication to the public was demonsfrated by the many instances where the Opposition resorted to quoting from The Age in parliament as a means of highlighting certain issues. So great was the secrecy and oppression that certain newspapers offered the only source of information about what was happening in the state. This chapter reflects this bias in the availabilify of information during the Kennett Govemment by the substantial use of newspaper articles as an information source.
That the Kennett Govemment commenced its period in office claiming an affinify for open and fransparent govemment which was quickly replaced by evidence of
•K . • •— There was significant controversy about this relationship as a consequence of the withdrawal of a program scheduled for the 7.30 Report by Jill Singer. The feature was to deal with the Kennett family's share portfolio and perceptions of imfair share allocations from a Chinese company. The removal of the program at the last minute was said to be in response to legal advice. This prompted accusations of "unreasonable influence over the media ...and alleg(ations) that the Kennett Govenmient was attempting to stifle debate and dissent in Victoria" (White and Economou 1999, p.32). 270 progressive attacks upon agencies of govemment accountabilify, is not an unusual phenomenon. What was unusual was the extent and breadth of accountabilify agencies that were undermined with a final unprecedented assautt on the role of public sector auditing.
7.2 Agents and Mechanisms of Transparency and Accountability
In chapter two it was established that as the role of govemment has become more complex so the role of public sector audit has responded by evolving to provide scmtiny in accordance with the expectations of the communify. As governments over recent decades have made increasing use of private sector organisations for govemment fimctions there have emerged other agencies to ensure tiansparency, safeguard accountabiHfy relationships and provide avenues for redress where poor performance is identified. Ombudsman offices, adminisfrative appeals tribunals, freedom of information and privacy legislation have been established to cater for "issues which had been hitherto left unsaid or ignored - things such as ethics, equify, faimess, access, openness or transparency, and the desire to provide citizens with effective mechaiusms by which they could call the public service to account" (Moss 1997, p.5).
Evans (1999, p.87) distinguishes between the role served by auditors-general (as adjuncts to parliament) "whose power is to report to parliament" and others that are intended to operate completely independent of parliament, such as ombudsmen, adminisfrative appeals tribunals and commissions of inquiry. Unlike ombudsman and other independent officers, whose appointment and independence is not protected by legislation, the parliamentary status of auditors-general provides them with a greater measure of protection from the whims and displeasure of parliament. For parliament to render the office of the auditor-general, as an officer of pariiament, frieffective would be like emasculating ttself The growth of independent agencies of accountability over the last two decades is seen by Evans (1999) as a consequence of the poHtical party system of govemment. Executive confrol of parliament ensures 271 that accountabiHty is more difficult to enforce. The use of independent pariiamentary agencies thus serves to reinforce accountabilify.^ Evans, however, in the appointinent of non pariiamentary officers, still sees the influence of the executive. Ultimately these officers are appointed by the executive govemment; the body whose actions they are largely meant to confrol. Evans suggests that even independent agencies can be used as a political tool to expose matters that have the capacify to influence and tum the perception of the pubhc about govemment. The reason for
this paradox lies with the phenomenon of new governments riding on a wave of reforming zeal usually generated by the scandals that assisted in the demise their predecessors. Such governments are most likely to establish new accountability mechanisms ,.. When the political system retums to what may be regarded as its normal equilibrium, (for) a government ensconced in office and largely in control of parliament, there is not, only a lack of incentive to establish new accountability mechanisms but a tendency to weaken and discourage those already in existence ... (and) remove them on the grounds of economy (Evans 1999, p. 88).
Independent agencies and the office of the auditor-general fall in and out of favour with governments, depending upon which stage in the cycle of goveming a govemment is in (as suggested by Evans). In relation to Victoria, the Kennett Govemment was initially very supportive of accountabilify agencies while these were highlighting the deficiencies of the previous govemment. Towards the end of its first term in office, this affinify of the Kennett Government with accountabilify had declined markedly, to the point where the govemment sought to weaken accountabilify agencies.'* For example, a former minister in the Cain Labor Govemment, Race Mathews, suggested that restrictive changes to Freedom of Information laws by the Keimett Govemment were
simply the latest of a long sequence of examples of his (Kennett's) inability to tolerate criticism or dissent. The industrial judges who have been subjected to mass dismissals, the director of public prosecutions whose independence has been
^ Zifcak (1997, p. 113) supports the proposition that in the absence of reforms which would considerably enhance the effectiveness of parliament as the principal forum for executive review under a party system, independent mechanisms for administrative review have a place in the cycle of accoimtability. The Victorian Auditor-General, Ches Baragwanath, stated that "1 think to some extent, no govemment likes independent statutory officers over whom they have no control. We've had a litany here in Victoria of Moira Rayner (Equal Opportunity Commissioner) and Bernard Bongiomo (Director of Public Prosecutions). We independent statutory officers are seen as a political risk" (The Age 27/07/99). 272
curtailed, the tribunals that have been stifled or starved of resources, an emasculated auditor-general and a Public Service cowered into silence by the threat of reprisals; all these testify eloquently to Kennett's determination to free himself from scmtiny (The Age 20/01/99).
Almost immediately after taking office the Kennett Govemment infroduced budget cuts across all departments and agencies as part of austerity measures required to claw the state back from the precarious financial position in which the previous Labor Govemment had left it. Particularly noticeable was the way in which Premier Keimett applied what Argy (1998, p.54) caHed 'hard economic liberalism' to fimctions which administered justice and access to justice. While he proceeded to cut resources to agencies such as the Human Rights and Equal Opportunify Commission, to amalgamate the Adminisfrative Appeals Tribunal and Social Securify Appeals Tribunal, he also applied economic rationalism to the way in which fimctions were provided. For example, the govemment proceeded to privatise many prisons, resulting in 80% of Victorian women prisoners and 40% of Victorian Male prisoners incarcerated in private prisons (Hancock 1999, p.43). As a consequence of numerous deaths in custody within a short period of private operators taking charge of prisons the govemment received persistent negative publicify for the privatisation of prisons (The Age 1/05/98). The government's difficulties were compounded when it was alleged that privately operated prisons were not more cost effective. This annoyed an already sceptical public which considered that it was "morally unacceptable for the private sector to profit from the incarceration of those the state has decided need to be punished" (The Age 5/10/00). Another example of the questionable appHcation of economic rationalism was the use of outsourcing criteria for police services. Outsourcing that was applied to areas such as asset management fraining, vehicle fleet management and maintenance proceeded without any significant public concems. However, when speed cameras, red light cameras, the police intelligence data system (Intergraph), prisoner fransportation and the provision of securify for major sporting and public events were outsourced, these were poorly received by the
^ For example, during the 1998 waterfront dispute, which resulted in a protracted battle between the shipping companies and dock workers, private security firms had hired riot shields and batons fi-om one of the privatised prisons (Hancock 1999, p.42) This raises issues of accountability, particulariy when encounters become violent. The lack of public scrutiny of private security frnns, issues of adequate training and selection criteria, especially when the use of weapons is involved, creates a vacuum of responsibility between the govenmient and the firm providing the contracted services. 273 public who saw these as fimctions which were more appropriately in the hands of an accountable govemment agency (The Age, 18/07/98, 16/11/98). Outsourcing creates a dilemma of "whether there should be a limtt on the natine and extent of outsourcing of public services" (Public Accounts and Estimates Committee (PAEC), Report 34, 2000, p. 36). The then Head of Cabinet Office, Departinent of Premier and Cabinet, Ms M. Sussex, seemed to agree that "clearly, there are some areas of govemance and judicial fimctions which wiH never be outsourced - and cannot and should not be outsourced" (PAEC Report 34, 2000, p.36). However, she made no moves to be specific about inclusions or exclusions to support this statement.
The applications of economic rationalism in Victoria were proclaimed as necessary to achieve fiscal economy. Funding reductions would undoubtedly affect the level of services provided and the logic of increasing efficiency to generate better service was enticing. However, Peter Loney, the Chairman of the PAEC, wamed that during its inquiry into Outsourcing of Govemment Services in the Victorian Public Sector
(a) key problem the committee encountered during this Inquiry was the incomplete nature of the performance and financial information that was available. There was little reliable or accurate data and there were problems in distinguishing between transitional effects and continuing effects, both in terms of costs and benefits. The inquiry was also hampered by the lack of data on matters of a more intangible nature, such as trends in staff morale, capability and probity issues (PAEC Report 34 2000, p. xvii).
In the absence of clear information about the effects of the government's reform initiatives, those who provided the media with fiiel for speculation about the appropriateness and benefits of govemment policy became the subject of Premier Kennett's ire, in particular, statutory officers appointed to ensure that the public had the means of holding the govemment accountable (The Age 14/10/99). Accordingly, the Kennett Govemment moved to progressively undermine the operational capabilities of independent agencies, and subsequently the role of the auditor- general, as part of his 'claimed' continued concenfration on economy and efficiency.
The following section provides examples of moves to silence key protections of govemment accountabiHfy that received significant public attention during the Kennett era. They include attempts to neuter parliamentary agencies and moves to 274 reduce information fransparency. These concerted efforts by the govemment to silence statutory officers entmsted with monitoring processes of accountability were but preludes to the government's main target, the auditor-general. These illusfrations provide a chronology of disregard for accountability measures before moving on to discuss, in detail, the reform of Victorian public sector audit. Ultimately, the audit reforms overstepped the boundary of the public's tolerance for the continual attacks on accountability. While the discussion will be presented as a predictable cyclical trend, it is clear that the quality and quantity of instances of accountability abuse, despite the attempt to ground justifications in the logic of economic rationalism, contributed to the eventual public backlash that removed the Keimett Govemment from office.
7.2.1 Accountability Undermined
During the Labor Party's period in govemment in the 1980's, Premier Cain introduced the office of Director of Public Prosecutions (DPP). Modelled on a British system that had been in operation for most of the twentieth century, the DPP was established to ensure that prosecutions were independent of the govemment of the day. The DPP was not a public servant and was given the status of a Supreme Court judge. The DPP was also given a separate budget with the ability to select staff This innovation was highly regarded as a means of ensuring the legal system was independent of govemment influence and was quickly adopted in other states. The independence of the DPP was soon tested when, in January 1993, Bemard Bongiomo QC, as DPP, pubHcly said that he "was considering whether or not he should charge the Premier with contempt of court, because his ill-judged remarks might jeopardise the faimess of a tiial" (Rayner 1997, p. 121). Before the year was over the govemment had passed a bill which greatiy reduced the autonomy and powers of the DPP. The reforms required the DPP's office to report to the Justice Departinent and only the Attomey-General was to have the power to institiite proceedings for 275 contempt of court. The govemment had effectively restiiictiired the office of tiie DPP from under Mr Bongiomo (The Age 26/04/97).^
The assaults on judicial independence continued during the Kennett Government's term in office. Rather than dismissing froublesome judges directiy, the govemment opted for the expedient of abolishing the courts on which the judges sat.^ The abolition of the Accident Compensation Tribunal in 1992 meant that nine members, having the statiis of County Court judges, were not appointed to other positions. Several members of the abolished fridustrial Relations Commission were not appointed to its replacement, the Employee Relations Commission, in 1993. In 1994 the practice of re-appointing judges to the Victorian Adminisfrative Appeals Tribunal was not followed by the Kennett Govemment. Other appointinents were held to be more desirable (Rayner 1997, p. 127; Waugh 1999, p.59). Primarily during 1993 and 1994, the jurisdiction of the Supreme Court was limited by the insertion of clauses into various pieces of govemment legislation to remove the right of citizens to appeal against perceived injustices, the "Save Albert Park" community action group bemg a prime example.^
Amongst other statutory officers whose critical comments were followed by their political demise was the Equal Opportunity Commissioner Moira Rayner. She had been especially unsupportive of the government closure of the Fairlea Women's Prison. "She also angered the Govemment by refiising to release confidential complaints about the unfair impact of public service cuts and by opposing the closure of the Northland Secondary College" (Rayner 1997, p.l41; Brumby 1999, p.6). The Equal Opportunity Commission was originally established as an independent statutory body with a tenured commissioner. In 1994 the Kennett Govemment not only abolished the position of Equal Opportunity Commissioner but also introduced
In 1996 the Labor Opposition gained political advantage, under Freedom of Information legislation, "from the release of Justice Department docmnents in which a senior public servant had noted his concems about govenmient 'vilification' of the office of Director of Public Prosecutions" (Rayner 1997, p. 236). ^ Hancock (1999, p.38) and Rayner (1997, p.l27) suggest that Victoria was not alone in these practices. The federal govemment and other state governments used the same political tactics to appoint less troublesome office bearers. The Kermett Govenmient was able to push through planning amendments without the need for citizen consultation for the staging of the Grand Prix. 276 a loser pays system for all complaints taken to the commission. Alan Goldberg QC commented that
(p)eople who are discriminated against ... are often the most disadvantaged members of our community. To suggest that they be required to chaUenge the Govemment, employer or provider of goods and services, with the unprecedented number of fmancial risks involved, makes a mockcty of a system which was designed specifically to provide the least privileged members of the community equality of opportunity for the just resolution and elimination of discrimination m this state (The Age 17/11/93).
The Equal Opportunity Office was replaced with a new, substantially weakened substitute which was less accessible to needy citizens.
In a move to limit scmtiny of govemment operations the govemment passed the State Owned Enterprises Act 1992 (SOE Act) which included provisions which allowed the government to exempt the Act from the Freedom of Information Act 1982 (section 90). With the large scale sell-off of state assets on the drawing board, the creation of legislation that allowed the govemment to make decisions about asset sales by executive fiat (the SOE Act) and by preventing the details of decisions from becoming public under FOI legislation (and also the Ombudsman Act), the govemment ensured that there was little avenue for public scmtiny of process or action in the sale of GBE's.
The Freedom of Information (Amendment) Act 1993 amended the 1982 FOI Act by including provisions which broadened the definition of exempt documents, increased charges for users of FOI and infroduced charges for members of parliament. This was said to be necessary to reduce the unreasonable demands on agency resources by vast numbers of applications for information by parliamentarians, which Labor MP John Thwaites admits was a political tactic used by both the Liberal and Labor parties to embarrass the govemment in office (The Age 23/01/99). Even as eariy as 1993 The Age was able to observe, with respect to the FOI, that "(a)lmost on an annual basis, Kennett has taken steps that have damaged the mtegrify of the legislation and reduced its usefulness" (The Age 1/02/99).
As the govemment sought to weaken FOI provisions through increased costs and exclusions, the usefulness of FOI legislation in holding the govemment to account 277 was demonsfrated by various issues exposed by applicants for information. For example, in 1995, while in Opposition, John Thwaites was responsible for revealmg waiting times by patients on hospital frolleys in emergency departinents. Also in 1996, reports that were critical of the child protection system were obtained through FOI. There were also moves by Labor MP, Rob Hulls, to obtain mformation before the 1999 election about the government's expenditure defending FOI cases m three government departments. This was in the wake of the govemment taking legal action to block the release of documents relating to confroversies associated with confracts in 1998 for casino licenses and with Intergraph (The Age 23/01/99). The information obtained through FOI was clearly damaging to the Kennett Govemment and would not have come to light without the existence of FOI legislation.
Under the provisions of further changes made to FOI legislation in July 1999 all names and information that would identify individuals were now removed from data released under FOI. This particular weakening of FOI provisions was condemned by the president of the Law Institute of Victoria, Michael Gawler, "as a reduction in the accountabilify of the Victorian Govemment" (The Age 1/05/99). This amendment has
made it almost impossible to establish who was responsible for government decisions ... It seems that the FOI Act should more appropriately be named the Fear of Information Act. The Govemment fears its use because of the exposure of its misdeeds and many fear using it because they fear repercussions from government if its misdeeds are exposed (The Age 16/09/99).
The other most significant limitation placed on the abilify of the public to scmtinise govemment documentation using FOI legislation, as the govemment practice of outsourcing increased, was the exclusion of documents said to contain commercial- in-confidence information. PAEC Report 35, March 2000, Commercial in Confidence Material and the Public Interest, concluded that the confracting process can limit fransparency and accountability in public adminisfration in two ways.
First, the conttact between govemment and the contractor can be declared "commercial in confidence" and so evade the provisions of FOI. This means that contractors' obligations in relation to service quality standards, handling of complaints, employment and training of staff and many other matters of public interest may be removed from public scmtiny. Secondly, the intemal operations of the conttactor are not subject to FOI or the Audit Act unless govemment and public access to information by the contracting agency is specified in the contract. This 278
diminishes access to information by ministers, the Auditor-General and the pubhc (PAEC, Report 35, March 2000, p. 145).
These limitations of available information apply in addition to other cost and access considerations. The presumption that 'public interest immunify' (Uhr 1999, p. 100) can be enjoyed as a consequence of dealings by govemment with commercial providers, does not absolve govemment of its obligations for open and fransparent decision-making. The increasing limitations placed on FOI applicabilify through exclusions and costs during the period of the Kennett Govemment eroded this avenue of govemment scmtiny.
7.2.2 Transparency and Commercial Secrecy
There were many instances where the Keimett Government tried to prevent information from being made public to avoid political embarrassment. In particular, two days before the downfall of the Keimett Govemment in the 1999 election the govemment succeeded in preventing the release of 12 pages from a police report into the cover-up of govemment briefings on ambulance service confracts. Details from the fraud squad's two year investigation, made known the previous week, had advised the Department of Public Prosecutions to consider charging a senior public servant with perverting the course of justice and charging a former Mefropolitan Ambulance Service (MAS)^ consultant and MAS official with collusive tendering and fraud (The Age 14/09/99). No charges were laid.
Other instances of information not being made available to the public were noted in the PAEC Report 35 in March 2000. The executive summary stated that
(t)his Inquity arose because the Auditor-General brought to the attention of Parliament that commercial confidentiality had become an issue of some contention between govemment agencies and his office. Agencies claimed that some information which the Auditor-General wished to include in his reports to the Parliament, was commercial in confidence and therefore could not be published" (PAEC Report 35, 2000, p.xix).
? The MAS awarded a contract for the running of its ambulance communications and scheduling service under questionable circumstances to Intergraph. Intergraph subsequentiy proved to be unable to efficientiy manage the contract resulting in much public concem over the contracting of this essential service. 279
Responding to the mounting criticism of the govemment, the PAEC had begun investigating govemment confracting practices in May 1997 but the draft report which was available for consideration fri August 1999, just before the election which removed Kennett from govemment, was not released until March of 2000 (The Age 20/08/99). The key findings of the report were
5.1 Govemment agencies have used commercial confidentiality exemptions to prevent the disclosure of information to individual parliamentarians, to the Public Accounts and Estimates Committee, to the Auditor-General and to the community.
5.2 It is unlikely that much of the material for which such exemptions have been claimed, would stand up to serious scmtiny as being legitimately commercially confidential.
5.3 On occasions, govemment agencies are using the pretext of commercial confidentiality as a shield against the disclosure of information which is commercially embarrassing to the govemment or which raises issues of probity (PAEC Report 35, 2000, p.71).
These findings were particularly damming of govemment procedures, a clear reason why the findings had not been released prior to the election in September 1999.'° The committee also considered "that the decision as to whether or not to disclose commercially sensitive information should be made according to the general principle that information should be made public unless there is a justifiable reason for withholding access" (p. xxxii). While the recommendation was for disclosure rather than secrecy, the Keimett Govemment had already been removed from office and it was up to its successor to ensure that govemment policy decisions would be more fransparent.
The perception that the Kennett Govemment was overly concemed with preventing the public from scmtinising govemment activities is well supported by media headlines. The Age claimed the following attention grabbing tities: "How to make a noise in Kennett's state of sflence" 20/01/99; "The Secrecy Plague" 1/02/99; "The lights are being dimmed in Victoria" 23/04/97; "How the Kennett Govemment keeps Victorians in the dark" and "The Secret State" 8/05/99; "Anti-secrecy tools aUowed to go blunt" 19/08/99; "The state of silence" 13/09/99; "What's Kennett hiding?" w Steve Bracks (the new Premier) was on the investigating committee until 21 April 1999. 280
15/09/99; and "Secret state begs questions" 19/09/99. The Australian Financial Review contributed "Official attacks Kennett secrecy" on 26/08/99. These headlines increased in shrill and frequency prior to the September 1999 election when the Kennett Govemment was removed from office and the auditor-general's very existence was imperilled.
7.3 Threats to the Victorian Auditor-General
The Victorian public audit function, at the commencement of the Kennett Government's period in office in 1992, was conducted in a manner very sunilar to that of the Ausfralian National Audit office, recognising their common ancestry in British public sector audit of the nineteenth century. The mandate of the auditor- general included efficiency and effectiveness responsibilities, with the office making significant use of confracted private sector agencies to assist with compliance auditing responsibilities. There was every indication from the performance reviews of the public audit function conducted on behalf of the govemment in 1993, 1995 and 1998 that the office itself was operating efficiently and effectively and that it was serving the public interest well, before the period of audit reform.
Ches Baragwanth was the Auditor-General for Victoria from 30 August 1988 to 3r* July 1999, that is, throughout the entire period that the Kennett Govemment was in office. His express wish to remain 'a faceless bureaucrat' proved to be a difficult form of presence to achieve. The fact that Baragwanath had presided over a turbulent political and economic climate for most of his term in office meant that he would become a significant (rather than faceless) public figure in Victoria. Baragwanath came from a family tradition of public service dating back to 1851 when a relative was in the first Victorian Parliament. Having studied accounting at night school Baragwanath then joined the Commonwealth Auditor-General's office. Over the next 31 years he rose to the rank of Assistant Auditor-General, having worked in New York on defence procurement from 1969-73, posted to Darwin in 1975 just after cyclone Tracey desfroyed much of the town, returned to the Commonwealth audit office in 1978 at a time when efficiency auditing was being infroduced and then on to Victoria in 1979. Accordingly, Baragwanath had a diverse experience base. He had 281 also made significant contributions to the accounting profession. As the President of the Victorian Division of the Ausfralian Sociefy of Certified Practicing Accountants in 1989, as a member of the Auditing Standards Board and Public Sector Accounting Standards Board and as the AusfraHan representative on the Public Sector Committee of the Intemational Federation of Accountants, Baragwanath had been in a position to influence public policy and accoimting developments.
Throughout his time in office as auditor-general, Baragwanath showed no hesitation in presenting his audit findings without concem for the person or party in office. On one notable occasion before the Kennett Govemment came to office in 1992, the auditor-general tabled his report on the Treasurer's Statement of Receipts and Payments for the Consolidated Tmst Fund for the year ended 30 June 1991. Deputy leader Roger Hallam commented on the audit findings stating that
the revelations and criticisms levelled at the government go to almost every tier of the state's financial operations, and 1 want to list those concems and criticisms as they came to me. • Concem is registered that, firstly, expenses have been moved off the balance sheet. • Secondly, Parliamentaty control has been circumnavigated. • Thirdly, expenses have been deferred, and the tme extent of costs quite deliberately understated. • Fourthly, revenues have been pulled forward to artificially improve the report. • Fifthly, the budgetaty deficit has been deliberately understated. • Sixthly, recurrent expenditure has been financed form borrowings. • The seventh point is that expenditure has been incurred without the sanction of Parliament. • The eighth point is that loan funds have been raised to meet interest costs. (Hansard, Legislative Council, 30 October 1991, p.l050)
The deputy leader also suggested the report revealed "the (Labor) Govemment, in its desperation to hang on to power, had been prepared to bend mles in every direction and on an awesome scale" (The Age 31/10/91, Legislative Assembly Hansard, 30 October 1991, p. 1050). Auditor-General Baragwanath cites the most difficuft audit report he has been involved with, as the Victorian Labour Treasurer's Financial 282
Statement in 1991-92 when the financial problems of Victoria were in a precarious position (BRW 30/07/1999; Australian CPA September 1999; Office of the Auditor General - Public Relations 11/09/95).
Auditors-general appear to be favoured by Opposition parties at all times and favoured by incumbent govemment only in the early stages of any period in office. Parliamentary debate in March of 1994, which concemed the second reading of a new Audtt Bill (that replaced the Audtt Act 1958), referred to comments made by Kennett while he was in Opposition five years eariier in 1989 which were very supportive of the role of the auditor-general. Kennett questioned in parliament whether it was wise to
(l)ook to other organisations to do the efficiency and effectiveness reporting to parliament? ... that will take away a major role of the auditor-general's office and will further neuter the independent advice that comes before parliament ... No other source is acceptable. There is no other measure than to have the Auditor-General do this work and be allowed to continue to do it totally independent of Parliament (Legislative Assembly Hansard, 22/03/94, p. 379).^^
His support for the role of public sector audit as the most appropriate check on govemment was given fiirther foundation in October 1992 when the newly elected Premier Kennett claimed that 'Mr Baragwanath and his officers deserve the fiill support of the Parliament and the public of Victoria for having the courage to carry out their jobs without bending to pressures'. This statement is commemorated as a plaque in the foyer of the Victorian Auditor-General's office.
The first 'honeymoon' stage in the relationship between a new govemment and the auditor-general ends when the auditor-general commences reporting on the period when the decisions of the incumbent govemment can be called into question. While ever the auditor-general's reports are still about the previous deposed govemment, the auditor-general is praised as a valuable accountabilify mechanism in govemance. When audit reports cover a time period when the new govemment has been in confrol, auditors-general become tiresome bureaucrats that are "bean-counting
" In the light of his obvious approval of private sector auditors doing all performance and compliance audits in 1999, ten years later, the views of politicians are clearly variable depending upon which part of the cycle of govemment they are in. 283
Philistines" (The Age 15/05/97). There were no suggestions that Ches Baragwanath was partisan by showing any particular dislike for the Kennett Govemment for although "his clashes with Kennett are the stuff of folklore, Baragwanath had his share of skirmishes with the Cain and Kfrner adminisfrations" (The Age 22/11/96, 27/07/99). There was also no evidence of the Premier havmg a personal grievance with the auditor-general.
In 1993, nine months after Kennett became Premier, Hansard provides evidence that the auditor-general was still well regarded by the govenment. "The Auditor-General states that kindergarten services are not meeting the needs of Victorians and are providing services in an expensive manner. The govemment would be irresponsible if it did not take cognisance of that report and act upon if (Legislative Assembly Hansard, 21/07/93, p. 40). By October 1993, however, there were the beginnings of discontent. The Opposition leader, John Brumby, suggested that "it appears from answers given today during question time and from statements recently made by the Auditor-General before the Public Accounts and Estimates Committee that the Auditor-General's independence from the executive is being undermined" (Legislative Assembly Hansard, 5/10/93, p. 818). Also on the 21/10/94, Hansard records how freasury officials refused to make certain information available to the auditor-general, thereby denying him access to information as required by the authority of section 45 (1) of the Audit Act 1958. As criticism by the auditor-general of govemment actions mounted the level of support by govemment for the office of the auditor-general (in its fraditional form) declined.
There were also rumblings of discontent with the audttor-general from Ken Baxter, the head of the Premier's department. Baxter, who had been appointed to the top public servant post from private industry, took exception to the way performance reports provided valuable material for Opposition parties to attack govemment for mismanagement and poor policy. ^^ He proposed that a system of intemal performance reviews be conducted by the Office of Public Sector Management. This
'^ It could be argued that Baxter did not have a public service background that his experiences in the private sector meant that he was unaccustomed to the detailed scmtiny to which parliamentary actions are submitted. 284 would mean that the auditor-general's office would be by-passed. He was also critical of the fact that the auditor-general's office was not subject to the same fiinding cuts as the rest of the pubHc sector^^ (The Age 23/08/93 and 01/09/93). At around the same time, evidence was provided by another report in The Age (10/09/93) that Ken Baxter had sent a letter to Ches Baragwanath on 8 January 1993 advising him that the Premier intended to discuss with him a confract of employment, even though the auditor-general was not appointed by the govemment but by the pariiament. While the contract did not eventuate, these reports highlight the deteriorating relationship between the Premier's Office and the auditor-general.
Relations between the auditor-general and the govemment began to deteriorate rapidly in May 1996 with the publication of four key audit reports that were damaging to the reputation of the govemment in the months before the announcement of the review of the public audit function. The first of these reports was Special Report 39, Marketing Government Services ~ Are you being served? (Tabled 15 May 1996), in which the auditor-general identified examples "where published material was, in the opinion of audit, totally inappropriate as it contained party-political statements" (para. 1.1.6). The report also criticised the appointment of the government's media buyer, Leeds Media, as "poorly documented and ... did not meet some aspects of sound public-sector accountability" (para. 6.14 - 6.20). The contentious second audit report in 1996, Report on Ministerial Portfolios May 1996 (Tabled 30 May 1996), detailed how the govemment had allowed Crown Casino Ltd to increase the number of gaming tables at the new Casino from 200 to 350 for an additional licence fee of $85 million. The auditor-general highlighted the government's decision not to claim significantly higher amounts in license fees and suggested that "there was inadequate support provided to audit for the Department's decision" (para. 3.8.303 - 324).^"* The Labor Opposition claimed that the report confirmed that the casino owners were govemment mates who were getting
This was contradicted by a report in The Age 18/09/93 which detailed how the auditor-general's office was not exempted from a $1.4 million budget cutback. A Liberal MP, Ross Smith, suggested that this might mean the auditor-general would not be able to carry out his job effectively. Steve Bracks, while in Opposition, as part of debate about the auditor-general, also suggested that the review of the Audit Act under NCP was brought forward because of criticism of advertising and Crown Casino. "He is very sensitive about those two matters" (Legislative Assembly Hansard, 4/12/96, p. 1600). 285 favourable freatinent (The Age 31/05/96). The same report also detailed numerous other criticisms of govemment. In particular, exfravagant gifts to former department heads (Ken Baxter) and evidence of appropriate admmisfrative processes not being followed (para. 3.6.15 - 16).
The third critical report was Special Report no. 42, Protecting Victoria's Children: The Role of the Children's Court, (due to be tabled 20 June 1996). This report was subject to much confroversy because the govemment (through the Attomey-General) advised "the Auditor-General not table the performance audit of child protection in the Children's Court, which was ordered by parliament ... (this) represents an unprecedented attack on the independence of the Auditor-General and on Parliament" (Legislative Assembly Hansard, 19 June 1996, p. 864). The Age on the 21/06/96, 22/06/96 and 23/06/96 asked how an audit team which embarked on an audit of the Children's Court with the full knowledge of the state government in 1994 was not allowed to submit its report because it was now argued by the govemment that the auditor-general had no jurisdiction over courts in Victoria. Even though the auditor-general had tabled a report about the magisfrate's courts in 1995 (as part of the Report on Ministerial Portfolios May 1995) the Children's Court report was viewed by the govemment as a threat to the important separation of legislative and judicial powers. The auditor-general stated that "(w)hile it has been my practice in the past to report on court operations, sometimes quite extensively, in the light of the explicit opinion now provided by the Solicitor-General, 1 have reluctantiy concluded that I am unable to fransmit Special Report no. 42, Protecting Victoria's Children: The Role of the Children's Court, to the Pariiament" (Legislative Assembly Hansard, 20 June 1996, p. 927). There was conjectiire that "(r)epeated claims by court and welfare officials in recent years that Govemment cuts in court, family welfare and child-protection finances have undermined the effectiveness of the service" (The Age 21/06/96). This served to sfrengthen the suspicion that the govemment had moved to block the report because it would be politically damaging. Although the auditor-general was prevented from tabling his report Hi pariiament, a copy of the report was leaked to the media by the Opposition (The Age 3/04/97). Again, during the Kennett Govemment, the press proved to be the means by which some scmtiny of government could be maintained. 286
The fourth audit report which provoked the government's determination to mute the auditor-general was the Statement of Financial Operations, 1995-96, on 15 October 1996. The report criticised the govemment for selling state assets, including the World Trade Cenfre, Port of Geelong and the Port of Portland for about $50 million below their book values" (para. 4.47 - 4.97; The Age 3/4/97). One month later on 15th November 1996 the Auditor-General, Ches Baragwanath, was called mto the Premier's office to be informed of the decision to commence an frnmediate review of the Audit Act 1994 under NCP guidelines. He was handed the terms of reference for the Audit Act review committee with two of the committee members having already been nominated.
The announcement of the proposed review of the public audit fimction under NCP generated significant criticism from both within govemment and the communify. The review of the audit fimction was viewed as 'a last ditch attempt' to silence yet another critic of govemment. The "auditor-general, has proved too independent and critical of govemment performance for a Premier afflicted with a serious tic - A Total Intolerance to Criticism" (The Age 26/04/97). Even, though many public sector reforms may have been considered unpopular, the Keimett Govemment considered it necessary that the criticism be shouldered for the "communify's overall interest". Premier Kennett claimed to justify his review of the auditor-general on the basis that he was willing to make the difficult decisions that had long-term consequences. He claimed that
govemments were about making changes for the right reasons that are intellectually based and obviously based on commonsense. No govemment should be dissuaded from doing what it believes is right to gain short-term political or personal popularity. That was the error of the previous govemment in this state - that it was always prepared to compromise good govemance to try to hang onto some vestige of power (Legislative Assembly Hansard, 18/11/97, p. 1162).
The logic used by the Kennett Govemment as justification for the reform of the public audit function was the very opposite to that which the public believed was the reason for reform. In the context of preceding attacks on independent statutory officers, it became apparent that the desire to restiict the activities of an agency of govemment accountability, to limit govemment criticism and retain political power was derived from short-sighted political expediency rather than long-term 287 justifications in the public interest. Subsequent events were to bear out this perception.
7.4 The Kennett Government's Reform of Public Sector Audit
The govemment chose Rod Maddock, a professor of economics at Lafrobe University and a known supporter of govemment economic reform, to chafr the committee to review the audit office. Maddock had written extensively about the effect of competition policy and the telecommunications industry, but had written nothing in relation to govemment audit. The second member, John Dahlsen, was a Melboume solicitor who had previously had a development proposal thwarted by a report from the auditor-general. He also had directorships in Woolworths and the ANZ Bank. The third member of the panel. Ken Spencer, was a partner of a 'big six' accounting firm, KPMG, a director of Crown Entertainment Group, Cify Link Management^ ^ and a director of the Ausfralian Accounting Standards Board. The selection of these members of the committee by the Kennett Govemment may have been as a consequence of
a political article of faith among hard nosed pollies and govemment insiders: never commission an inquity report unless you "know" what the inquirers are likely to conclude. On that basis, Mr Kennett may not have "knovvTi", but he would be well pleased with the report released on Thursday of the panel inquiring into the fimctions and role of the auditor-general (The Age, 26/04/97).
The review committee was charged with the responsibility of determining if the Audit Act 1994 allowed conduct that was uncompetitive under the provisions of NCP legislation. If so, the committee was to recommend altemative means of achieving the objectives of audit legislation. The committee advertised in The Age on 23 November 1996 for submissions, with the closing date of 20 January 1997. Characteristic of the Kennett Government's mode of operating, the comnuttee
'^ Both of these directorships involved entities with which the Victorian govemment had substantial dealings and had been the subject of considerable comment by the auditor-general (The Age, 3/10/96). 288 conducted the review with little fransparency'^ with apparent haste and secrecy, features which attracted the attention of the press.
The three-member panel's meetings have been held m private; the panel refiises to release any of the 51 submissions it has received; its draft report goes to the govemment a week before its deadlme ... While some submissions have been released by academics and accountancy bodies, those of the key players remain locked away. These include submissions from more than 10 govemment departments and agencies (The Age 3/04/97).
Ches Baragwanath was critical that the process of review was conducted by a govemment appointed team rather than a parliamentary committee (VAO, 1997d). The appointinent by the Kennett Govemment of a review committee pointed to a lack of independence on the part of the govemment in the review process. An essential element of the independence of the auditor-general is that the role not be subject to any direction by the executive govemment (Funnell 1996).
The Premier's decision to review the office of the auditor-general does not appear to have arisen from a process of wide consultation or discussion. When considering the government's program of NCP reviews just four months earlier, the audit office was considered a low priority and scheduled as the last of seven reviews to commence in June of 1998. Neither "was the scheduling of the review, ordered by Mr. Kennett, or its terms of reference discussed within the parliamentary parfy room or, according to Govemment sources, in Cabinet. Everyone, it seems, was kept in the dark" (The Age 3/04/97, 1/10/97). The auditor-general's office was vocal in its belief that the review would damage the fraditional relationship between public audit and the abilify to safeguard the public interest. The auditor-general engaged in "the unprecedented
The committee tried to deflect criticism about the lack of transparency by stating that this arose from factors beyond their control. Rod Maddock presented a paper on Competition Reviews & the Audit Act at seminar for The Institute of Public Administration, Australia in Melboume in August 1997. Having personally attended the seminar, it became clear to me that he had a hostile audience. He wanted to discuss process and methods for inquiries. However, the audience was interested in the terms of reference, the semi-public nature of the inquiry and the obvious haste with which the inquiry was conducted, particularly as the timing for submissions extended over the annual Christmas break, which further reduced time available for detailed public comment and review. He disavowed any ability to manage these issues claiming that they were set by the government and that he only worked within the parameters that were given. He was openly critical of what he described as the auditor- general's efforts to undermine the committee's work as "a stage-managed public relations campaign with high emotive appeal" from a person with a vested interest in resisting change. This perception was not well received. 289 action ... (of) writing to all members of parliament on 21 November" (Legislative Assembly Hansard, 4 December 1996, p. 1578). That no auditor-general has previously felt it appropriate to address every member of parliament was debated as being a 'serious matter' dealing with "an unprecedented cfrcumstance, and a matter of urgent public importance". The content of the auditor-general's letter was viewed as a very sfrong condemnation of the government's proposed review. It was read in parliament and is reproduced as follows;
While 1 acknowledge the government's right to apply the national competition policy to its own operations, this review involves a fundamental challenge to a key element of the Westminster system of parliamentaty democracy in that my freedom to independently audit government activities on behalf of the parliament and the taxpayer could be seriously compromised. I am astonished to see that the role of the Auditor-General is regarded as a govemment activity and, therefore, subject to this review. In fact, my role and that of my office is clearly separate from govemment. The Auditor-General forms part of the parliament's regulatoty and accountability framework and is the principal source of independent information for both the parliament and Victorian taxpayers on the performance and operations of the govemment itself I emphasise that 1 am not opposed to independent reviews of my office by the parliament. Two major reviews since 1992, commissioned by the parliament, have concluded that 1 am discharging my financial and performance audit responsibilities, using both in-house and private sector resources, economically, efficiently and effectively. It is inappropriate for the govemment, as the subject of my audit, to commission a review which directly questions whether the Auditor-General should undertake audits on behalf of the parliament and taxpayers and seeks to influence the manner in which audit services are to be provided. Such action undermines the powers of parliament and is prejudicial to audit independence. In addition, the terms of reference are worded in such a way that appears to me to pre-empt the outcome of the review. For instance, one of the terms of reference envisages govemment agencies having the right to choose their own auditor. I find this objectionable as it is a well-established principle that those subject to an audit do not appoint their own auditor. Numerous parliamentaty inquiries within Victoria and across Austtalia have concluded that the interests of parliament and taxpayers are best served by an Auditor-General as a single independent voice with audit responsibility extending across the whole spectmm of govemment activity, free from govemment influence or control, and with a mandate to audit and investigate wherever and in whatever way deemed necessary.
In my eight years of reporting in the public interest without fear or favour, 1 view this govemment action as representing the greatest threat to the independence and even the vety existence of my role, and to parliament's and the community's right to know. 290
It is my intention to provide a written submission to the review secretariat arguing that any review of the Auditor-General's role is the sole prerogative of the parliament, and any changes to the role should only be considered if it believes they would strengthen the Auditor-General's independence and freedom to examine and report to the parliament on the full ambit of public sector activities. I am concemed that any measures which compromise the stamtoty independence and effectiveness of parliament's extemal audit function will weaken the ability of parliament to provide the constimtional checks and balances on the exercise of executive govemment power. Accordingly, 1 seek your support, as a member of parliament, in defending the integrity of the institution of parliament. Yours sincerely C. A. BARAGWANATH Auditor-General 21.11.96
This proved to be the first of several detailed submissions and responses the auditor- general made during the course of the review.
7.4.1 The Outcomes of the Review Process
While the govemment did not implement all the recommendations of the Audit Act review committee, it did follow the general direction proposed by the committee's 1 7 report. The proposed legislation to effect the changes was passed in the Legislative Assembly on 20th November 1997 and implemented on 1st July 1998. The infroduction of an approach that typified the general frend of govemments around the world to engage in 'steering rather than rowing' gave the recommendations an air of legitimacy.
The Audit Act review committee considered that the auditor-general should not undertake audits directly, but confract with the public sector audit office (Audit Victoria) and the private sector for all financial and performance audits. The Audit Act Review-Report made significant mention of the public sector audit model used in
In response to the aimouncement of changes to the Victorian audit fimction Opposition leader, John Brumby, alleged that "six accoimting firms, which had contributed more than half a million dollars to the Liberal Party during the 1996 state election, were "all lining up for their reward" (The Age 25/04/97). The fact that one of the review committee members was a partner of KPMQ with a potential financial interest in the outcomes of the review, could also have been considered a form of conflict of interest as implied by John Brumby. 291
New Zealand where a purchaser/provider split had been implemented, but not for all financial audits and not at all for performance auditing. It is interesting to note that the New Zealand House of Representatives Inquiry into Audit Office Legislation 1998 which was presented after the Victorian audit reforms, considered that constituting Audit New Zealand as a state owned enterprise, would result Hi "unnecessary risks to both Crown and the Audit Office ... (and) such a move could impact negatively on the office's independence". Furthermore, "the efficiency benefits of removing the Audit Office's audit capabilify have not yet been estabHshed" (Summary p. 10). Although atfracted to the New Zealand model, the Audit Act review committee considered "that the New Zealand model can be improved upon" by a complete, rather than partial, separation of purchaser and provider (Audit Act Review-Report 1997, p. 49). Evidence for this assertion was not provided. This, the report argued, would allow the auditor-general to concenfrate on policy, audit methodology, audit priorities and confract management. In practice, the Audit Act Review-Report meant that the Victorian Auditor-General would be removed from a direct operational role and be given the role of a 'confractor- general'. Under the proposed reforms the auditor-general had no power to initiate audits and had no way of independently checking the accuracy of private audit work. Supported by a small elite team, the auditor-general would determine audit priorities, encapsulate the requirements of all audit assignments in confractual terms (assuming that this is possible for all types of auditing) and confract out all audit assignments.
Audit Victoria, a new body, was to be created out of the then Audttor-General's Office to operate as a govemment business enterprise, separate from the Auditor- General's Office, under a board of management. It was suggested that this arrangement ensured that Audtt Victoria would not be subject to any influence by the govemment and that tt would enable it to independentiy provide audit services (Audit Act Review-Report, 1997, p. 47). In practice, this stiiicture saw the operational elements of public auditing fransferred out of the pubHc service, takfrig with them the accumulated govemment audit expertise and corporate memory. As a separate entity. Audit Victoria would then compete for audit tenders with other commercial
This knowledge base made experienced employees of Audit Victoria attractive to other audit service providers and resulted in significant 'poaching" of staff by accoimting firms (The Age 9/07/99). 292 audit service providers. The proposed sale of this entify within two years would mean that the govemment would retain no operational expertise that would be necessary to inform and direct the confracting process. "Mr Baragwanath said that the changes, which strip him of his auditing staff, would create a world first - an auditor-general's office without auditors. 'While the biU purports to give total discretion in the performance or exercise of my powers, it effectively removes all operational discretion'" (Auditor-General Baragwanath, quoted in The Age 31/10/97). The Audit Act review committee also recommended that the auditor- general be made an independent officer of parliament and that the auditor-general's office be fimded from an appropriation from parliament (Audit Act Review-Report, 1997 Recommendation 2.2). While the recommendations conceming the auditor- general's relationship to parliament followed the path taken by the Commonwealth Govemment (and other Westminster systems of govemment), the merits of such a change in status were questionable in conjunction with the other reform initiatives. "If the Govemment accepts the report and legislated its provisions, Mr Baragwanath will have his powers removed and given to a committee and he will be independent in name only" (The Age 26/04/97).
The significant innovation proposed by the Audit Act review committee, which was unique in Westminster style democracies, was the extension of confracting to performance auditing. While it has been the practice of govemments to call in private consultants to provide assistance in matters where particular expertise is required (VAO 1997a, p.51), the performance audit has always been managed and confrolled by the auditor-general. This type of audit has fraditionally been viewed as a function requiring specific expertise, appreciation of the intricacies of govemment accountabilify and a regard for the public interest. Performance auditing was conducted by public servants. With conceptually different objectives underpinning audit processes and different accountability regimes and responsibilities between the public and private sectors, no other govemment had considered that audit outcomes for performance auditing could be done as effectively by a private provider.
Economic rationalist arguments, as embodied in NCP legislation, to justify public sector audit reforms, typified an institutional theory perspective where reforms where 293 explained more by a search for legitunacy than by substantive results. DiMaggio and Powell (1991) suggest that organisational change can be more about making stmctures increasingly similar without making them more efficient. The proposed public sector audit reforms had the effect of promoting a more generic approach to audit between the private and public sectors. This allowed for power stiiictures to be redefined, with the accounting profession potentially havmg an even greater sphere of influence as the public sector made increasing use of private sector accountmg and auditing expertise. Although the Histitiite of Chartered Accountants in Ausfralia (ICAA) was generally supportive of more competition in public sector audit, they did voice a little concem about the lack of operational capabilify the auditor-general would have in the new regime (ICAA, 1997).
The auditor-general made a very detailed submission to the Audit Act review committee in January of 1997, responded to the Audit Act review committee's report in May 1997 and in his Report on Ministerial Portfolios in May 1997 made a detailed commentary on the review proposal. It was clear that the review had no support from the VAO in terms of how it was conducted (in apparent haste), the persons conducting the review (a govemment, rather than parliament, appointed committee), the justifications used (NCP provisions on the grounds of efficiency and qualify improvements when no evidence of deficiencies existed) and the proposed outcome (of removing the constitutional role of the auditor-general). An interview conducted for this thesis with Ches Baragwanath on 25 June 2002 confirmed that he "never believed for a minute that the review would be successful based on the poorly fitting rationale and justifications offered". The former auditor-general also claimed that he never felt that the review process was a personal issue. Rather, the review was the preliminary step in silencing an avenue of govemment criticism. The reform of the VAO promised to achieve this end.
The Kennett Government's desire to silence critics and undermine public scmtiny stmck a cord with the public that was franslated into action. Soon after the review committee handed down its findings in April, the Victorian communify commenced a campaign to 'Save our Auditor-General' on 15 May 1997, by holding public rallies. The organisers and communify groups, including the Victorian Council of Social 294
Service, the Victorian Council of Churches and the Victorian Council of Civil Liberties, had vastly underestimated the level of public friterest in the tineats to the operation of the auditor-general contained in the review report.'^ The executive director of Liberty Victoria, Joseph O'Reilly, clauned that the campaign to protect the office of the auditor-general had exceeded expectations.^'^ So great was the interested crowd on 15 May 1997 that the speakers were forced to speak twice in the one night because the assigned venue could not hold the crowd. Those who publicly decried the moves to reform the Victorian audtt office included the former Victorian ombudsman Norman Gesche, the former Commonwealth Auditor-General John Taylor, the Managing Director of the Ausfralian Stock Exchange and former Victorian Auditor-General Richard Humphry.
The reform prescription was questionable in many respects. The application of competitive measures to a body with a constitutional role that is independent from govemment, the use of economic theory to justify the radical reform where no evidence of inefficiency existed, a prediction that the reforms would lead to increased costs in the long term, and a suggestion that contestabilify would somehow improve audit quality all served to make the reform prescription all the more contentious.
7.5 The Implications of the Reform Prescriptions For Accountability and Audit Quality
The presumption that increased competition will enhance the effectiveness of public sector audit assumes that the audit function engages in activities that have unambiguous outcomes that can be embodied in confractual terms. Competition policy and agency theory suggest that where confractual outcomes can be clearly
Ten more public rallies were held in July across the state. Having personally attended this event it was clear that despite the cold wintry conditions people were prepared to stand and patiently wait to hear the speakers. Discussions by people in the crowd centred on a desire to do something about the continual moves to undermine parliamentary accountability to the public. The changes proposed to public audit were not viewed as reforms to improve efficiency. The level of awareness about the implications of the proposed audit reforms was surprisingly high, considering that the public is often portiayed as apathetic. 295 specified the activify can be successfiil. Where outcomes are not clearly defined, for example in performance audituig, "(i)t is argued that over reliance on regulatory processes will subvert the audtt product from being a professional judgement mto being a statement of compliance for the regulator" (Hatherley 1997, p.l). The expansion of govemment audit responsibflities and the increasingly generic nature of financial reporting have meant that it is not cost effective for govemment auditors to perform all audits of govemment entities.
Compliance auditing (financial auditing) requires the application of specified criteria against a defined outcome. It could be argued the increasingly generic nature of financial reporting practices, procedures, accounting and auditing standards means that the skills required to conduct compliance auditing are not unique to govemment auditors. Houghton and Jubb (1998, p. 31) immediately prior to the Victorian reforms concluded that the continued use by the Victorian Auditor-General of many private sector audit firms for financial audits implied that they were of adequate qualify and price. The auditor-general confirmed that in 1996 seventy-five percent of the entire financial audit base was serviced by private sector resources (VAO 1997b, p. 16). It is clear that private contractors provided the auditor-general with valuable assistance for compHance audits. However, performance auditing, which encompasses the more subjective accountability obligations, provides a particularly complex environment for confractual relationships. "Performance audits have been one of the main sources of conflict between the present govemment and Baragwanath" (The Age 7/06/97).
The application of a confracting relationship to performance auditing needs an entirely different approach from that employed in compliance audits. Performance auditing makes use of specialist skill and judgement in relation to the efficiency and effectiveness of outcomes against stated objectives, usually found in govemment policy. Whereas compliance auditing is very much an accounting exercise.
^' This clearly defined outcome takes the form of financial reports that have in the past been based on cash accounting techniques which provided limited avenues for subjective concepts. As the public sector has increasingly embraced accmal accounting the financial reports of govemment also contain elements of estimate and opinion common to the private sector. 296 performance auditing forces the auditor-general to become more intimately involved with govemment policy. There are often no clear performance measures available for service fimctions, with constmcted performance indicators being devised to provide some form of subjective assessment measure. The objectives of performance auditing also assume the presence of certain public service accountabilify values that include a concem for equify and justice as a means of determining whether outcomes are in the public interest. These factors would certainly make the specification of confract terms for the outsourcing of performance audits a very complex proposition. It may be reasonable to suggest where performance auditing is outsourced,
(i)n order to ensure that the service - deliverers abide by their contractual obligations to purchasing principals, the latter tend over time to spell out contractual obligations in ever greater detail and to engage in more minute monitoring. Part of the decline in in-house production is therefore offset by an increase in contract administtation (Alford and O'Neill 1994, p. 162).
A second paradox contained in the Audit Act-Review Report lies in the assumption that private sector auditors will produce an audit outcome of the same qualify as public sector auditors. To evaluate this proposition requires consideration of the differences and similarities between the public and private sectors. From the discussion in chapter three tt is clear that the role of audit serves a different function in the commercial and public sectors. In the public sector there are many more forms of accountability that public servants are required to consider in their tasks, many of which compete with one another, ft has been shown that the role of audit in the public sector extends further than the role of commercial auditing to ensure that all forms of accountabilify are effectively discharged and that the public interest is safeguarded. Chapter four highlighted the differences between the public and private audit fimctions and how each has adapted to economic pressures. As govemments are increasingly confracting audtt services to the private sector and are adopting private sector audit methodologies, the increasing use of tools and agents from a different contextual environment causes conflicts with underlying objectives and motivations. At issue with the Victorian public sector audtt reforms was whether private sector providers, who need to remain profitable in a competitive environment, could perform the audit fimction as reHably and with the same underlying motivation !97
and objectives as had previously been provided by the Victorian Auditor- General's Office. Mike Richards^^ suggested that
the principal objective of the present exercise (reforms) is to stop the auditor-general from doing audits and give them a sanitised Audit Victoria and private-sector auditors. That single move will ensure that there are no critical audits of government either on a performance or value-for-money basis. What private-sector auditor is going to spill the beans on government upon whom it is dependent for further work? What private-sector audit accountants are going to have the detailed knowledge, experience and expertise to know about govemment processes such that abuse can be exposed (The Age 16/05/97)
The Audit Act review committee appeared to believe that a competent performance audtt could be provided by any audit supplier (Audit Act Review-Report, 1997 Findings 7.5.4-6). Houghton and Jubb (1998, p.31) suggest that the "proposition is not compelling, given the experience in New Zealand, where audits are seen as qualitatively different from other types of audits. In the New Zealand case, these audits were retained by the govemment supplier of audit services". Houghton and Jubb also suggest that performance auditing is "a type of specialfy product (that) is rationally supplied by the existing specialist - the auditor-generals office" (Houghton and Jubb 1998, p.3i). The Victorian Auditor-General (in his response to the Audit Act review committee's report) shared the view that performance auditing requires "unique expertise ... with no equivalent audit function within the private sector culminating in comprehensive public reporting across all facets of resource management" (VAO 1997b, p. 18). Further support for this proposition was provided by Mike Richards who claimed that performance auditing requires expertise not currently available within the private sector.
In the consulting profession ... the general state of knowledge about govemment processes and concepts like accountability were laughably inadequate. Private sector professionals are not trained to understand the vety different nature of govemment organisations and their accountability requirements. To let such people loose on doing performance audits ... is to guarantee lame audits that will simply tell the Govemment what it wants to hear" (The Age 16/05/97).
If, as suggested above, private providers of performance audits lack the skill to provide an appropriate service and they sanitise audit reports to ensure the
^^ Mike Richards is a political commentator for The Age and was a senior adviser to the Cain Govemment from 1982-85. He has also spent seven years in a large intemational consulting firm. 298 govemment is not subjected to public criticism for poor audtt findings, audit quality will diminish on both counts. The question of whether private organisations for confracted audtt services can be made pubHcly accountable becomes a pressing issue when tt is clear that such agencies are being given greater confrol and power over the enforcement of public accountabflify relationships as a result of the increasingly generic nature of reporting processes and methods. The reform measures thus had significant implications for accountabiHfy and audtt qualify and yet the Audit Act review committee appeared to have spent little tune on these issues.
7.5.1 Competition Policy as the Justification for Change
Much of the justification for audit reforms was derived from NCP which required that all state govemments review their legislation for compliance with competition principles. There was a presumption in NCP that "regulatory restrictions (on competition) pervade the economy ranging from govemment sanctioned monopolies to licensing regimes and various restrictions on competitive conduct" (section 1.1). The proposed remedy was that "govemments should adopt the principle that there should be no regulatory restrictions on competition unless clearly demonsfrated to be in the public interest, and should review all existing legislation for consistency with this principle" (section 1.1). Incentives were offered by the Federal Govemment for state govemments to comply with these provisions by the creation of 'Competition Payments' above normal fimding relationships.
Competition provisions were to apply to "all Victorian Govemment departments and authorities, including govemment authorities" (Guide to National Competition Policy 1995, section 6, paragraph 2). The substantial financial incentives available ensured that state govemments prepared timetables for legislative review as evidence of a progressive approach to the review process. The decision to bring the time-tabled review of audit forward twenfy months on 15 November 1996, and not to exempt the VAO from NCP, generated considerable unfavourable political sentiment from
^^ NCP provisions allowed for each state participating in NCP to get an allowance from the Competition Payments Pool on a per capita basis each year commencing from 1997-8 and ending in 2005-6. Payments were indexed with an annual cost to the Commonwealth increasing from $209 million in 1997-8 to $2.4 billion by 2004-5 (Victorian Govemment 1996, section 4). 299 politicians, public servants, academia, the media and the public m both Victoria and interstate. No other state had gone down this path (The Age 25/11/96), 19/06/97). A former Commonwealth Auditor-General, John Taylor, suggested that the application of competition policy to the audtt fimction was ludicrous. He cynically suggested that "could it be that under Victorian competition legislation policy we'll have judges required to tender for trials agauist barristers and solicitors? WiU the views of those to be judged be given a heavy positive weighting in determining tender outcomes? Where are the limits once democratic reforms are to conform to the latest economic theory?" (The Age 15/10/97). In the Hght of evidence provided by two performance audit reports suggesting that the Victorian Auditor-General had been efficiently and effectively discharging his role in office (see section 7.5.1.2), the suggestion that the VAO should be reviewed under NCP was not driven by pure public interest motives. Instead, institutional theory suggests that processes of rationalisation and standardisation may have more to do with shoring up positions of power, than the rhetorical reasons offered for change. Despite the apparently persuasive rhetoric the justification for the application of NCP provisions to public audit was not accepted by the public or the business communify. There were many who regarded it, in institutional theory terms, as a legitimisation exercise with NCP having only a tenuous link with a public audit function that had never been criticised on the basis of cost, efficiency or quality.
The fimction of govemment audit exists as a consequence of constitutional relationships that are not expected to change at the whim of the govemments in office. The Kennett Govemment did not accept this proposition and proceeded to make radical changes in the name of ideology, espousing the theoretical virtues of competition and market forces. Substantially, the govemment was relying upon the difficulty of demonsfrating and measuring the results of audtt reform. The lack of a clear link between process and outcomes makes it difficult to argue against changes when they mimic dominant mechanisms for public sector reform. However, it is not a foregone conclusion that competition will always generate greater efficiency, as the Audit Act review committee implied, or enhance social accountabilify. "Even economic theory does not claim that competition or markets, however perfectly competitive, will produce equify, social justice or environmental objectives. All 300 economists agree these are outside the competency of markets" (Ranald 1995, p.ll). Functions, such as public audit, that exist to ensure accountabilify obligations are met and that public interests are safeguarded are not necessarily compatible with efficient resource allocation and market forces.
The decision to apply NCP provisions to the Victorian Audit Office was viewed by most commentators as inappropriate. The ASCPA (1997, p.l 1) claimed that
(w)hile acknowledging the government's prerogative to review its operations under national competition policy, we do not believe that the role of the auditor-general, as an independent representative of parliament, should be regarded as part of govemment. We support the contention that the office of auditor-general is separate from govemment and therefore is beyond the terms of reference of competition policy.
"In virtually every other state in Ausfralia and the Commonwealth, the auditor- general legislation has been sfrengthened ... the auditor-general has been made more independent, given more autonomy and given better resources" (The Age 28/11/97). Clerk of the Senate, Harry Evans, suggested that this "may be confrasted with the situation in Victoria, where the government's proposals for the restmcturing of the Auditor-General's Office were perceived as a dismantling exercise" (Evans 1999, p.89). The Ausfralasian Council of Audttors-General (ACAG) submission to the Audit Act review committee stated that "(t)he Commonwealth Government's and Parliament's published views do not see a Imk between the Commonwealth's competition policy and the Auditor-General's fimctions. This is because the functions of the Auditor-General are not market functions, just as the function of criminal justice and constitutional legal systems are not market fimctions" (Executive Summary). Debate in pariiament showed that the Labor member for Williamstown, Steve Bracks
wished to endorse the state public accounts and estimates committee decision to write to govemment requesting that a suitable govemment representative appear before the committee to explain why the Auditor-General should be included in the National Competition Policy review; and endorses the decision of the committee to request the Clerk of the house to seek and provide independent advice in relation to whether the current review is ultra vires the relevant competition policy legislation (Legislative Assembly Hansard, 3 December 1996, p. 1518).
Subsequentiy, on 4 December 1996, the govemment was able to use its majorify on the Public Accounts and Estimates Committee to prevent it obtaining independent 301 legal advice as to the appropriateness of applying NCP to the public sector audit function. This was documented in Hansard, with MP R Hulls expressing concem that
the chairman of that (PAEC) committee has now done a backflip on the committee's original decision ... The question that must be asked is what pressure has been put on the govemment members of that committee by the Premier to reverse their original decision ... The Premier is attempting to intimidate the committee and to undermine what has until now been the independent role of the committee - that is, to investigate matters pursuant to the Parliamentary Committees Act. The Labor members of the committee have grave concems about whether it can now operate appropriately (Legislative Assembly Hansard, 4 December, p. 1606).
Saul Eslake, one of the commissioners of the Victorian Commission of Audit (VCA) in 1993, in affirming the importance of the auditor-general, argued that "(p)arliament needs to have one voice providing an opinion to it on the hundreds of public sector entities. That voice's independence needs to be protected (as it is) by a special relationship with parliament, which precludes the Govemment from inhibiting it in any way" (Victorian Commission of Audtt 1993, p.208). When the proposed reform of the Victorian Audit Office was announced Eslake claimed that he stood by his earlier comments about the need to support the role of the auditor-general. He considered that the proposed moves to reform public audtt would take away some of the auditor-general's power by giving a government-dominated committee the right to determine who carried out govemment audit responsibilities (The Age 16/04/97). Eslake reminded those who would see the role of the auditor-general greatiy diminished that the govemment audit function is not an ... office with a political purpose, "but one that serves the public interest in scmtinising the expenditure of taxpayer's money and the performance of govemment departments and agencies" (The Age 26/04/97). ft was also suggested by the media that
(o)f course, Mr Kennett's cheeky invocation of national competition policy to institute a review of the office of the auditor-general will have bluffed some people that this is all normal "best-practice management" change ... Setting out to achieve a political advantage by neutrahsing a ttoublesome auditor-general under the guise of a corporate reform to govemment auditing involves ... an ethical lapse and a poor political judgement (The Age 16/05/97).
A former senior Liberal MP, who retired in 1996 with 10 years experience on the PAEC, rejected the proposed changes to the Victorian Audit office as beuig absurd for it meant "approaching the auditor-general's role through a narrow and legalistic 302 focus on competition policy. It is as if radical changes to church, monarchy and judiciary were planned and justified by commissionfrig a ffrm of management consultants to report on the cost effectiveness. Cost and efficiency are second order issues" (The Age 28/03/97).
7.5.1.1 The Public Audit Monopoly and Independence
The need for economy and efficiency in govemment has generally been the prime motivation behind the application of market-based tools to the public sector. However, the presumption by economic rationalist ideology that the monopoly provision of any govemment goods and services is prima facie evidence of inefficiency is questionable (see above). This did not prevent the Audit Act review committee from concluding that the Audit Act 1994 inhibited the public interest because the auditor-general did have a monopoly by virtue of the enabling legislation (Audit Act Review - Report 1997, p.5). The Audit Act review committee applied specific criteria contained in the Hilmer Report (1993) to identify ways in which the Audit Act 1994 inhibited competition. Most importantly. Principle 5 of the Competition Principles Agreement stipulated that legislation should not restrict competition unless it could be demonsfrated that the benefits of the restriction to the communify as a whole outweigh the costs and that the objectives of the legislation can only be achieved by restricting competition. This implied a test of three parts: the identification of a restriction; determination of whether the benefits outweigh the costs and there is no other way to attain the same benefits. The Audit Act review committee argued that a restriction did exist, that is, a monopoly in pubhc sector audit was conferred by the appointment of an auditor-general to have total discretion on all matters, including the audit scope, approach and resourcing sfrategies, and this monopoly was in conflict with competition policy. The committee also found that there were other means of achieving the public audit fimction: they recommended separation between the purchaser and provider of audit services. The result would be that "(w)hile the costs of audtt may rise, ft is the Committee's judgement that the benefits to Victoria will exceed any rise in costs and that the reforms proposed are in the public interest" (Audit Act Review - Report 1997, p.7). 303
The submission by Audttor-General of Victoria to the Audit Act review committee referred to at least 15 reviews that examfried the exclusive position underpinning the role of the auditor-general m Australia over the last thirteen years. The submission stated that
(a)ll 15 extemal reviews strongly endorsed the exclusivity of the Auditor-General as the Pariiament's and the community's sole extemal auditor with total discretion in undertaking the specified functions to achieve the established statutoty objective. These reviews have concluded that such exclusivity and discretion are essential to the achievement of the objective of providing a single mdependent extemal audit voice reporting on the totality of govemment operations to Parliament and the public (VAO 1997a, p.7).
Professor Bill Russell from Monash University suggested that "(t)he current practice whereby particular audits are tendered out provides scope for commercial operations and competition can be accommodated - but to say that the Audit Act is monopolistic in providing for a single auditor-general is Hke saying the Catholic Church is monopolistic in having only one pope" (The Age 26/11/96).^"^
The Ausfralasian Council of Auditors-General (ACAG) submission to the Audit Act review committee stated that the monopoly status of auditors-general allowed for uniform standards of auditing across all public sector entities. By having only one principal who is not aligned with the political parfy that holds office, the auditor- general acts as an independent agent free to review any operation and to table any relevant information before parliament (ACAG 1997, Efficiency and Effectiveness Issues, p.l). While the auditor-general's position as an officer of parhament has assured that his independence has been sfrengthened, Houghton and Jubb (1998, pp. 33-34) do not believe that the same applies to the independence of the confracted auditors performing the audit work in the field. Fee dependence and political preferences can inhibit independence. The member for Williamstown in 1997, Steve Bracks, also suggested in parliament that partners of chartered accounting firms would selectively tender for govemment performance audit contracts on the basis of whether they have the potential of being critical of govemment. If they took on such
Rev Cleary, the chairman of the Anglican Church's social responsibilities committee, said that "churches regularly pray for their politicians, but prayers for the Auditor-General had been reasonably widespread in Anglican, Catholic and Uniting Church congregations" (AFR 18/11/97). 304 assignments they could jeopardise other dealings with govemment which might threaten revenues. Should it be difficuft to get private confractors to provide audit services, the proposed reforms to the audit office left no room for the auditor-general to take on the work himself (Legislative Assembly Hansard, 19/11/97, p. 1294). After examining the reasons why partners of private accountmg ffrms undertake govemment audits in the United States, Lowensohn and CoHins (2001, p. 32) conclude that "analysis demonsfrates that partner motivation decreased when the political climate becomes more 'charged' in terms of political competition, political dissension, and media scmtiny". The lack of competition in the audit supply market in such circumstances has implications for both audit qualify and the provision of independent audit services, particularly where an auditor-general has no operational capabilities.
The impact on audit independence of the need to ensure profitabilify has long been a point of contention in private sector auditing. In circumstances where audit findings are not favourable, the need to protect audit fee revenues has generated perceptions of impaired audit independence. Lee (1995, p. 48) suggests that auditors "use the public interest argument continuously as a means of protecting their economic self- interest". The reputation of private audit providers was also not enhanced when David White, a former minister in the Cain /Kimer Govemments, recalled history by pointing out "that the most spectacular financial failures during the 1980's were privately audited, including Pyramid and Tricontinental. In the 1980's the auditor- general did not have responsibilify for the State Bank and Tricontinental. He should have" (The Age 7/12/96). In other words, an independent auditor-general would have provided a better audit product for govemment business enterprises. This view was also supported by the NSW Auditor-General, Tony Harris, who saw the link between information, accountabilify and democracy essential to safeguard against the abuse of executive power. He considered that after the Kennett reforms to public sector audit this link had been broken in Victoria "because the auditor-general will not in future be able to provide parliament with the same qualify reports as was allowed in the psist" (The Age 27/OS/99). 305
In the pubHc sector, as established in chapter four, independence is primarily concemed with the personal independence of the auditor-general, in terms of appointment and tenure, and a wide mandate to conduct audits "free of dfrection from executive govemment, the bureaucracy and its auditees" (Guthrie and English 1997b, p. 12). While the Victorian audit reforms improved the personal independence of the auditor-general by making him an officer of parliament with budget allocations determined by parliament rather than the Premier's department, the mandate to audit was removed. With no operational capabilities the auditor-general was effectively responsible for the work of contractors without the ability to "have direct influence or power to discipline, alter, organise, enthuse (that is lead and confrol) those doing the work" (Taylor 1998, p. 37). Auditor-General Baragwanath concluded in his response to the Review of the Audit Act that "(i)f Auditors-General do not have total discretion over audit resource strategies, it follows that they cannot be held accountable for the audit outcomes" (VAO March 1997b, p.2). He considered this to be a major impediment to his independence.
The inclusion in the audit review committee's terms of reference of the suggestion that "authorities may select their own auditor, with the ability to choose between the auditor-general or private auditors" (Audit Act Review Report 1997, section 1.2.3, p. 16) caused significant concem (The Age 25/11/96, 27/07/99). The ability of govemment agencies to by-pass the auditor-general's office was viewed as "a ftmdamental chaflenge to a key element of the Westininster system of pariiamentary democracy" (comments made by the Auditor-General to The Age 25/11/96). The submission by the Ausfralasian Council of Auditors-General and the ASCPA to the Review of the Audit Act 1994, both supported the need for a single voice, independent of the govemment of the day, acting on behalf of parliament and the public. Any other operational mode was viewed as compromising the independent role of the auditor-general to provide an effective oversight role for the whole of govemment. The potential for govemment agencies to select their own auditor was subsequentiy rejected by the Audit Act review committee. The committee considered that "(a)llowing auditees to select their own auditors would displace the Auditor- General position from tts pivotal role in reporting on the accountability of the Executive to Pariiamenf (Audit Act Review - Report, 1997, 6.3, p.43). Hi this respect 306 there was agreement between pubHc opinion and the findings of the Audit Act review committee. In many other respects there were significant differences of opinion between the views of the committee and the views of the community. Not surprisingly the electoral majorify held by the Kennett Govemment meant that any debate in parliament about the review recommendations could be 'stifled' and 'gagged' (The Age 8/12/97). This forced the debate about audit reform mto a more open forum with the media providing a valuable (and often the only) outlet for public opinion. The Audit (Amendment) Bill was considered to be "an arrogant piece of legislation" which caused "so many people to be angry. That is why we had a packed public gallery last night. And that is why one of the biggest ever petitions has been presented to parliament - because people feel that the decent things they want from parliament and from Govemment are falling apart around them" (Legislative Assembly Hansard, 20 November 1997, pp.1369-1371).
7.5.1.2 Costs, Efficiency and the Public Interest
The vague invocation of the 'public interest' by the Audit Act review committee without any description of what improvements to the public interest would accme, was not substantiated. Instead, it was concluded that "(w)hile the costs of audit may rise, it is the Committee's judgement that the benefits to Victoria will exceed any rise in costs and that the reforms proposed are in the public interest" (Audit Act Review - Report 1997, p.7). The possibilify of gaining vague outcomes without the abilify to determine the cost of such outcomes provided no basis for determining whether the changes to operational stmctures of public audtt were justified. Standard private sector consulting procedures provide a detailed cost analysis to support conclusions and recommendations. Even, allowing that the outcomes of auditing are not readily quantifiable, the lack of any supporting evidence to justify the Audit Act review committee's recommendations did little to persuade the pubHc that the pubHc would benefit from the audit reforms.
Just as any cost justification for institutional changes were elusive so was an efficiency based justification. Although the office of the auditor-general was to be reviewed under NCP in order to improve economy and efficiency, there was little 307 evidence to suggest that these deficiencies were present m the VAO. The office of the auditor-general had been evaluated and reviewed independentiy twice m the five years prior to the announcement of the review. A performance review was conducted in 1992 by Fergus Ryan, managing partner of Arthur Andersen and in 1995 Alan Talbot, a partner at Price Waterhouse. Fergus Ryan's report found that
(t)he Auditor-General is meeting his objectives effectively, economically and efficiently ... The office's audit methodology is consistent with current audit thinking ... The office's performance audit methodology is advanced in development by world standards, and its application to specific engagements is generally of a high standard. The presentation of the office's performance audit reports is of a high standard in world terms (Report quoted in Legislative Assembly Hansard, 22/03/94, p. 387).
In his submission to the Audit Act review committee the Auditor-General of Victoria refers to the performance review conducted by Price Waterhouse in 1995. He noted that the report "found that the Office compared favourably with the "big 6" chartered accounting firms in respect of financial audits, and equivalent overseas audit offices in regard to performance audits" (VAO 1997a, p.23). The Audit Act Review - Report 1997, however, attempted to meet objections such as this by claiming "the purpose of the review is not to examine the performance of the Auditor-General's office" (p.87) and that
the committee is not involved with a review of the Office of the Auditor-General. As such the fact that a number of submissions made reference to the high quality of the work done ... is not central to the committee's deliberations. The committee will, however, be concemed with the likely impact on quality which might result from any recommendations the committee makes in its final report (p. 99).
This statement by the review committee seems to divorce economy and efficiency from quality. The review process, under the guise of NCP, had the objective of proposing reforms to enhance economy and efficiency through competitive mechanisms. Thus, the committee's statement implies that, providing the prescription does not adversely impact upon audit qualify, the measures to increase competition are desirable. Considering the unique public oversight role of the auditor-general, the justification for reform was indeed thin.
In a public audit system where the auditor-general develops the terms of reference, runs the tenders, overseas audit processes and writes parliamentary reports there 308
would need to be a level of expertise within the auditor-general's office to ensure specifications are appropriate. The Audit Act Review - Report recommended "the creation of Audit Victoria because it will retain within the public sector the current audtt skills available to the Auditor-General" (p. 47). However, where the auditor- general has no operational capabilities it is unlikely that this could be done effectively if "the new regime will be largely dependent on the quality of friput we (the office of the auditor-general) receive from the various contract audit service providers" (The Age 9/07/99). This could mean that the auditor-general would be in a position where he did not have all the specialist knowledge needed to effectively determine confract specifications. As the employees of Audit Victoria were not public servants under the confrol of the auditor-general and operate in a profit- cenfred environment, a potential for conflict of interest arose in the sharing of knowledge. The government's expressed intention to sell Audit Victoria within two years of formation would mean that the expertise would have been transferred completely into private hands.^^ A performance review of the VAO operations, conducted in September 1998 by Stuart Alford a partiier from Emst and Young, had expressed concem highlighting this possibilify and by calling for protections to ensure "that the client knowledge base built up over time through direct involvement in public sector audits is not eroded" (Alford 1998, p. 11).
The Audit Act review committee's suggestion that the reform of the Victorian Auditor-General's Office would mean that it was likely that costs would rise in the short term proved to be tme. After the reforms had been implemented The Age (27/08/99) reported that the auditor-general's office had requested an exfra $6.2 million to run the new auditing system and subsequently reduced this to $3 million after negotiations with the Department of Treasury and Finance. Just after the new
y^ This did happen just afler the creation of Audit Victoria. Three seiuor investigators resigned to join a competing auditing firm with the then Shadow Treasurer Steve Bracks commenting that the public audit office "would stmggle to replace the trio's combined 75 years of auditing experience" (Herald Sun 24/11/98). The three persons involved had moved from a public service pay scale (commonly known to be less than the rates available in the private sector) to a govemment business enterprise where remuneration was competitive and they were then enticed to leave to go to a competitor. One can only speculate what substantial changes had occuned in their salaries as a consequence of the reform of the public sector audit. These kinds of financial incentives would see experience leaving the public service at an increasing rate from both Audit Victoria and the elite team remaining with the auditor-general. 309
Bracks Govemment took office it was reported by The Age (11/11/99) that the total additional payments to cover the audit office restmcture was $17.9 million. Salary costs rose with the commercial operating arm of public audtt "having considerable freedom in setting remuneration levels for existing and new employees (Audit Act Review - Report 1997, p. 47). Professor Keith Houghton, in his submission to the Audit Act review committee (January 1997), clauned that as salary costs are the biggest single expense within an audit office, the lower public service cost (and pay) stmcture within the auditor-general's office would mean that the adoption of competition within the public sector "may not provide the price competition that may be held to exist" (Houghton 1997, p. 1). Thus, the potential for public sector audit to become more economical as a consequence of reform was generally agreed to be unlikely. While the incorporation of subjective judgment in confractual terms would be difficult at any time, the assessment of efficiency and effectiveness during a period of reform is even more difficult to determine. The need to identify fransttional costs and benefits, to identify the opportunify costs of diverting resources to reform at the expense of the qualify of existing services (Peters and Savoie 1998, pp. 9-10) and the difficulty of arriving at performance indicators for human services all combine to make assessments of performance ambiguous. The lack of clear outcomes hampers assessments of cost ex ante and ex post the reform initiatives.
In addition to the applicabilify of competition policy to the public audit function in general, the specifics of the way in which the policy was applied were also questioned. The executive summary of the Hilmer Report states that "there may be cases where the application of the market conduct mles should be suspended or adjusted on public interest grounds, primarily where benefits of the conduct in question are found to outweigh the anti-competitive detriments" (Hilmer 1993, p.xxii). The submission to the Audit Act review committee by the ACAG "also questions how relevant the competition policy is to the public audit fimction, given the mechanisms that are already in place to ensure its economy and efficiency. In particular, even if some savings could be achieved, thefr achievement is likely to have a severely adverse impact on public benefits" (ACAG Executive Summary, 1997). This view was shared earlier by the ASCPA in their submission to the Review 310 of the Audit Act 1994. The ASCPA recommended that, "(i)n the absence of sfrong evidence to suggest that the Audit Act 1994 does not contmue to reflect appropriate public-interest principles, and the office of the auditor-general is not efficient in its operations, there are no grounds for change" (ASCPA 1997, p. 10).
In Febmary 2000, the report of the Senate Select Committee on The Socio-Economic Consequences of NCP - Riding the Waves of Change, made several observations which could all be applied to the reforms of public audit in Victoria. Amongst the findings the committee concluded that
> that the application of NCP in Ausfralia was "the inconsistent application and interpretation of the public interest test with its domination by economic assessment ahead of the harder-to-measure intangible attributes in the social and environmental areas" ( Executive Summary p.xiii).
> "that there is general confiision and misunderstanding over what constitutes the 'public interest'" (Executive Summary p. xiv).
> that the legislative reviews undertaken by State Governments are not always undertaken in an open, fransparent manner with the views of all interested parties taken into consideration (Executive Summary p. xvi)
English and Guthrie (2000, pi6) agreed that in relation to Victoria
(t)he scant reference to costs/benefits resulting from the Maddock recommendations could hardly be presented as a transparent and rigorous evaluation as required by competition policy ... and failed ahogether to consider the nature of public interest and public accountability and audit's cmcial role in its manifestation.
Evidence, therefore, suggests that the review of public sector audit in Victoria was undertaken with an ulterior political motive. DiMaggio and Powell (1991) suggest that in highly stiiictured organisations change tends to promote practices that will reduce diversity as a consequence of processes that have more to do with cultural and poHtical justification than any claims to efficiency. The use of NCP to justify the audit office reforms was generally viewed outside govemment as an attempt to offer a palatable justification to undermine the office of the auditor-general as an implacable, fearless critic of the government's contempt for accountability. This 311 would also help to explain the mconsistencies and flawed logic that, m other circumstances, would not have been viewed as a justification for reform on the scale of the dismantled public audit function in Victoria.
These criticisms, when coupled with what Auditor-General Baragwanath referred to as "a report which is devoid of empfrical evidence and is characterised by unsubstantiated assertions, textual inconsistencies, uncertainty as to likely outcomes and recommendations based on minorify views" (VAO 1997d, p. 10), made it clear that the report was based on flawed logic. During interviews for this thesis, Ches Baragwanath stated that he regarded the Audit Act review committee's report to be 'a very poor piece of research' (Interview 25/06/02).
7.6 The Awakening of the Electorate
Despite protests in the sfreet, sabre rattling in parliament, outcries from prominent members of the community, church groups, professional associations, and also from interstate, as noted above, the Kennett Govemment implemented the measures to reform the audit office. The Premier was not to be dissuaded from using the rhetoric of economic rationalism and the hegemony of competitive markets to justify reforms that the public found disagreeable. The electoral majorify held by the Kennett Govemment allowed the changes to take place even though they did not represent a consensus view in the community and in parliament. This disregard for public opinion would subsequently prove to be Kennett's undoing. The electorate were inspired to voice its protests but apparently the firmly ensconced Premier chose not to hear the messages being delivered.
Despite the Westminster importance of parfy room soHdarify, the proposed restmcture of the operations of the Victorian Auditor-General caused considerable dissent within the Liberal/Coalition. One Liberal MP, who declfried to be named, claimed that "(g)enerally speaking, the overwhelming number of MP's are absolutely oufraged" (The Age 25/11/96). The Kennett Govemment also faced criticism from within the Liberal Party ranks with the state council of the Liberal Party suggesting 312 that "they have a responsibility to raise our voice of protest at the government's cavalier disregard of the widespread hostility towards the changes to the Audit Act 1994" (The Age 17/11/97). The MP for Frankston-East, Peter McLellan, qutt the Liberal Party over the changes to the Audit Act, to become an independent politician. The loss of the Mitcham by-election on 13 December 1997 by a 15.4% swing against the govemment, forced by the resignation of the Liberal MP Roger Pescott as a protest about the proposed govemment changes to the Victorian Audit office, sent a message of discontent to the govemment much deeper than the norm.
The factors contributing to the electoral protest were suggested to include the lack of community consultation, the proposed changes to the VAO and also a partem of change which limited the jurisdiction of courts and the people's access to justice (The Age, 14/12/97). While evidence of public discontent existed earlier, this was the first conclusive message delivered to the Kennett Govemment. Almost a year later, in the Opinion section of The Age 29/11/98 tt was suggested that the Keimett Government's backdown over the proposal for a toxic waste dump in the suburb of Werribee was a function of community action together with a private company which was responsive to community views. "Werribee is a qualified win for Victoria's democracy" (The Age 29/11/98). There was a sense of achievement by the action group who had come up against a govemment that was known for making decisions on economic grounds without considering public opinion.
In the period just before the election of 18 September 1999, Kennett's reputation as a chief executive officer (CEO) seemed to be growing whilst his reputation as the leader of a democratic govemment seemed to be waning.
Kennett's deepest desire seems to be to convert the democratic citizemy of Victoria into a curious new hybrid poHtical form, halfway between clients of a business corporation and subjects of a feudal state.... Through a cuh of personality and inventive advertising techniques, Kennett has smothered debate, marginalised critics and evaded detailed policy scmtiny (The Age 13/09/99).
Hi the mean time, the Labor Opposition in their election campaign had taken a firm hold of the public concem for the role of the auditor-general. They suggested to Victorians that once elected, a Labor Govemment would restore the powers of the 313
auditor-general, reduce the secrecy of govemment conttactmg processes and restore rights previously taken away in Freedom of Information Act amendments. The Labor Opposition had campaigned sfrongly in the mral community where discontent about the perceived inequitable resource aUocations between rural and mefropolitan residents was high. Premier Kennett had campaigned relyuig on 'his mns on the board' most notably the huge reduction of debt, improved consumer spending and confidence, rises in housing approvals, jobs growth and the flurry of significant building projects and infrastmcture developments (notable for their concenfration in Melboume). Any concem for accountabilify appeared to have little bearing on his sfrategy and accomplishments.
Unfortimately the Keimett Govemment had failed to read the level of discontent generated by the drawn-out battle over accountabilify and the widening gap between Melboume's prosperity and the mral communify. In the 18 September 1999 election, the Liberal Party secured 36 seats together with the 7 seats held by the aligned National Party making a total of 43 seats. This, compared with the Labor Party's 41 seats, meant that the 1999 election results were so close that the outcome was dependent on the allegiances of three independent members of parliament from country electorates. It was no surprise that they voted to support the incoming Labor Party. Before deciding to support the Labor Party to enable it to form govemment the three independent members of parliament had requested responses from both the Kennett Govemment and the Labor Opposition leader to a Hst of conditions under which they would support a minorify govemment. The conditions included the restoration of the role, fimction and resources of the auditor-general, the repeal of the restrictive amendments to the Freedom of Information Act and a judicial inquiry into the mefropolitan ambulance confracts (The Age 13/10/99). While these requests were essentially part of Labor Parfy policy initiatives and caused no political hardship for Opposition leader Steve Bracks, for Kennett, on the other hand, they represented a significant reversal from previous govenunent policies. When faced with his political demise. Premier Kennett agreed to repeal the 1997 changes to the audit legislation in a manner that was described as "an exfraordinary performance in political expediency - his seven year manfra about the need for policy consistency and sfrong leadership dumped in order to accommodate the independents" (The Age 16/10/99). 314
Kennett's Liberal coHeagues were also critical of the speed and ease of the capitulation claiming that "his parfy room sfyle had not changed: he still expected MP's to mbber-stamp a series of policy reversals with little protest" (The Age 16/10/99). Premier Kennett's capitulation did nothfrig to convmce the independent MP's that he was sincere in his motives. They chose to support the Labor Parfy and, having lost the election, Kennett resigned from politics on 4 November 1999. The Age (19/10/99) suggested that Kennett's demise was a combination of "(h)is actions to muzzle the auditor-general, his obsession with secrecy, the vitriol he spat out indiscriminately, his style of one-man mle, amount(ing) to an erosion of good govemance, the dismantiing of checks and balances and of the people's right to know and be involved in how their state is govemed" (The Age 19/10/99).
Soon after the new Bracks Govemment took office, on 25 November 1999, parliament debated the Audit (Amendment) Bill to reinstate the auditor-general's powers to audit. The member for Footscray, Mr Mildenhall, claimed that "the bill does two things. It restores the office and substance of the Auditor-General. It gives back to the Auditor-General his arms, legs and power, and enshrines the office of the Auditor-General in the state constitution" (Legislative Assembly Hansard, 25 November 1999, p. 572). By 1 January 2000, moves had been undertaken to repeal the 1997 amendments to the public audit fimction and absorb Audit Victoria back
Oft ^^^ into the office of the auditor-general. The Audit (Amendment) Act 1999 (assented to 14 December 1999) states the main purposes of the Act are to repeal the Audit (Amendment) Act 1997. Auditor-General Wayne Cameron, appointed 19 September 1999, stated in his Annual Report 1999-2000 that fransferring the staff, assets and the liabilities of the corporatised Audit Victoria back into the VAO, meant a restmcturing and merging of two quite different organisations and two quite different cultures. This would seem to have restored the public accountabilify mechanisms to their former position. The reality, however, is somewhat different. In an interview conducted on 23 June 2002 with a, now retired, senior staff member of the Victorian Auditor-General's Office who was fransferred to Audit Victoria at
This move came too late for Ches Baragwanath, the auditor-general who had presided over the period of review and stmctural reform. Ches Baragwanath retired in July 1999. 315 the time of the audit restructure in July 1998, the interviewee made tt clear that at the time of the Kennett reforms Audtt Victoria was expected to be a commercially viable entify. All staff were required to have a commitinent to profitabilify and to maintain client goodwill. As a consequence, the attitude towards performance auditing in Audit Victoria was very different from that fraditionally held in the pre- reform public audtt office. The interviewee stated that in the former VAO "everyone, down through the ranks to almost the cleaners, knew that they were working for the public interest and reafly believed it". Hi Audit Victoria, there was a clear need to ensure cost recovery with no obvious concem for pursuing a public interest perspective in performance auditing. Other differences in attitude became clear m the fraining provided to audtt staff fransferring into Audit Victoria from the VAO, who were instiiicted in personal grooming and terminology. Report writing styles that were previously regarded as being direct, were to be made less direct and flamboyant sfyles of apparel were discouraged. These 'improvements' were considered to be necessary because 'everyone dealt with could be a potential client'. All audtt staff had a sales quota and had to seek out consultancy opportunities (Interview 23/06/02).
Although much of the previous stmctures, features and principles of public sector audit were restored by the Audit (Amendment) Act 1999, the function of public audit was not restored to the pre Keimett reform position. The Audit (Amendment) Act 1999 contains the following new clause in section 7F: "The Auditor-General may engage any person or firm under confract to assist in the performance of any function of the Auditor-General". Debate in parliament concluded that "(i)n other words, while there is no requirement for contestabilify under the new regime, the Auditor- General has the capacity to engage anybody he likes" (Legislative Assembly Hansard, 8 November 1999 p. 420). The "(p)roposed new section 7F gives the Auditor-General extensive powers of delegation ... The bill allows the continuation of performance audits (to be contracted), not just financial audits" (Legislative Assembly Hansard, 25 November 1999 p. 600). Ches Baragwanath confirmed in an interview that he had been asked for his opinion about section 7F before it was included in the new Act. While the former auditor-general suggested he could see why it might be useful to insert the clause, it should be used only as a last resort, as 316 an exception, and require justification to pariiament. This proviso was not included in the legislation (Interview, 25/06/02).
Subsequent to the auditor-general's powers being reinstated, there is evidence to suggest that the public audit office has continued to pursue practices uicompatible with a qualify public sector audit fimction as defmed in this work. Rather than this reflecting a period of transition in which a mixture of in-house and confracted performance reports co-existed, the timing for the awarding of performance audit assignments indicates that there was an intention for the task to be outsourced in its entirefy. Performance audits have been confracted to private providers by the auditor- general, something that is not clearly evident when examining performance reports submitted to parliament in the period immediately after amalgamation. The following represents five audit reports that were tabled in 2000 with comments about resourcing identified in each report as they appeared on the VAO website.
Represented persons: Under State Trustees' administration Performance Audit Report 63 (Tabled 24 May 2000). The audit was undertaken by the former Audit Victoria under agreement with the Auditor-General. However, prior to the fmalisation of this Report, legislative changes abolished Audit Victoria, with the staff of that organisation transferring to my Office. Consequently, the Report was finalised by my own staff.
Building control in Victoria: Setting sound foundations, Performance Audit Report 64 (Tabled 30 May 2000). This audit was the first performance audit contracted-out under fully contestable arrangements. The audit was undertaken by Deloitte Touche Tohmatsu under contract to the Victorian Auditor-General's Office.
Reducing landfill: Waste management by municipal councils, Performance Audit Report 65 (Tabled 31 May 2000). The audit was undertaken by the former Audit Victoria under agreement with the Auditor-General. However, prior to the finalisation of this Report, legislated changes abolished Audit Victoria, with the staff of that organisation transferring to my Office on 1 Januaty 2000. Consequently, this Report has been finalised by my ovm staff
Non-metropolitan urban water authorities: Enhancing performance and accountability Report 66 (Tabled 16 November 2000). The audit was contracted-out under contestable arrangements. An Emst & Young led consortium consisting of Emst & Young, Culley Knipe & Associates, and Connell Wagner were contracted to perform the audit.
Services for people with an intellectual disability. Report 67 (Tabled 21 November 2000). The audit was undertaken by Deloitte Touche Tohmatsu under conttact to the Victorian Auditor-General's Office. 317
ft was suggested by the senior member of Audit Victoria interviewed for this thesis, that reports 66 and 67 were confracts awarded after amalgamation. Thus, while the public had their champion m the auditor-general reinstated, the door was left open for performance audtts to be confracted, with evidence suggesting that two performance audtts have already been outsourced, at the discretion of the auditor- general. Victoria had thus moved back from an exfreme form of economic rationalism applied to the pubHc audit fimction, to a position that represents a fiirther incremental movement towards increasingly generic auditing between the public and private sectors. The Kennett Government's choice of Wayne Cameron, the depufy Auditor-General of New Zealand, in July 1999 to replace Ches Baragwanath provided further impetiis to this change. Wayne Cameron had gone down the path of radical reform before and may have been more amenable to the market provision of audit services. Interviews with two retired senior public audit staff confirmed a significant change in culture in the VAO under Cameron.^^ For example, audtt office reports which were previously printed in two colour plain paper to minimise cost, were immediately changed to glossy, multi colour reports. Of more concem, audit staff that had been transferred from the VAO to Audit Victoria and then back again, were not greeted with great enthusiasm. Returning staff were almost regarded as obsolete in their attachment to pre reform audit practices and ideals (Interviews with a senior public sector audit staff member 23/06/02 and Ches Baragwanath 25/06/02).
7.7 Conclusions
The changes made to the Victorian Audit Office cannot be viewed in isolation. The progressive steps taken to dismantle the operational capabilities of many independent agencies that were either critical of the Kennett Government or somehow impeded the Premier in his passionate pursuit of a more businesslike govemment were earlier moves to change accountability relationships. His desire for speed in the reform process meant that adminisfrative processes, accountabilify and the need for
77 — ~ ' "^ ' — Wayne Cameron was not contacted to get his response to the views expressed by his predecessor because he was appointed auditor-general after the Kermett Govemment period in office and had not been resident in Victoria during the period of audit turmoil. Also the thesis does not deal with the period subsequent to Auditor-General Baragwanath. 318 consultation were freated with contempt. This approach to the management of Victoria created considerable discontent in the media, within parliament, with ombudsman, judges, teachers, nurses, childcare agencies, communify action groups and many others. The discontent arose from perceptions of damage to social equity, access to justice, increasing secrecy and diminished accountability.
The zealous pursuit of economic rationalism has provided many challenges to traditional forms of govemment accountability relationships. Some of the many challenges that apply to any govemment in a westem sfyle economy, arise from the following factors:
> the infroduction of intermediaries between the purchaser and recipient of public goods and services blur the lines of accountabilify;
> the inability to specify service obligations clearly in confractual terms has implications for the qualify of the service being provided;
> the usage of commercial-in-confidence clauses to protect commercial interests at the expense of public interests; and
> the different underlying basis of service provision by commercial providers, which relies on profit rather than social objectives, has implications for the qualify of services provided.
When considering the processes used in Victoria by the Kennett Govemment to implement economic reform, rather than the reform mechanisms themselves, there are additional issues complicating the challenges posed by public sector reforms. Some of additional elements arise from:
> the implications for the qualify of service provision when change is enforced within tight time frames without consensus views;
> the abuse of commercial-in-confidence clauses to protect the govemment from public scmtiny of confracts that may not be in the public interest;
> the changes made to legislation to prevent public from obtainuig information and from access to redress for govemment actions;
> the undermining of accountability agencies to limft criticism of govemment; and 319
> the inappropriate application of NCP to public sector agencies where considerations other than cost have a greater bearing on outcomes.
In such an environment the functions that safeguard public mterest are all the more important. As the primary agency responsible for providing assurances of govemment accountabilify, the office of the auditor-general carries with tt the expectations of the public that govemment actions will be scmtinised and evaluated in accordance with communify mles and values. The auditor-general's office is an accountabilify mechanism standing between the executive and parliament, staffed by independent public servants and without political allegiances. It is clear that the Victorian public were subjected to a period of radical reform in a manner that provided much fuel for speculation about govemment actions and motives. When the Kennett Government moved to restrict the operations of what the public perceived as a vital link in the chain of accountability, the auditor-general, it seemed like the public had found 'voice' (Hirschman 1970) in unison.
The fraditional notions of public audit independence are not compatible with the provision of performance audit services by profit orientated commercial enterprises. The socially constmcted role of public auditing is different from the socially constmcted role of private sector auditing. A qualify public audit fimction requires that those engaged in public audit be mindful that the objective of public audit is to safeguard the public interest, rather than the pursuit of profit. It is clear that the Victorian public did not view the use of profit motivated private confractors as compatible with the underlying objective of public audit.
The new Labor Govemment, headed by Steve Bracks, took office in November 1999 with the Premier recognising that the "privatisation experiment with the auditor- general's office had failed", and that even the new leader of the Opposition, Denis Napthine, had "recentiy admitted the changes to the public sector watchdog's function were a mistake" (The Age 11/11/99). The suggestion that the reform of the audit office was an economic experiment ignores the underlying political motive behind the restmcture of the audit office. "The first mle of ethical scientific experimentation is that the subjects must not be injured by it ... The second mle of 320 ethical scientific experimentation is that subjects give informed consent to the processes that they about to undergo" (The Age 23/10/99). Hi Victoria the people were not wamed of the extent of the planned 'revolution' that Kennett was to infroduce. Nor were they wamed of the way in which he was to go about it. While the economy did financially prosper, this was at the expense of social equity and accountability. In a democracy, it is the will of the people together with the evolving socially constmcted values of that sociefy that endures. A politician only holds office for as long as the pubHc allows it. 321
CHAPTER EIGHT
THE PUBLIC SECTOR REDEFINED
It is not easy nowadays to remember anything so contrary to all appearances as that officials are servants of the public; and the official must try not to foster the illusion that it is the other way round (Sir Ernest Gowers, in Pollitt 1993 a, p. 188).
8.1 New Public Sector Paradigms Reconsidered
The role of govemment is to manage civil sociefy by creating an appropriate balance between individual interests and values and those based upon shared interests. The role of government can thus be regarded as necessarily involving a contest between public interest and self or private interests. This has been especially obvious in the dynamic intemational environment of the last few decades which has served to change the long-established understandings of public sector govemance and to place the role of govemments under greater scmtiny.
In Ausfralia, from the 1970's, the adoption of market-based solutions to problems of govemance followed a worldwide frend to promote efficiency in public sector agencies. The reasoning underpinning institutional change during this period has been couched in public interest advocacy terms, reflecting the need for govemment to act responsibly with public resources. However, economic rationaHst priorities in the context of public sector reforms have shifted the attention from govemment policy ends to the means used to ensure social wellbeing. The adoption of this sfrategy appears to have given little consideration both to the many uiherent 322 shortcomings of private sector tools of management, accounting and auditing, and the profit motivation which competitive solutions pursue. The drive to promote competition as a means of ensuring economy and efficiency has been "more frequently based on rhetoric and ideology than on careful evaluation" (Norman 2001, p. 66). The failings of this approach to govemment are now so obvious that they have been recognised in a number of parliamentary reports throughout Ausfralia.
The Senate Select Committee on The Socio-Economic Consequences of NCP (2000 Executive Summary, p. xiii) stated that "(t)here is a concem that policies labelled as "economic rationalisation policies" are eroding the social cohesion of some communities and devaluing social objectives at the expense of economic objectives such as productivity and efficiency". These consequences of reform have not been unique to the Ausfralian environment. Thynne (1996) was also unconvinced that reforms were improving the role of govemment. Baseci on his New Zealand experiences, he noted how
reforms have changed, or are changing, the configurations of power and authority in and beyond govemment in ways that appear to enhance neither the processes of democratic mle nor the individual and collective well-being of many sections of society, ft is surely time to stand back, to take stock of the situation, and to question whether the reforms are in fact achieving goals and objectives (Thynne 1996, p. 47).
In addition, Norman (2001, p. 84) noted that m New Zealand, "(i)n its quest for rational efficiency, the NPM has over-emphazied the formality of reporting outputs and under-valued the more value laden and political issues of what constitiites effective outcomes and results". Rhodes (1996, p. 108) was equally critical of reform mechanisms based on experiences in the United Kingdom, in particular thefr dubious accountabilify credentials. He stated that "(t)here is no evidence to show this batch of reforms has provided customers with any means whatever for holding the govemment to account." Hideed, there are important limits to what govemments can borrow from the private sector (Peters and Savoie 1998, p. 401). Private sector models can hardly apply to all govemment operations because of the fimdamental differences in thefr underiying motives. NPM practices have promoted explictt definition of outputs with a view to cost controls. However, it is questionable whether the provision of public services to the disadvantaged, elderiy and ill members of the community can be adequately reflected within such stiictiires. 323
Histead, an environment of inflexibflify is being perpefrated by the need for public servants to meet performance targets.
Prior to the public sector reforms of the last two decades when govemment played a more active part in the provision of govemment services, govemment operations were conducted in a manner less concemed with economy, efflciency, management performance indicators and more with attention to issues of social equify and justice. While criticisms of inefficiency and unresponsive bureaucracies were levelled at govemment institutions, the functions of govemment represented a significant sector of the economy which had an active part in coordinating and regulating competing interests. The economic crises of the 1970's and 1980's provided a fertile ground for change with the private sector being held up as a model to be emulated. Based on govemance principles advocated by public choice theory, the Ausfralian Government has sought to infroduce contestable markets in most govemment operations. The costs of making this paradigm shift have been significant with the govemment now set on a 'path dependent' development route.
When a paradigm shift does occur it does not necessarily mean that a new paradigm wiU provide the answers for all problems faced in the previous regime. "To be accepted as a new paradigm, a theory must seem better than its competitors, but it need not, and in fact never does, explain all the facts with which it can be confronted" (Kuhn 1970, p. 17 - 18). Despite the abilify of a paradigm to "insulate the communify from those socially important problems that are not reducible to the puzzle form" (Kuhn 1970, p. 37), the new public sector management paradigm has encountered little effective opposition. Creating the perception that an entify is progressive by providing outward evidence of a real concem for economy and efficiency in an environment where there is little real opportunify to evaluate the outcomes, has allowed measurement and quantification to take precedence over social equify and justice. Govemment operations can appear to be more efficient by adopting standardised procedures. This form of legitimisation, a mimetic form of institutionalism, is characterised by a concenfration on rationalised formal procedures in a highly stmctured environment where outcomes cannot be clearly substantiated. Meyer and Rowan (1977) argue that as large organisations and 324 govemments expand their dominance in a field or social environment, organisations become increasingly homogenous within a field and increasingly organised around rituals of conformify. Govemments and the accounting profession have successfully imposed compliance with mechanisms that support the new economic rationalism paradigm that foster competitive behaviour and more efficient work practices. This has created an environment for an mcreasingly generic approach to management, accounting and auditing procedures between sectors. While the need for resource allocation efficiencies may have driven the change process in the early stages of govemment reform
(t)oday, however, stmctural change in organisations seems less driven by competition or by the need for efficiency. Instead, we contend, bureaucratisation and other forms of organisational change occur as the result of processes that make organisations more similar without necessarily making them more efficient (DiMaggio and Powell 1991, pp. 64-65).
Changes to institutional stmctures in govemment promoted by the new paradigm have served to alter accountability relationships in the public sector. These changes have increased accountabilify obligations by public servants and also increased the diversify of agencies now ensuring accountabilify obligations are satisfied.
8.2 The Effect of Economic Reforms on Accountability and Audit
In his comparison of accountabilify in the public and private sectors Mulgan (2000, p. 95) concludes that "(s)tmctures of accountabilify appear to be more stringent in the public than the private sector, particularly in terms of accountabilify of organisations for the processes by which they determine their general directions and policies". The Victorian Auditor-General, Ches Baragwanath (1999, p. 4), suggested that there are two important differences between the private and the public sectors which give concepts of accountabilify in the public sector additional significance. The first is the profit motivation of private industiy that cannot be franslated into 'bottom line' accountability in govemment. The goals of govemment encompass so much more than economic concems. The second difference accepts that market participants can choose to be involved, while taxpayers cannot. The compulsory nature of taxation powers gives rise to "expectations that there will be a fiill 325 accounting for the use of such resources in terms of probify, legaHfy, economy, efficiency and effectiveness" (Baragwanth 1999, p. 5). Citizens have a right to expect that govemments are held accountable in all these respects, even when services are delivered by the private sector but paid for by govemment. At the heart of this relationship is the oversight function of public audit.
The role of audit is central to the constitutional accountabilify of govemment to the public. This role can only be effectively fiilfilled by ensuring that the auditor-general is independent of both the executive and the agencies of govemment. The maintenance of this independence constitiites the fimdamental condition necessary to ensure that the executive is made constitutionally accountable; that is, a qualify public sector audit fimction is being provided to the people. In the context of Victoria, the application of the precepts of economic rationalism to agents of accountability, in particular to the public audit function, is a significant illusfration of the consequences for accountability of the hegemonic intmsions of rhetorical ideology during the period of government reform examined in this thesis. As the role of the auditor-general evolved to meet the challenges of the economic rationalist approach to govemment, the public audit function has moved away from the fraditional understanding of that which constituted a 'quality' audit function. This has occurred in a progressive manner with little resistance from the public, except in Victoria where the exfreme nature of public sector audit reforms was franslated into fiirther opposition by an already alienated public.
Of particular relevance to public sector auditors has been the diversity of mechanisms now available for the provision of what were once referred to as public services. There is a mix of national, state and local govemments all providing or overseeing the provision of services through govemment departments, agencies, public boards, confractors, private companies and voluntary organisations. These bodies are then held accountable for their fimding with a variety of formal and informal mechanisms, including the obligation to consult with the community. With this great variety of agencies, both public and private, there is the risk that lines of accountability will become uncertain and even fractured. White and Hollingsworth (1999, p. vi) suggest that 326
accountability can be seriously weakened if people do not know who is responsible for the provision of particular services; if they do not know who is m a position to hold service providers to account - who appoints them, who funds them, who has statutoty responsibility for the service; and if they do not know who is empowered to investigate complaints against them or audit their accounts.
It is the role of the auditor-general to ensure that the chain of accountability between the govemment, parliament and the citizens is not weakened by altemative delivery methods. Although the auditor-general has responsibility for the audit of government operations and government business enterprises, the mandate does not extend to a variety of functions now provided to citizens by private interests.
Govemment reforms have multiplied also the range of accountability obligations owed by public servants as a consequence of managerialism, notably to be answerable for efficient performance. As reforms in the public sector privilege the measurable over the non-measurable, accountability for performance can be more easily audited. White and Hollingsworth (1999, p. 10), suggest that NPM has "produced greater use of audit and auditing as a management tool. This involves both an increase in the quantify of audit activify and qualitative changes" (see Power 1997). As a consequence, as govemment reforms gained momentum in Ausfralia during the 1980's and 1990's, public audit was compelled to adapt to economic rationalism as a means of maintaining organisational legitimacy. The projection of market practices onto auditing has made the ftinction of audit appear to be more efficient, rational and progressive. In doing so the purpose of public audtt has been made to resemble that of the private sector. Lovell (1996, p. 269) considers that
(t)he public and private sectors have traditionally been seen to possess distinctive and differentiating characteristics and qualities, but these differences are being dismantied by the transplanting of a commercial ethos into public sector organisations with the attendant rise of managerialism ... As a resuft audit, like any aspect of govemment administration, will be subject to a managerialistic assessment (Lovell 1996, p. 269).
This creates a perception that the fraditional role of the auditor-general was somehow lacking and needed to be upgraded in line with NPM policies. To be more efficient the auditor-general needed to be part of the solution to ensure economy, efficiency and effectiveness in government agencies. From an audit qualify viewpoint, the greater reliance on private sector concepts and practices by public sector auditors. 327 together with the increasing use of confracted audtt providers, has affected the way in which the public sector audit function meets the expectations of the public. Unlike the private sector, public audit obHgations are underpumed by an explicit public interest objective. History has shown that the need for private providers of audit services to be competitive and profitable is given a higher priorify than the public interest.
The changes made to the Victorian Audit Office in 1998 had significant implications for the role of the auditor-general, the relationship of the auditor-general with parliament, the auditor-general's relationships with auditees and, therefore, for the qualify of audit. Stage three in the audit evolution process (discussed in Chapter 4) has seen a rise in the importance of the wishes of the auditee with the auditor-general accommodating new audit practices in response to the govemment reform initiatives.
As a radical step in the push for greater competition in govemment operations, the reforms proposed for the Victorian Audit Office were an exfreme version of a path of economic rationalism that Ausfralian govemments are currentiy fravelling. The
Ausfralian National Audit Office's website home page (accessed 18/06/02) states that the ANAO "is well placed to improve public sector performance ...from knowledge gained ... from its close association and involvement with
Commonwealth agencies and bodies on a day to day basis". The website also details how the ANAO arranges seminars on emerging accounting issues to assist agencies to meet new reporting requirements, how the ANAO will undertake specific reviews of Commonwealth agencies on request and provide better practice guides to ensure better practices are promulgated to the whole Ausfralian public sector. These functions under previous paradigms of public sector audit would not have been seen as compatible with maintaining independence from auditees while ever parliament was the client of the auditor-general. This point was cleariy made fri the auditmg standards of the Ausfralian Audit Office in the 1980's which stated that auditors must not get involved in providing advice on how audttee departinents were to carry out 328
their duties or participate m the management of an auditee (AAO, Auditing
Standards 1987, paras.2.2.3.3 and 2.2.3.10). Concem about the opportunify for a close association with auditees to compromise auditor independence was raised in
1985 by the then Commonwealth Auditor-General, John Monaghan, who stated that it was not necessary for the auditor-general to please his auditees (Monaghan 1985, p. 19). Subsequent to public sector reforms, public audit is movmg slowly along a reform path that is creating a pseudo management accounting relationship between the auditor-general and govemment agencies.
The fraditional role of the auditor-general has been to uphold the constitutional accountabilify of the govemment to the public, through parliament, by bemg independent of the executive and those being audited. To satisfy these conditions meant that a quality audit function was being provided. "Auditors-General do not discuss independence as a criterion justified in its own right, but as a qualify that is necessary if Parliament's needs are to be met effectively" (Ausfralasian Council of Auditors-General 1997b, p. 1). It is unclear whether the beneficiaries of public sector audit, the public, have realised that there has been a shift away from fraditional constitutional audit relationships.
8.3 The Way Ahead
The reforms that have been progressively implemented into public sector audit in the Commonwealth Govemment and in Victoria, prior to 1997, represent movements along a path in support of economic rationalism. The 1997 public audit reforms under the Kennett Govemment, some of which were subsequentiy revoked, represented a significant innovation in current practice, even compared to that of New Zealand. The reforms represented what may be a further stage of audit evolution under an economic rationalist paradigm as ttistitutional forces promote fewer distinctions between public and private sector auditing. The emergence of a fiirther stage in the evolution of public sector audit makes a standardised approach to 329 auditing more of a possibilify.^ However, the retreat from this position in Victoria signified that the public were not yet ready to accept the radical leap, witiiout knowing if or when it may become acceptable in the fiiture.
The effect of the incremental nature of management reforms on public sector audit in Commonwealth and state govemment jurisdictions prior to the Kennett Govemment experiment in 1997 ensured little effective opposition would emerge, especially when both sides of politics were fervent advocates of reform. Given the then low profile of public sector audit in the community, concem was even less likely to be expressed about any changes to the understandings of the role of pubhc sector audit. Just as "economic rationalisation policies are eroding the social cohesion of some communities and devaluing social objectives" (The Senate Select Committee on The Socio-Economic Consequences of NCP 2000, Executive Summary, p. xiii), so they are having damaging effects on the role of public sector audit.
The damage to public sector audit qualify, characterised by the third stage of audit evolution, has allowed a difference between purpose and outcomes to emerge. As public audit moves away from a fraditional Westminster approach, the possibility of a public sector 'expectations gap' developing as a consequence of the auditor- general's impaired independence is likely. The composition of a public sector expectations gap conceptually may have similarities with private sector audit, where the micro technicalities of audit processes are generic between sectors, and differences arising from the underlying objectives of audit, which currently contiast the public interest in the public sector with the profit motivations of private sector auditors.
Issues of compromised independence form a major part of 'an expectations gap' in private sector audit, signifying a level of dissatisfaction by the public with the audit function. Despite this gap, and despite the now very obvious defects of private sector audit motives and practices seen in waves of large-scale corporate coUapses, particularly in the 1980's and more recentiy with Emon and the HIH insurance
' Evidence of this exists in Victoria's partial refreat to the former relationships with the insertion of clause 7F into the Audit (Amendment) Act 1999. 330
group, govemment reforms continued to adopt private sector audit and accounting methods. The continuation of processes to make the sectors more generic, despite the known shortcomings of the private sector, provides evidence of tacit acceptance of the shortcomings of private sector values and practices.
The 'expectations gap' in the private sector is based on compliance with mles and regulations as they apply to commercial business entities. The 'gap' is composed of the following elements, as determined by the ASCPA and ICAAA m their 1993 report "A Research Study on Financial Reporting and Auditing: Bridging the Expectations Gap";
1. User expectations (an ideal) 2. Reasonable standards (what they realistically should be) 3. Existing standards (what they are) 4. Service delivery gap (what was provided)
In public sector compliance auditing, the ready acceptance that contiacted private sector auditors can adequately perform audits together with the adoption of generic methods and practices by public sector auditors means that expectations gap components 2 and 3 above are essentially the same between sectors. However, the unique nature of public sector performance auditing has the capacify to more clearly reflect the paradigm change in government operations and cause expectations gap components that are also unique. In particular, components 1 and 4 represent factors that may contribute to a public sector audit expectations gap.
The delivery of assessments of economy, efficiency and effectiveness in an increasingly managerialist mode has generated the greatest criticism of auditors- general and opened the prospect of an expectations gap in the public sector. The new emphasis on the auditee in performance auditing means, as noted above, a movement away from the fraditional view of public sector auditing being independent of both the executive and those being audited. This can marginalise the public from the audit process with pubHc expectations of the audit function not being met (component 1). Issuing of best practice guidelines by auditors-general is a sfrong indication that 331 auditors-general have moved closer to their auditees. When auditors subsequently review clients that have implemented these best practice procedures, this is fri effect checking of processes proposed by the auditor-general, therefore exposing the auditor-general to a possible conflict of interest. This has impHcations for the type of service provided, as identified in component 4.
The audit reform experiment in Victoria removed the remaining unique aspects of public auditing by making performance auditing (the historically most contentious and the most revealing form of govemment accountabilify review) contestable. In conjunction with the removal of operational capabilities, the reforms resulted in the auditor-general being in a position where it would have been difficult to ensure govemment accountabilify. The fact that the public audit fimction had become reliant on the work of private confractors who were philosophicafty committed to a profit objective rather than a public interest motivation also meant that audit qualify, essentially as determined by the robustness of the auditor-general's independence from govemment and the auditees, was questionable. Victorian public sector reforms were the ultimate step in creating a generic audit environment with little to differentiate public from private sector auditing. Yet, it was evident from communify protests and a barrage of media commentary that public expectations of the govemment audtt function in Victoria were not aligned with the private provision of performance auditing services. Concem for a lack of independence as a consequence of conflicts of interest, typicafly associated with private sector audtt, meant that the public audit function would lose it potency, leaving the public at the mercy of the executive govemment. The Kennett Government's aggressive attacks on statutory officers of accountability had already provided evidence of the possibilities open to a dominant executive. The community's oufrage, which was subsequently franslated into votes for the Opposition, made it clear that they considered an independent auditor-general was still a fimdamental requirement of Westinfrister accountabilify to ensure that abuses of power were exposed.
Although the Bracks Govemment reinstated the powers of the auditor-general with the enactinent of the Audit (Amendment Act) 1999 in pariiament on 14 December 1999, the Victorian public has been left with legislation that is subtiy different from 332 that which existed prior to the radical reforms of 1997. Whereas previous to the Kennett reforms the legislation did not have opportunities for the Victorian auditor- general to confract performance audtt to the private sector, the Bracks' legislation aUows an auditor-general to use whatever resources are considered appropriate to carry out any audtt function under the provisions of section 7F of the Audit (Amendment) Act 1999. This represents a movement away form the previous high regard for an independent review of govemment audit clients by assummg that auditing services, in particular performance audits, can be conducted equally well by both private and public sector providers. In combination with a management consulting-type approach to the public audit fimction, this infroduces the potential for conflicts of interest that damage independence and public audit qualify. In the private industry the reputation of the audit profession has become tainted by corporate collapses with issues of compromised independence representing the most signiflcant criticism of auditors. Thus, the use of private sector auditors to undertake performance audits on behalf of the auditor-general, would not inspire an increased level of confidence in audit outcomes.
The public's expectation that auditors remain independent from clients has been one of the most enduring components of the private sector expectations gap. Unless the fraditional role of public sector audit is redefined, perceptions of impaired independence have the potential to become the most significant component of the public sector expectations gap. It was with a degree of reluctance that Ches Baragwanath considered the proposition of a public sector audit expectations gap. The proposition that, perhaps, he represented a diminishing group of public servants who were committed to a fraditional Westinfrister audit function was accepted by him with resignation. He agreed that public audit had clearly moved away from the Westminster approach to a new purpose redefined by economic rationalism. The new purpose was regarded by him as representing a decline in public audit qualify (Hiterview, 25/06/02).
In Victoria the communify did not support a radical move towards fiilly contestable auditing as an extension of economic rationalism in government. However, when changes to the audit fimction are a slow progressive deviation from fraditional audit 333 paths to an altemative consistent with private sector manageriahsm, little resistance appears to have been offered in the evolution of pubHc audit m Ausfralia. Opportunities for conflict of interest already exist as a consequence of close relationships with auditees and exposure to criticism inherent in the processes of performance auditing. These potential conflicts mean that the traditional role of public sector audit in safeguarding the public interest is under threat.
8.4 Future Research
There is considerable scope for additional research to evaluate the application of economic rationalism to public sector audit. The objectives of public audit are firmly rooted in a public interest concems which caimot be readily translated to the private sector's notions of economy and efficiency. In fraditional Westminster sfyle govemments the auditor-general is the supreme accountabilify agent. Economic rationalism, within a neo-classical framework, places the auditor-general in a position where the role is one of many accountabilify agents. Future research may provide evidence of the extent of this frend in other govemment jurisdictions together with perceptions of how the trend impacts upon audit qualify. The determination of whether the new direction has pubHc support is also important to ensure that the will of the people as part of informed democratic processes sanctions the evolutionary path which public audit is on. 334
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