Financial management

Financial management overview

You're responsible for directing and monitoring your entity's financial performance and complying with the law.

To do this, you must understand Victoria's financial management framework.

The framework is a range of laws that require your entity to:

• govern and be accountable for financial management, performance and risk management
• deliver government objectives in a financially efficient way
• maintain the Parliament's and community’s confidence about the use of public resources
• provide clear and accurate information to Parliament and the community about the management of finances.

Your board must ensure your entity’s structure, management and operations work together to comply with the framework.

Your entity is accountable to your Minister for its financial management and reporting.

Financial management framework

Under the Constitution Act 1975(opens in a new window), Parliament may enact laws authorising the government to impose taxes and receive and spend money.

Some state entities (such as schools) get most or all their funding from government.

Other entities (such as water authorities) charge for goods or services, then hold and spend the money they raise or pay dividends back to government.

In addition to the Constitution Act 1975, there are 3 main Victorian laws that underpin financial management:

• Financial Management Act 1994(opens in a new window) (FMA) and subordinate legislation made under it (such as directions and instructions)
• Audit Act 1994(opens in a new window)
• Annual Appropriation Acts

There are also specific laws that apply to a particular entity or class of entities. These may provide powers or impose responsibilities that vary from those set out in the 3 main laws.

Your board must ensure your entity complies with these laws in all relevant cases.

Commonwealth law may also apply to your entity, such as:

• the Corporations Act 2001 (Commonwealth), if your entity is a company formed under that Act
• some tax law, like the Goods and Services Tax Act 1999 (Commonwealth)(opens in a new window)
• other laws, like the Payment Times Reporting Act 2020 (Commonwealth)(opens in a new window), which applies to larger entities and requires them to report on payment terms and times when dealing with small businesses.

In some cases, Commonwealth law may override a state law that would otherwise apply. In other cases, both Commonwealth and state law can apply simultaneously.

The Australian Constitution says that if there is an inconsistency between applicable Commonwealth and state laws, Commonwealth law prevails.

It’s the responsibility of your board and entity management to identify and ensure compliance with all State and Commonwealth laws that apply to your entity.

The Financial Management Act 1994 (FMA)

The FMA and its subordinate legislation are the foundation of Victoria’s financial management framework.

The FMA governs budget processes and sets out many entities’ obligations for:

• financial administration
• accountability and performance targets, such as in budget papers
• reporting, such as in annual reports.

The Department of Treasury and Finance (DTF) administers the FMA. It supports the Treasurer and Assistant Treasurer to account to Parliament for:

• the government’s obligations
• the state government’s overall financial performance.

State-controlled companies formed under the Corporations Act 2001 (Commonwealth)(opens in a new window) may not be subject to the FMA.

But even if not subject to the FMA, the Corporations Act 2001 (Commonwealth)(opens in a new window) still requires these companies to report annually and imposes other financial governance and management obligations.

Directions, instructions and guidance under the Financial Management Act 1994 (FMA)

Your entity is also likely to be required to comply with subordinate legislation under the FMA:

• Directions, which are mandatory and issued by the Assistant Treasurer
• Instructions, which are mandatory, linked to directions and issued by DTF
• Guidance, which is non-mandatory, linked to instructions and directions and issued by DTF.

The main subordinate legislation your board may need to know about and comply with are the:

• Financial reporting directions(opens in a new window), which mandate consistent financial and non-financial budgeting and reporting in public sector organisations
• Standing Directions(opens in a new window), which support good financial governance and reporting.

Other mandatory frameworks under the Financial Management Act 1994 (FMA)

The Standing Directions may also require your entity to apply other financial management frameworks and policies.

These include:

Other key financial management laws

Annual Appropriation Acts

All revenue collected by the Victorian executive government is paid into the Consolidated Fund, set up under the Constitution Act 1975(opens in a new window) and the Financial Management Act 1994(opens in a new window).

However, the law authorises some money to remain outside the Consolidated Fund, such as revenue raised by entities that have their own powers under law to collect, retain and spend money. For example, water corporations.

An Appropriation Act authorises money to be drawn for a specific purpose from the Consolidated Fund.

Appropriation Acts authorise the Treasurer to fund departments and some entities, such as Court Services Victoria and IBAC.

Some entities are funded through a department’s appropriation instead of the entity having its own separate appropriation under an Act.

If your department funds your organisation, your board and management will need to work with them on your budget and performance management processes.

Audit Act 1994

This Act provides authority for the Victorian Auditor-General(opens in a new window) to:

• audit the annual financial statements of public sector organisations
• audit or review how the public sector manages public resources.

The Auditor-General is also authorised by the Corporations Act 2001 (Commonwealth)(opens in a new window) to be an auditor for companies formed under that Act. For example, state-owned companies.

Public Administration Act 2004

This Act sets standards for good governance in the Victorian public sector.

It requires entities to provide financial and non-financial information to ministers or the Premier upon request (the FMA also includes similar powers).

Borrowing and Investment Powers Act 1987

The Borrowing and Investment Powers Act 1987(opens in a new window) gives some entities the power to:

• borrow and invest in a range of financial products
• access the financial arrangements required to manage debt and investment portfolios.

Your role in financial governance

You need adequate financial literacy to:

• oversee your entity’s financial performance
• understand the financial statements and material presented to your board.

Strong financial governance and scrutiny in the public sector supports the efficient use of public resources.

It promotes well-informed, strategic decision-making and protects against corruption.

Your board’s role in financial governance

Your board must establish and maintain effective financial governance for your entity. To do this, your board must:

• set up and maintain arrangements for planning, managing and overseeing financial operations and risks
• develop and uphold policies and processes for strong financial management
• document and communicate roles, responsibilities, accountabilities and delegations
• ensure your entity has the resources and capabilities to meet its financial obligations
• ensure any external financial work is managed well, such as by shared services or the private sector
• take all reasonable steps to minimise and manage the risk of fraud, corruption and loss for your entity
• ensure your entity follows all bank accounts and borrowings requirements
• review your board’s performance with regard to financial management each year.

You must also oversee other financial governance matters for which the CEO is responsible, such as:

• establishing an effective internal control system
• managing financial information.

What your board must set up

To support your board in its oversight and assurance role you must set up:

1. an audit committee
2. an internal audit function.

Audit committee

The audit committee is normally a sub-committee of your board. Members must have appropriate skills and experience. It may include external expertise.

Its role is to support your board to review your entity’s:

• financial and risk management system and controls
• compliance with financial management laws and standing directions
• actions to address non-compliance issues and internal and external audit findings
• annual financial statements
• financial management information in your entity’s annual report
• other compliance requirements, such as reporting to the Office of the Victorian Information Commissioner.

The audit committee also:

• recommends to your board whether to release information to Parliament (in some cases this is required by the FMA or another Act, such as the audited financial statements included in annual reports)
• provides advice to the board and board chair on the content of annual compliance attestations
• communicates with external auditors, like the Victorian Auditor-General's Office
• considers auditor recommendations on financial management, performance and sustainability
• oversees your board’s internal audit function.

Read more about audit committee governance(opens in a new window).

Internal audit function

Your board must set up and maintain an internal audit function to provide assurance to your audit committee and board.

Its role is to ensure that your entity addresses any risks that would prevent the entity meeting its objectives.

The internal audit function also identifies areas where your entity can improve its efficiency and performance.

Reporting lines

To maintain its independence, the internal audit function needs to functionally report on audit activities to your board’s audit committee

Composition and experience

The internal audit function can have:

• internal auditors employed by your entity
• external auditors
• a mix of both.

Your board must ensure the function:

• is independent of your entity’s management
• has experienced and qualified auditors
• applies professional standards to internal audits
• has enough information to do its job
• has access to the audit committee and Chief Financial Officer
• has a process to manage conflicts of interest for its members.

Things to prepare, maintain and implement

The internal audit function must prepare, maintain and implement:

• an internal audit charter, to be approved by the audit committee and easy to use for everyone in the entity
• a strategic internal audit plan, based on the governance, risks and controls of your entity
• an annual internal audit work program that sets out the key audit areas, based on the governance, risks and controls of the entity.

The audit plan and work program must audit anything at risk from fraud, corruption and loss.

Other bodies it works with

The internal audit function must work with:

• your board's audit committee
• portfolio department secretary
• the Victorian Auditor General's Office.

For the audit committee, the function must give them a report on how effective and efficient your entity’s financial, reporting and internal systems and processes are.

For your portfolio department secretary, the function must assist them to improve how your entity manages financial risk.

Other financial management roles

Your entity’s 3 financial governance positions are:

• your board (referred to in the Standing Directions as the responsible body) – accountable to your minister
• the Chief Executive Officer or CEO (referred to in the Financial Management Act 1994(opens in a new window) as the accountable officer) – accountable to your board and sometimes your minister
• the Chief Financial Officer or CFO (also known as the chief finance and accounting officer) – accountable to the CEO and sometimes your minister.

Your portfolio department and the Department of Treasury and Finance have supporting roles.

Your board’s responsibilities

The Standing Directions(opens in a new window) require your board to ensure that your entity meets its objectives in a financially efficient way.

Your board must:

• set your entity’s strategic direction and priorities
• approve related plans, budgets, policies and major strategic decisions
• oversee your entity’s objectives, service delivery and performance
• approve key accountability reports such as annual and performance reports
• meet its obligations to maintain strong financial governance
• keep the minister informed of activities with potential financial implications for the State.

Your CEO’s responsibilities

Your CEO’s responsibilities are to:

• manage your entity’s finances, financial information and risks
• ensure accurate and up-to-date financial reports are provided to your board
• meet reporting requirements
• ensure the proper use of resources for which your entity is responsible
• ensure your entity is financially sustainable and complies with the law
• set up and maintain an effective internal control system.

An internal control system sets all the processes and rules to ensure that resources are properly managed and recorded.

This is different to the internal audit function which tests those controls and checks to ensure they are effective.

Assurances they provide your board

The CEO must assure your board on the integrity of your entity’s:

• financial management, performance and sustainability information in the annual report
• budgets, financial projections, financial reports and performance reports.

They must also confirm your entity complies with attestation requirements in your annual report and any laws and standards.

Your CFO’s responsibilities

Your CFO’s responsibilities are to:

• prepare accurate information on your entity’s financial management, performance and sustainability
• set up and review accounting and financial information systems, governance and internal controls that safeguard your entity’s resources
• give advice on the financial impacts of your entity’s current and future activities
• develop your entity’s financial management capability.

Assurances they provide your audit committee and CEO

The CFO must assure your board’s audit committee and the CEO that reports on your entity’s financial position and operating results:

• are fair and comply with Australian Accounting Standards and the FMA
• comply with your entity’s risk management and internal compliance and control policies.

They also make sure your entity has effective systems and controls for financial management, performance and sustainability.

Your portfolio department

Your portfolio department’s responsibilities are to:

• support, guide and monitor your entity
• advise your minister on your entity.

Your portfolio department can’t direct or control your entity on its performance or statutory functions.

Your CFO and portfolio department secretary

Your portfolio department secretary and your CFO must provide information to each another.

This helps your portfolio department to support and monitor your entity.

Department of Treasury and Finance (DTF)

DTF’s responsibilities are to:

• support portfolio departments with their entity’s financial management
• advise the government on financial, compliance and performance results across the public sector, to assist accountability and decision-making.

DTF does this by:

• receiving and analysing financial data and reports
• reviewing and proposing changes to directions and other frameworks
• issuing and updating guidance, resources, instructions and government policies.

Compliance and reporting

Your board should ensure your entity acts in a way that is accountable and transparent.

You need to ensure your entity upholds high standards for how it reports on:

• financial management compliance
• annual financial outcomes
• annual non-financial (operational) outcomes
• other information that supports government decision-making.

This demonstrates that public resources are being used properly and effectively.

Compliance assessment, reporting and attestation

Each year your entity must assess and attest it complies with all relevant requirements in:

• the Financial Management Act 1994(opens in a new window) (FMA)
• the Directions
• the Instructions
• mandatory government frameworks or policy requirements.

Your entity must also disclose any areas it hasn’t complied with. Any material compliance deficiencies must be disclosed publicly in your entity’s annual report.

Key compliance dates

September: entity compliance report

Your entity must give your portfolio department a compliance report in September.

It sets out what your entity has or hasn’t complied with and any related risks.

October: portfolio compliance summary

Your portfolio department must give DTF a compliance summary in October.

It sums up what the department and its entities have or haven’t complied with.

December: Assistant Treasurer whole of government report

DTF reports to the Assistant Treasurer in December about:

• whole-of-government compliance and risks
• advice on proposed strategies to improve compliance.

Over a 3-to-4-year period: detailed internal audit compliance reviews

Your board’s internal audit function must do a detailed compliance review of all relevant requirements of the Standing Directions and FMA over the period listed in your internal audit plan.

At a minimum, this must occur over a 3-to-4-year period.

Every year: annual report

Your entity must prepare an annual report every year that complies with:

• the FMA
• the Standing Directions
• the Financial Reporting Directions.

These laws say what your entity needs to report on for declarations, accounting treatments and disclosures.

The annual report comprises a report of operations and audited financial statements.

Your entity must publish its annual report on either its own public website or your portfolio department’s website. You should ensure that the annual report is timely and accurate, published in an accessible manner and easy to comprehend.

For most entities (those who have a 30 June financial year balance date), tabling of annual reports in Parliament normally occurs by 31 October or the first Parliamentary sitting date thereafter each year.

Other reporting requirements

Your entity, CEO and Chief Financial Officer must give any financial-related information to:

• your minister
• your portfolio department
• DTF.

This supports government decision-making, risk management and reporting.

The law also says your entity must give information to your portfolio department secretary if they need it.

This helps them advise the minister on whether your entity is fulfilling its responsibilities.