AUSTRALIAN Wool Innovation has been found to be largely complying with its statutory funding agreement with the Federal Government, but was given opportunities to clean up its act while being audited for the first time by the Australian National Audit Office.

The ANAO’s report tabled yesterday identified that AWI made several governance and SFA process changes after the performance audit was announced, while admitting it “has not sought to obtain assurance over the source of these actions or whether they have been appropriately implemented.”

The report also disclosed that AWI has spent more than $7.5 million on its WoolQ project and outlined the secrecy around the appointment of former AWI chief executive officer Stuart McCullough in the internal role of chief marketing and innovation officer in October 2021.

The SFA between AWI and the Australian Government sets out the governance and rules around the expenditure of matching government funds and is managed by the Department of Agriculture Fisheries and Forestry. The audit is the first by the Australian National Audit Office of AWI, or any industry-owned rural research and development corporation.

The ANAO report said AWI is largely effective in meeting the requirements of the SFA, and has been making improvements to its governance, stakeholder engagement and monitoring and evaluation arrangements; however, some of AWI’s polices and processes need to be updated to align with the current SFA.

AWI’s management and governance arrangements were found to be largely appropriate, but it had not established policy and guidance for its directors and officers regarding the SFA requirement to not engage in agri-political activity, the ANAO found.

The audit office found that AWI is largely effective in applying the performance principles under the SFA, but it has not established a research, development and extension (RD&E) investment profile, against which the balance of the portfolio can be monitored. AWI’s investment portfolio also does not outline the planned proportion or target of projects against AWI’s strategic plan’s priorities, government and industry priorities, or by risk and return, nor is AWI effectively monitoring or reporting on improvements in administrative efficiency, the ANAO said.

AWI’s arrangements for the management of funds are largely effective, the audit office said, but AWI does not have a documented control framework to provide visibility over the effectiveness of its processes and controls. AWI also has not established a methodology for calculating the proportion of eligible R&D for projects, and the terminology and approach used by AWI in its matching payment claims differs from year to year as well as differing from the terminology and approach used by DAFF, the ANAO said. There are also substantial differences between the R&D excess amounts listed in AWI’s matching payment claims and the data in DAFF’s systems. AWI is not managing risk for high-risk and high-value projects in accordance with its Risk Management Framework, the ANAO said.

The ANAO made six recommendations to AWI aimed at improving its board performance reviews; the development and maintenance of a balanced portfolio; measurement and reporting on improvements in administrative efficiency; arrangements to determine eligible research and development (R&D) processes for preparing matching payment claims; and risk management. AWI has agreed to implement all recommendations.

Changes made during the audit

In ‘Appendix 2 Improvements observed by the ANAO,’ the audit report outlines significant changes AWI made to its governance and SFA processes during the term of the audit and after public submissions closed on 23 October 2022.

The report said: “Performance audits involve close engagement between the ANAO and the audited entity as well as other stakeholders involved in the program or activity being audited. Throughout the audit engagement, the ANAO outlines to the entity the preliminary audit findings, conclusions and potential audit recommendations.

This ensures that final recommendations are appropriately targeted and encourages entities to take early remedial action on any identified matters during the course of an audit,” the report said. Remedial actions entities may take during the audit include:

• strengthening governance arrangements;
• introducing or revising policies, strategies, guidelines or administrative processes; and
• initiating reviews or investigations.

The existence of independent external audit, and the accompanying potential for scrutiny improves performance. Improvements in administrative and management practices usually occur: in anticipation of ANAO audit activity; during an audit engagement; as interim findings are made; and/or after the audit has been completed and formal findings are communicated.”

The changes implemented by AWI during the course of the audit included:

– In October 2022, establishing a board Marketing and Product Innovation Committee.

– In February 2023, updating its Code of Conduct to include a section on agri-political activity, and proposed incorporation of agri-political activity into annual probity training from March 2023.

– In January 2023, AWI advised that it had updated the government R&D priorities listed in its project management system from the 2016 national rural RD&E priorities to the 2021 National Agricultural Innovation Policy priorities. AWI advised that its system has been ‘aligned manually for financial year 2021/22 and now updated for 2022/23 reporting’.

– In February 2023, AWI updated its Cost Allocation Policy to include a section titled ‘Cost Allocation methodology – Alignment with SFA Funding Sources’.

– In January 2023, AWI updated its project management system to include a more detailed project proposal risk management plan, which can also be used for program or strategy risk assessments.

The ANAO also reported that it is “not clear whether these actions and/or the timing of these actions were planned in response to proposed or actual audit activity. The ANAO has not sought to obtain assurance over the source of these actions or whether they have been appropriately implemented.”

AWI was also provided with a draft copy of the ANAO’s report in April, enabling it to provide a response by 10 May.

In July 2022, the ANAO said it proposed to examine the following criteria:

Does AWI have appropriate management and governance arrangements?

Is AWI effectively applying the performance principles under the SFA?

Is AWI effectively managing funds in accordance with the SFA?

In its report, the ANAO said the audit focused on AWI’s compliance with the requirements under the SFA, but did not examine merits of decisions made by the AWI board; the effectiveness of the programs, projects or investments undertaken by AWI; and the effectiveness of the Department of Agriculture, Fisheries and Forestry’s role in overseeing the operations of and administering the funding for AWI.

WoolQ has cost $7.5m-plus

AWI received $57.7m in grower levy and matching payments from the Australian Government via the SFA in 2021–22, and a key motivation for the review was concern over the shareholder benefit and market failure relevance of AWI’s WoolQ project.

In November 2021, Nationals Senator McDonald made the case for the AWI audit stating the Rural and Regional Agriculture and Transport committee’s concern at the lack of transparency and accountability around AWI’s failure to release an EY Port Jackson Partners report of a review of AWI’s WoolQ platform, and AWI’s 2pc wool levy preference announcement weeks before it released details on its current reserves, projected income and wool production forecasts and project commitments. Industry groups objected to the announcement that gave AWI several weeks to promote its levy preference to growers ignorant of AWI’s financial details and projections.

By late 2021, Australian Wool Innovation had admitted to spending $6.4 million on WoolQ, including a taxpayer contribution of about $1.2 million; expenditure that some growers believed contravened the SFA’s market failure requirements and had showed negligible benefit to growers.

The ANAO report said up to October 2022 AWI’s WoolQ platform launched in 2018 comprised 23 projects, with a total expenditure of $7.5 million, but “there was no overarching risk assessment or management plan for delivery of WoolQ.”

The report also disclosed important conclusions in a Port Jackson Partners report commissioned by AWI in May 2019 to ‘evaluate the ownership, operation and the liquidity of WoolQ and present options to the AWI Board and CEO’ that AWI has refused to release.

The report noted that:

Ownership and governance of WoolQ are subsidiary to broader data transparency issues.

• Many potential investors/owners are conflicted. It is unlikely other entities would [be] interested in taking a stake in WoolQ prior to it demonstrating take up unless the intention was to frustrate its development.
• New ownership unlikely to address impediments to uptake. Those with the potential to help resolve impediments to take up, are those with the greatest incentive to frustrate WoolQ’s development and impede industry transparency and restructuring more broadly.

The ANAO said it reviewed AWI’s implementation of the Wool Selling Systems Review final report recommendations that included development of a Wool Exchange Portal, WoolQ’s precursor. The audit office found that all recommendations applicable to AWI have been implemented, but has seemingly made no clear determination on whether WoolQ had addressed a market failure or shown grower benefit.

Secret discussions on Stuart McCullough’s international position

The ANAO said its examination of board meeting papers between June 2020 and February 2023 showed meetings including a ‘board only session’ were not formally minuted, which “compromises the completeness of the records of the board’s proceedings and resolutions”.

The ANAO said in October 2021, the board’s deliberations and decisions regarding the establishment of former CEO Stuart McCullough as chief marketing and innovation officer were not documented in the board’s minutes.

“There are no records of the board’s deliberations or resolutions regarding the establishment of the CMIO role, nor its responsibilities or remuneration package.

“Nor are there records of the board’s resolutions regarding the appointment of a candidate to the role,” the ANAO found.

The report said AWI advised that the board’s deliberations regarding the CMIO role occurred during board only sessions and via email and ‘were not recorded at the time due to the high level of sensitivity and confidential nature of the topic’.

AWI provided records of emails between the chair and directors discussing and refining the position description for the role; updating directors regarding the chair’s progress negotiating the contract and remuneration package with the candidate; and providing advice that the contract had been signed.

The ANAO said email records do not provide evidence of the board’s resolutions regarding the establishment of the role, its remuneration or appointment of a candidate to the role and AWI acknowledged that the decisions regarding the CMIO role should have been better recorded.

“With hindsight the Board acknowledge that this should have been noted in the November 2021 meeting following the appointment of the CMIO and associated changes,” AWI told the ANAO.

The ANAO said a full record of the proceedings and resolutions of directors’ meetings, as well as resolutions passed by directors without a meeting, should be captured in minutes to ensure a complete record of the directors’ resolutions is maintained.

AWI welcomes audit report and recommendations

AWI chairman Jock Laurie welcomed the ANAO report on whether AIWI is largely complying with the Statutory Funding

In his letter to the Auditor General Grant Hehir in May when he responded to the draft report Mr Laurie wrote that AWI is proud of the research, development and marketing work it undertakes on behalf of Australian wool growers in accordance with the Statutory Funding Agreement (SFA).

“We note that the audit coincided with the implementation of new frameworks and programs to improve our performance and measurement systems.

“Our sole purpose is to invest in both R&D and marketing projects which will enhance the profitability, international competitiveness and sustainability of the Australian wool industry,” he wrote.

“We aim to increase value, demand and market access for Australian wool through collaboration and consultation with stakeholders, investment in research, development, extension and marketing initiatives whilst collaborating and consulting with stakeholders.

“AWI’s agrees with all the recommendations as presented in the Section 19 draft report as we are always seeking ways to continually improve all areas of governance within the company and are already taking steps to implement improvements in several key areas.”

WoolProducers welcomes AWI’s agreement to ANAO recommendations

WoolProducers chief executive officer Jo Hall said the peak grower body welcomed AWI’s agreement to the recommendations of the ANAO report.

“Given that AWI is a company funded by compulsory levies and tax payer dollars that it should be expected that governance and financial processes should be gold standard.”

However, Ms Hall said AWI’s process around the appoint of former CEO Stuart McCullough as chief marketing and innovation officer was “obviously concerning given the lack of transparency and recording of how or why the establishment of that role was necessary, and the fact that the ANAO has picked up on it and identified this process as an example of an opportunity for improvement, that AWI has acknowledged in hindsight.”

“It is interesting that the ANAO report did not pass comment on the unusual situation of a board establishing a role within the business, including fulfilling renumeration and recruitment duties, which is usually an operational function not conducted by boards other than for the position of CEO,” she said.

No attempt by ANAO to address board selection issue – Ingram

Wool grower and former Australian Wool Growers Association director Robert Ingram said the ANAO audit report was extremely frustrating and disappointing.

He now doubted the veracity of the ANAO to make positive, constructive and long-term change in the organisations it audits.

“It won’t happen – the intrinsic problems that we have with AWI are still there; they weren’t even looked at.”

He said examples of this were the lack of action on WoolQ and the “ongoing gerrymander of the board selection process” favouring stud breeder interests.

“This means that the (Merino) studs, that don’t represent the majority of producers, will still control the industry.

“It wasn’t even looked at.”

Mr Ingram said the Port Jackson Partners report disclosures clearly show that there was an ulterior motive behind AWI’s attempt to implement WoolQ.

“Because what the Port Jackson Partners report showed was there was no market failure and yet AWI persisted and continues to persist with WoolQ, wasting shareholders’ money.”

He said AWI is continuing to undertake projects and activities that duplicate current market services such as wool specis, market reporting and traceability where there is no market failure.

“There is definitely a culture problem at AWI.

“It’s a cultural issue related to a particular group that controls AWI,” he said.

“If you had a board that didn’t have vested interests, you would get better outcomes because there would be more objectivity in running the company and making decisions.”

Sheep Central has sought a RRAT Committee response to the AWI audit. Click here for more information and to download the full ANAO report.