SECTION ONE: Special Reviews

Compliance Reviews

Financial Compliance Audit Reviews

Follow-up Report on Compliance Reviews Undertaken in 1997–98

Aspects of the Annual Reports Act 1984 and the Annual Reports (Departments) Act 1985

Grants Paid to Non-Government Entities

Trust Account Activities

Public Authorities (Financial Arrangements) Act and Public Authorities (Financial Arrangements) Regulation 1995

Expenditure on a Ministerial Letter: Political or Governmental

Investment Powers of a Controlled Entity under the Public Authorities (Financial Arrangements) Act 1987

Parliamentary Control Over Consolidated Fund Appropriations

Indemnifying Public Officers

Financial Compliance Audit Reviews

In December 1996, following a Public Accounts Committee sponsored peer review of The Audit Office, it was recognised by the Office that there was a need to expand the financial compliance audit work undertaken. The 1996–97 financial year saw the commencement of an annual program of compliance reviews across all relevant agencies audited by the Office.

A compliance review aims to form a view on an agency’s compliance with its primary legislation, other relevant legislation and regulations, Treasurer’s Directions, Premier’s and Treasury circulars and memoranda and its own policies and procedures.

The financial compliance audit program for 1998–99 comprised five reviews. The reviews undertaken were of:

Reports on each of the first four reviews follow. The review on the core business operations of agencies arrived at some initial conclusions, but it has been decided that further processes were necessary in order to report conclusively to Parliament. As a result, this report will now be included in Volume One of the Auditor-General’s Report to Parliament for 2000. The draft of each report was discussed with representatives of both The Treasury and the Premier’s Department.

Following these reports, there is a follow up report on the two reviews undertaken and reported to Parliament last year. These reviews tested compliance with Treasurer’s Directions in respect of the usage of credit and fuel cards by agencies.

In addition to the compliance reviews, a number of ‘across the board’ reviews were also undertaken during 1998–99. An ‘across the board’ review differs from a compliance review in that it is an audit usually focused on a transaction type or activity, and is not necessarily undertaken to test compliance with legislation or direction.

‘Across the board’ reviews were conducted on accounts presented for payment by a major telecommunication carrier, the procedures followed by government agencies in leasing property, payments for overtime worked by rostered staff in a selected number of agencies and the procedures involved in determining dividend payments made by agencies for payment to the Consolidated Fund.

The reports on these reviews will be included in Volume Three of the Report to Parliament which is due to be tabled in December 1999.

Follow-up Report on Compliance Reviews Undertaken in 1997–98

Volume Two of the 1998 Report to Parliament included the results of two financial compliance audit reviews which had been undertaken during 1997–98. Twelve months after the tabling of the Report, follow-up reviews were performed in order to gauge what actions had been taken by the central agencies in regard to the recommendations made as a part of those reviews.

Usage of Credit Cards

In response to the review, the Premier immediately instructed the Director-General of the Premier’s Department and the Secretary of the Treasury to conduct a joint review of credit card usage. Additional data was sought from The Audit Office and Treasury issued a questionnaire on usage and controls to selected agencies.

In June, an updated version of the Treasurer’s Directions was issued, together with a schedule of cardholder responsibilities and an example agency policy document which is to be developed to suit individual agencies.

The initiative shown by both the Treasury and the Premier’s Department is commended as the main recommendations of the compliance review are addressed by this action.

Usage of Fuel Cards

The two main recommendations of the review were:

Both the Treasury and the Premier’s Department have advised that no action has been taken on this report.

Compliance Review of Aspects of the
Annual Reports (Statutory Bodies) Act 1984 and the
Annual Reports (Departments) Act 1985

BACKGROUND

Legislation to govern the accountability and public disclosure requirements of Government agencies in New South Wales did not exist prior to the mid 1980’s. The above mentioned Acts significantly increased the amount and quality of information provided to the public and other users by requiring that annual reports be prepared on a common basis and be tabled in Parliament in a timely manner.

What Does the Legislation Require regarding timeliness?

The head of an agency must prepare the agency’s annual report and forward it to the appropriate Minister and the Treasurer, within four months of the end of the financial year. The Minister must table the report in both Houses of Parliament within one month of receipt.

If Parliament is in recess the Acts provide for the Minister to present the annual report to the Clerk of either House of Parliament. By this process, the report shall be deemed to have been laid before the House of Parliament.

The legislation allows the head of the agency to apply to the Treasurer, within three months of the financial year-end, for an extension of time to these deadlines. The legislation requires the particulars of the extension to be included in the annual report if granted. Neither Act affords the Minister the ability to apply for an extension of time.

The 1997–98 annual report process for a number of budget dependent general government sector agencies was not completed in the period set out in the abovementioned Acts. This was due to the Government’s decision to introduce retrospective legislation in order to address a legal problem with supplementary appropriations from Parliament. In turn, the completion of their annual reports was delayed.

That retrospective legislation (Appropriation (1997–98 Budget Variations) Act, 1998) also allowed agencies 28 days after the date of its assent to submit their annual report to the Minister. The Act was assented to on 30 November, so the due date became 28 December 1998 for agencies affected by the appropriation problem.

The annual report legislation also requires agencies, among many other disclosures not covered by this review, to include in their annual report ‘the cost of distribution to the public of the annual report’.

What Does the Premier’s Department Require?

Premier’s Memorandum 98-4, entitled Production Costs of Annual Reports, requires Chief Executive Officers of departments and the Board of statutory authorities to prepare their annual reports ‘in the most cost effective manner’. The memorandum suggests a number of ways of minimising costs, including limiting the size of the report, the number printed and the paper quality, as well as printing the report in black and white.

What is the Potential Risk?

The major risk identified is that an agency’s annual reports will not be tabled in Parliament and therefore not be subject to the scrutiny of Members of Parliament and the public. Another risk is that the report will not be tabled on a timely basis. In both instances, the accountability of the Minister, the agency and its senior executive will suffer.

There is an additional risk that, while the costs of producing, printing, and distributing an annual report may not amount to much money to an individual agency, there may be better ways to spend taxpayers’ funds than on lavish annual reports. As far as The Audit Office can determine, while the Premier’s Department has issued policy on the cost of reports, no central agency regularly examines the cost associated with annual reporting.

What Did We Do?

A compliance review was conducted on all agencies which are required to comply with either of the above mentioned legislative requirements. The review focused on annual reports produced for periods ending in calendar year 1998, except for universities which were reviewed for the 1997 year.

The objective was to determine the performance of an agency in meeting the reporting deadlines for the submission of its annual report to the Minister and Treasurer and the subsequent tabling of the report in Parliament by the Minister.

Data was also gathered on the cost, size and print colouring of the report and the number of copies produced.

What Did We Find?

  1. Compliance with Statutory Deadlines

(Unless otherwise stated, the ministerial titles used in this report are those that were current at the time the annual reports were prepared or were due to be prepared.)

What Agencies Did

The performance of agencies in having their annual reports printed and forwarded to the Minister and Treasurer within the statutory deadlines was generally satisfactory.

However, two agencies have not yet forwarded their report to their Minister and consequently, it has not been tabled in Parliament within the five months allowed by the legislation. The agencies which failed to comply with the legislation are:

1997–98 Annual Report Not
Forwarded to the Minister by the Agency
(as at 12 October 1999)

Ten agencies were between 2 days and 108 days late in forwarding their report to their Minister and to the Treasurer. They were:

Late Submission of Annual Report
by Agency to the Minister and to the Treasurer

The following 7 agencies were unable to produce evidence of the date on which they submitted their annual report to the Minister. It is therefore not possible to conclude whether that statutory deadline was met and whether, in turn, the Minister met the deadline for tabling the report before both Houses of Parliament.

Further, while achieving the deadline for forwarding their annual report to their Minister, the six agencies listed below either failed to send the Treasurer a copy of the report, were late or could not provide evidence of meeting this aspect of the statutory deadline. They are:

The Drug Offensive Act 1987 requires that a comment on the NSW Drug Offensive Foundation’s operations is to be included in annual report of the Department of Health. For 1998, this legislative requirement was not followed.

What Ministers Did

The only legislative requirement placed on a Minister is to table, or cause to be tabled, the report in both Houses of Parliament. Some Ministers do this shortly after receipt from the agency, well before the one month afforded by the legislation.

Our review indicated that as at 12 October 1999, the annual reports of four agencies are still to be tabled in Parliament by four separate Ministers, almost one year after the legislation requires. These reports are listed below:

1997–98 Annual Report Not Tabled in Parliament by the Minister
(as at 12 October 1999)

(a) The Authority advises that it submitted its report to the Minister and Treasurer during October 1998.

Further, the table below lists 61 agencies where their respective Ministers have not met the timing requirements of the legislation for the tabling of reports in both Houses of Parliament. The three longest delays were by the Minister for Public Works and Services in respect of the Board of Architects of New South Wales which was tabled on 28 September 1999, 316 days late. Also tabled on that day were the 1996 and 1997 reports. Next was the Treasurer, who presented the report of the New South Wales Structured Finance Activities 183 days late and then the Minister for Land and Water Conservation who tabled the report of the Forestry Commission of New South Wales 173 days after receiving it.

Late Tabling of 1997–98 Annual Report
In Parliament by the Minister


Minister
Agency

Due Date

Days Late
Minister for Agriculture and Minister for Land and Water Conservation Forestry Commission of New South Wales
Valuer-General’s Department
Department of Agriculture
Rice Marketing Board

26.11.98
3.12.98
28.1.99
30.11.98

 173
33
1
9
Attorney General, Minister for Industrial Relations and Minister for Fair Trading Office of the Director of Public Prosecutions
Judicial Commission of New South Wales
Office of the Protective
Commissioner and Public Guardian
Workcover Authority of NSW
Workers’ Compensation (Dust Diseases) Board
Department of Fair Trading

23.1.99
9.1.99

30.11.98
18.12.98
7.11.98
30.11.98

 44
37

140
6
18
7
Minister for Energy and Minister for Emergency Services Great Southern Energy
Integral Energy
NorthPower
Energy Australia
Australian Inland Energy
Advance Energy
NSW Rural Fire Service
Delta Electricity

30.11.98
30.11.98
30.10.98
30.11.98
27.11.98
30.11.98
28.1.99
23.11.98

 17
17
47
17
20
17
1
7
Minister for the Environment Zoological Parks Board of NSW
Environmental Trust
Waste Recycling and Processing Service
Inner Sydney Waste Planning and
Management Board
Northern Sydney Waste Planning and
Management Board
Illawarra Waste Planning and Management Board
Western Sydney Waste Planning and
Management Board
Macarthur Waste Planning and
Management Board
Central Coast Waste Planning and Management Board
Southern Sydney Waste Planning and Management Board
Hunter Waste Planning and Management Board

30.11.98
28.11.98
26.11.98

28.11.98

27.11.98
29.11.98

28.11.98

30.11.98

30.11.98

30.11.98
30.11.98

 3
5
7

5

6
4

5

3

3

3
3
Minister for Gaming and Racing Department of Gaming and Racing
Liquor Administration Board
Casino Control Authority

28.1.99
30.11.98
24.1.99

 6
23
10
Minister for Health and Minister for Aboriginal Affairs NSW Cancer Council
NSW Medical Board
Dental Technicians Registration Board
Podiatrists Registration Board
Optometrical Registration Board
Nurses Registration Board
Psychologists Registration Board
Optical Dispensers Licensing Board
Physiotherapists Registration Board
Chiropractors and Osteopaths Registration Board
NSW Aboriginal Land Council

23.11.98
26.11.98
17.11.98
15.11.98
15.11.98
15.11.98
15.11.98
15.11.98
15.11.98
15.11.98
19.6.99

 9
6
15
17
17
17
17
17
17
17
38
Minister for the Olympics Olympic Roads and Transport Authority

24.1.99

 15
Minister for Ports Marine Ministerial Holding Corporation
Waterways Authority

17.1.99
7.1.99

 4
49
Minister for Public Works and Services Board of Architects of New South Wales

16.11.98

 316
Minister for Sport and Recreation Sydney Cricket and Sports Ground Trust

2.8.98

 19
Minister for Transport Rail Services Australia
Department of Transport
State Transit Authority

30.11.98
11.1.99
1.11.98

 45
17
108
Treasurer Office of State Revenue
Office of Financial Management
New South Wales Structured Finance Activities
The Crown Entity
New South Wales Financial Institutions Commission

21.1.99
22.1.99
9.11.98
21.1.99

30.10.98

 8
7
183
110

11
Minister for Urban Affairs and Planning and Minister for Housing Ministry of Urban Infrastructure Management
Honeysuckle Development Corporation
City West Development Corporation
Land and Housing Corporation
Home Purchase Assistance Authority
Department of Urban Affairs and Planning

23.1.99
27.11.98
30.11.98
30.11.98
2.11.98
22.1.99

 5
10
7
7
35
6

Both Acts require that each agency’s report be tabled before both Houses of Parliament. Advice from the Parliament indicates that the reports for the following agencies have only been tabled in the Legislative Council and not the Legislative Assembly:

Finally, the following agencies failed to publish ‘costs’ in their annual report and are thus in breach of the legislation:

  1. About the Annual Reports

Cost of Distribution

The components of ‘costs’ do not appear to be defined in the Acts, regulations or elsewhere, so it is unclear whether the figures disclosed by agencies are therefore comparable. Perhaps the only thing close to a definition is contained in the Treasury publication, Annual Reports, A Guide for the NSW Public Sector where, when addressing the issue of the price of annual reports, it is stated that the ‘selling price of the report should not exceed the direct cost of production’. This would comprise labour and printing cost of the report. It is The Audit Office’s view, however, that the disclosed costs of most agencies are the costs of printing the reports, not the cost of production.

The Audit Office, in a review conducted earlier in the year on behalf of the Treasury, found that the reported costs of production of the annual reports of sixteen of the twenty agencies under review was less than in the previous year.

The following observations on cost were made from data collected during the compliance review:

Size

Print Colour

Number of Copies Printed

WHAT DOES THIS MEAN?

It is apparent that some agencies and most Ministers are not complying with their responsibilities under the annual reporting legislation. The outcome of such actions is to delay or indefinitely defer an essential part of the accountability process in the State.

WHAT SHOULD BE DONE?

Recommendation 1

Treasury remind agencies of their responsibilities in respect of the statutory timing requirement of the annual reports legislation and that any 1997–98 annual reports yet to be forwarded to Ministers, be forwarded and then tabled in Parliament.

Recommendation 2

Agencies be reminded that an exemption from the Treasurer should be sought, and the reasons for the exemption be subsequently published in the annual report, when production of the annual report is anticipated to be delayed beyond the statutory deadlines.

Recommendation 3

The Treasurer remind Ministers of their responsibilities in respect of the statutory timing requirements of the annual reporting legislation and that any 1997–98 annual reports not yet tabled in Parliament, be tabled.

Recommendation 4

Treasury provide direction to agencies regarding the components of the costs of distribution of annual reports so that a meaningful comparison of costs can be made between agencies.

Recommendation 5

Agencies be reminded of the statutory requirement to disclose the cost of distribution of annual reports within the annual report.

WHAT IS PROPOSED TO BE DONE?

The Treasury has undertaken to include the reported matters in its 1999–2000 Annual Reporting circular which is issued annually in June.

Compliance Review of Grants Paid to
Non-Government Entities

BACKGROUND

In December 1995, an Audit Office performance audit report entitled Ethnic Affairs Commission: Administration of Grants was tabled in the Legislative Assembly. While the report related only to the granting activities of one agency, The Audit Office produced a better practice guide applicable to the whole of the New South Wales public sector. This guide covered the planning, pre-grant, granting, monitoring and evaluation stages of the grant process.

 

WHAT IS THE POTENTIAL RISK?

A review of the 1998–99 Budget Papers reveals that over $2b was estimated to be passed from Consolidated Fund, via departments, to non-government agencies. In addition, grants are also made by statutory authorities and universities.

There being no public sector wide directions which cover the grants process, there is a risk that individual agencies will have deficiencies in the processes they have developed for making grants.

At a more detailed level, there is the risk that:

One of the recommendations of the performance audit was that the Government should establish a system of information exchange between those government agencies which administer grants. This recommendation does not appear to have been adopted. So, a risk still exists that entities seeking grants could be duplicating their requests by applying to more than one agency for funds for the one project and hence be funded more than once for an activity.

The performance audit also questioned the need for granting agencies to have more specific program objectives and to consider using funding contracts or agreements. Emphasis was also given to the transparency of the approval process (including intervention by the Minister) and the need for criteria to measure program effectiveness.

Further, with the 1998–99 financial year containing a State election, there was also a risk that inappropriate grants may have been made by Government in order to attract votes in marginal electorates.

 

WHAT DID WE DO?

The review was undertaken at all agencies making grants to non-government entities. The objective was to determine whether grants made by agencies to non-government entities have resulted from an objective and transparent approval process aimed at meeting specific program descriptions, have been satisfactorily acquitted and used by the recipient entity for the approved intention.

To test these controls, a review of each agency’s documented procedures was undertaken and grants made were tested for compliance with the documented procedures. An assessment of the agency’s procedures was then made against the better practice guide mentioned earlier.

Finally, The Audit Office attempted to obtain computerised data from agencies and combine that data to determine whether any non-government entity received more than one grant for the same project.

 

WHAT DID WE FIND?

Following are observations regarding some of the more critical aspects of the granting process:

Advertising Availability of Grant

In the vast majority of cases, agencies utilise media advertisements, web sites, press releases and faxes to inform likely applicants of the availability of grant moneys and the application procedures to be followed. This approach is utilised for grants in respect of major projects or initiatives and allows all potential applicants an opportunity to apply.

Some agencies make grants purely at the discretion of their Minister and as such do not necessarily seek applications from potential recipients. This type of grant is generally non-recurring and is often made to meet a critical, immediate need. It is traditionally of smaller value than recurring grants.

The overall conclusion is that the notification process is open and transparent, particularly for recurring grant programs which account for the vast majority of grant moneys spent.

Approval Process and Ministerial Involvement

Our review found no major problems with the approval process. Applications were usually appraised by a pre-established committee and recommendations made to the particular Minister for approval.

Align with Core Business

There were no instances reported from the sample of grants reviewed in each agency, where the nature of the activity funded by the agency was not aligned to its core business.

Funding Agreement

It was pleasing to note that funding agreements between the funding agency and the recipient are being utilised in the majority of agencies. Although no standard format of agreement appears to exist for this action, these agreements are critical to the accountability process because they put in writing the expectations and, where developed, critical performance indicators which the donor agency wishes to achieve in order to ensure that it is getting value for money.

Agreements are not normally used in relation to discretionary grants. However, as stated earlier, these grants are usually, one off and are of a relatively small amount.

Follow up Procedures

The most common follow up procedures utilised by agencies include requiring recipients to provide one or a combination of milestone reports, audited financial statements and its annual report to the agency for investigation and review. In turn, many agencies have their officers conduct site visits as a means of establishing that the grant project is progressing satisfactorily and achieving its goals.

The sole use of audited financial statements for this purpose is questionable. The statements merely show that the funds have been spent on the particular project, but not what was achieved by the expenditure.

The development of various performance indicators is a new initiative and agencies should be required by Government to ensure that recipients provide the necessary data to assist this process.

Value for Money

Many of the procedures mentioned above are considered by agencies as also allowing them to ensure that they receive value for money for their grant dollar. In addition some employ an external ‘expert’ to evaluate this, while others insist on having a representative on the recipient’s management committee or rely on complaints from interested parties to question the merits of a grant.

The monitoring of value for money is seen as being more difficult for long-term projects because of the time it is likely to take for measurable outcomes to become evident and it was acknowledged that some projects do not immediately produce measurable community benefit. Such difficulties make the need to monitor projects even more critical.

Are Evaluation Procedures Effective?

Overall, the evaluation procedures utilised by agencies are generally effective. The review revealed a small number of agencies which have experienced difficulties in maintaining their evaluation control procedures, mainly due to staffing problems. As reported under the next heading, the monitoring and evaluation stages provide the greatest opportunity for making procedures more effective, particularly if performance indicators can be developed by all agencies to help measure the return on the grant dollar.

Better Practice Followed

The better practice guide sets out practices to be followed within each of the planning, pre-grant, granting, monitoring and evaluation stages. Most agencies appear to be following most aspects of the guide, with many having adopted all of them. Those practices which are least used at this time, are mainly in the evaluation stage and are those concerned with the analysis of performance indicators and with agencies publishing evaluation reports on projects in their annual reports.

Election Bias

Based on the sample of grants reviewed, no apparent bias was noted in the manner in which grants were made for the period immediately before the 1999 State election. The review could not guarantee that individual grants, particularly those of a discretionary nature, were not made for that purpose.

Central Control

Due to the inconsistent nature in the manner in which information about individual grant recipients is electronically stored across the public sector, it was not possible to reach any conclusion as to whether private sector entities were involved in obtaining grants for a specific project from more than one government agency.

 

WHAT DOES THIS MEAN?

The implications of this review are that agencies are generally managing the planning, application and approval processes in a satisfactory manner. However, the monitoring and evaluation processes can be improved, essentially with the use of performance indicators.

 

WHAT SHOULD BE DONE?

Recommendation 1

The Government consider the merits of setting up one database to control and record the name, amount and details of every grant project funded so as to ensure that ‘double dipping’ is not occurring. Other uses for this information could also be developed, particularly in the application appraisal process, where the history of applicants who have previously received grants could be established.

Recommendation 2

Treasury develop a standard set of procedural guidelines for use by all agencies involved in making grants to the private sector. The better practice guide mentioned earlier and the guidelines developed by NSW Health would both provide a useful starting point for this initiative. Consideration should be given to developing a standard, across the public sector, grant application form as part of this process. This would also assist with achieving Recommendation 1.

Recommendation 3

If Recommendation 2 is not adopted in full, then the use of performance indicators, which are developed as part of the planning process and then used as part of the evaluation process, should be made mandatory by Government. Agencies should also be required to include aspects of economy, efficiency and effectiveness in their evaluation process.

Recommendation 4

The procedural guidelines suggested in Recommendation 2 include robust procedures to be followed when there is ministerial intervention in the approval process.

 

WHAT IS PROPOSED TO BE DONE?

The Treasury will consider the costs and benefits of establishing a central register of grants, issuing procedural guidelines and performance indications.

WHAT HAS BEEN DONE?

Premier’s Department has advised that at the request of the Budget Committee of Cabinet, it commenced, on 13 September 1999, a review of the grants programs in a range of agencies.

Compliance Review of Trust Accounts Activities

BACKGROUND

A ‘trust’ exists when one person (the trustee) holds assets for the benefit of another (the beneficiary).

The size and complexity of trusts within the New South Wales public sector vary along a continuum from highly structured to the more cursory. Examples of trusts that are highly structured are those given status as statutory bodies under the Public Finance and Audit Act 1983 (The Act). An example is the Jenolan Caves Reserve Trust. These trusts prepare financial statements and annual reports and accountability is therefore at a high level.

Moving along the continuum, there are trusts established by legislation but not scheduled under the Act. The Casino Community Benefit Trust Fund is an example of this type of trust. Accountability requirements vary with these trusts, some producing financial statements and reports, others having their activities mentioned in notes to the accounts of parent agencies. Some merely produce a report for their Minister in a format designated by the Minister, which may or may not be tabled in Parliament.

Finally, there are trusts operating without legislative obligations, which appear to have evolved by necessity, as part of an agency’s operating activities. The Australian Accounting Standard AAS 29, ‘Financial Reporting by Government Departments’ identifies these trusts as either being controlled by an agency or managed by an agency.

Controlled trusts exist where an agency benefits from the asset in the pursuit of its objectives and is able to deny and regulate the access of others to that benefit. These trusts are therefore accounted for within the agency’s financial statements.

Managed trusts exist where the agency only performs a custodial role. An example is the cash held on behalf of people in prison by the Department of Corrective Services. Activities of these trusts are disclosed by way of note to the agency’s financial statements.

This report is primarily concerned with controlled and managed trusts. It does not cover trusts, the operation of which is the sole reason for the agency existing, such as the Public Trustee and the Protective Commissioner. In the context of this report, the trustee is a State public sector agency and the beneficiary is an individual, who, for a variety of reasons, is not in a position to be able to look after their own affairs or who has passed assets to the trustee for a particular purpose.

 

WHAT IS THE POTENTIAL RISK?

Because trust accounts involve an agency in handling a third party’s cash or property, they are a high-risk activity. The less the legislative requirements for accountability, the higher the risk. Managed trusts appear to be the highest risk. This is because of the fiduciary responsibilities of the agency for people who, because of their circumstances, cannot look after their own affairs or those who have passed assets to an agency to be held for a particular reason.

Alternatively, an agency may be given a bequest to administer. The bequest can be either conditional or unconditional, but either way there are responsibilities attached to it for the agency.

Within the New South Wales public sector structure, limited direction and guidance on the procedures to be observed when operating trust accounts can be found within the Trustee Act 1925 and the Treasurer’s Directions. However, it has mainly been left to individual agencies to develop specific and tailored policy and procedure guidelines to suit their needs.

There does not, therefore, appear to be any specific legislation governing an agency’s right to hold and operate funds on behalf of third parties. The activities seem to have evolved over time, by necessity.

WHAT DID WE DO?

Inquiries were carried out in all agencies in order to establish where controlled and managed trust accounts were maintained. For those agencies identified, the review was carried out to determine whether the agency has the legal right to operate trust accounts and whether it has and is following its policies and procedures in respect of the operation of trust accounts.

Specifically, achievement of better practice would necessitate policies and procedures to exist to cover the following general activities, where applicable:

WHAT DID WE FIND?

Overall, the operation of trust accounts was generally satisfactory. The risk of isolated problems happening seems to be at its greatest in the accounts managed by the Department of Community Services and the various Area Health Services because of the often vulnerable status of the persons being cared for by these agencies and the control deficiencies caused by the relative small size of residential units, group homes and hospitals. Prisons and youth centres also present high risks. These deficiencies are sometimes exacerbated by the absence of a third party to hold the trustee accountable.

Agencies operating managed trusts were not able to identify for The Audit Office where they had a legal right to operate trust accounts.

Following are comments on the major control procedures, as viewed by The Audit Office:

Clear segregation of duties

In thirteen agencies where trusts operate, difficulties were identified with the segregation of duties among staff. In the main, this resulted from the limited size of the agency or the unit of the agency where trust funds are held. In half of these agencies, however, there was assessed to be a compensatory control, being a high level of involvement by senior staff in the trust account activities.

Receipting of moneys lodged with the agency

The receipting function is generally well controlled and operating effectively. It is important that, in the small communities mentioned earlier, processes are in place to allow for weekend deposits by family and friends to be controlled.

Banking of moneys

No problems were reported in respect of the banking of trust account lodgments. However, ten agencies do not maintain a separate bank account for these funds, preferring to deposit the funds in their general bank account. Such procedures would seem to breach the Treasurer’s Direction forbidding the mixing of private and public moneys (TDs 100.02 –100.03).

Disbursements from trust accounts

A majority of agencies have written guidelines covering the disbursement process. The controls over this function generally operated effectively, except some deficiencies were again reported in accounts maintained in small communities. Instances were reported where supporting documentation was lacking. This was usually in respect of minor expenditures for outings and meals. The review also highlighted a lack of managerial review of transactions in these communities.

Security and recording of assets purchased

This type of transaction generally occurred in the communities caring for disadvantaged people or those in prison. Valuable or attractive purchases made on behalf of individuals were generally well controlled, so as to ensure that the purchases accompanied the person when moving to another physical location or leaving the care of the agency.

Regular account reconciliations

A satisfactory outcome was achieved in this critical control over these accounts. Almost all agencies regularly reconcile their bank accounts, subject the reconciliation to review by a second officer and agree the total of the ledger with the total of individual account balances.

Account closure requirements and dispute resolution

Control procedures were generally satisfactory in respect of the closure of accounts. While no disputes over the operation of individual accounts were noted, it was apparent that very few agencies had developed formal dispute resolution procedures.

What Does This Mean?

Although the legal authority to operate trust accounts may be in doubt in some instances, agencies are generally accepting their custodial responsibilities and satisfactory controls are operating over the activities of trust accounts. However, special attention needs to be exercised in trust account activities in small communities.

WHAT SHOULD BE DONE?

Recommendation 1

Treasury to ensure that agencies have the legal right to operate trusts for the vast range of people now benefiting from this service.

Recommendation 2

Treasury to ensure continued good stewardship by agencies through the development of a better practice manual to cover all aspects of operating controlled and managed trust accounts. Special attention should be given to trusts in small communities.

Recommendation 3

Agencies should be reminded by Treasury of the need to establish a separate bank account for trust funds, so that the handling of these funds accords with Treasurer’s Directions.

Recommendation 4

Although no specific disputes over individual trust accounts were identified during the review, agencies, as part of managing the risks associated with such accounts, should be required to establish formal dispute resolution processes.

Recommendation 5

Treasury to review all accounts currently bearing the word ‘trust’ in their title, in order to ensure that the nature of the operations of the account is that of a trust account and not just the result of inaccurate naming of the account.

WHAT IS PROPOSED TO BE DONE?

Treasury will write to agencies concerning trusts. Agencies will be asked to review all bank accounts which include the word ‘trust’ in the title. To avoid possible confusion, agencies will be asked to change the title if the funds are not considered to be trust funds.

Where funds are held on behalf of others, agencies will be asked to consider whether they have a legal right to hold such funds. Where agencies do not have a legal right, they will be asked to consider whether it is appropriate for them to continue to hold funds in trust. Where it is considered appropriate they will be asked to have their legislation amended to give them the legislative power.

Agencies will be reminded that Treasurer’s Directions apply to all funds controlled by an agency, including trust funds. Directions regarding segregation of duties, receipts, debtors, payments and reconciliations also apply to trusts.

Agencies will be asked to refer all disputes concerning trust funds to the Department Head/Chief Executive Officer of his/her delegate in the first instance.

Compliance Review of Public
Authorities (Financial Arrangements) Act 1987
and
Public Authorities (Financial Arrangements)
Regulation 1995

 

BACKGROUND

The Public Authorities (Financial Arrangements) Act 1987 (The Act) makes provision with respect to certain financial arrangements and investments of public authorities; constitutes the New South Wales Capital Works Financing Corporation and repealed the Public Authorities (Financial Accommodation) Act 1981.

WHAT DOES THE LEGISLATION REQUIRE?

The Act provides a framework for the investments of, and financial arrangements by, public authorities. Three categories of financial arrangements are dealt with, namely financial accommodation, financial adjustments and joint financing arrangements. Each category is clearly defined in the Act by way of examples.

Typically, financial accommodation includes raising money by the issue of debentures, bonds, stock, promissory notes, etc. A financial adjustment occurs when an agency enters into an arrangement or transaction such as one of the numerous types of swaps, options or futures contracts or agreements. A joint financing arrangement is with a person for the purpose of undertaking the agency’s functions and involves a financial arrangement in respect of the agency’s infrastructure or other capital assets.

The Act also schedules or regulates the authorities which can avail themselves of each type of financial arrangement and details the processes to be followed by agencies.

Guarantees by Government are also defined and procedures described. In addition, the Act provides for the investment powers of authorities and certain procedures are laid down.

The Regulation outlines procedures regarding the issue of securities by agencies and schedules authorities according to their investment powers.

 

WHAT IS THE POTENTIAL RISK?

The review of compliance by agencies with this Act was based on the premise that the Act was to operate as a control mechanism. The control was seen to be that all agencies were required to apply for approval to use powers under the Act and that they could only operate up to various levels of authority approved for them under the Act.

The major risk is that agencies included within the legislation will not follow the procedures outlined by the Act and Regulation. As a result they may enter into unlawful borrowings, transactions or arrangements, thus exposing the agency and the Government to possible adverse financial and non-financial consequences. They may make illegal investments by going beyond their powers and investing in high-risk transactions. This could result in losses.

There is also a risk that agencies not included within the legislation will engage in similar activities to those agencies given powers under the Act, but will do so without the controls afforded by the Act.

 

WHAT DID WE DO?

The review considered all agencies. For those agencies defined as an ‘authority’ by the provisions of the Act, a view was formed on whether they complied with the requirements of the Act and Regulation during 1998–99.

For agencies not fitting the definition of ‘authority’, we checked that they did not engage in borrowings, transactions, arrangements or investment activities during the year which should have been subject to the provisions of the Act and Regulation or other legislation.

 

WHAT DID WE FIND?

Financial Arrangement Activities

The review identified twenty-four agencies which, despite having the power to enter into financial arrangements, had breached the legislative requirements of the Act. The agencies and their breach are listed in the following table:

Agency

Breach

Ambulance Service of NSW

Treasurer’s approval not obtained before entering into financial accommodation.

Area Health Services (sixteen)

Treasurer’s approval not obtained before entering into financial accommodation.

Australian Museum Trust

Governor’s and Treasurer’s approvals required under the Act not obtained before acquiring financial accommodation.

Australian Water Technologies Pty Ltd

Governor’s and Treasurer’s approvals required under the Act not obtained before acquiring financial accommodation.

Corrections Health Service

Treasurer’s approval not obtained before entering into financial accommodation.

Royal Alexandra Hospital for Children

Treasurer’s approval not obtained before entering into financial accommodation.

Sydney Water Corporation

Treasurer’s approval not obtained before entering into a finance lease arrangement.

Waste Recycling and Processing Service

Treasurer’s approval not obtained before entering into financial adjustment

Water Ecoscience Pty Ltd

Treasurer’s approval not obtained before entering into a finance lease arrangement.

Another matter was disclosed during the review. Landcom entered into joint venture arrangements, using the authority of the Housing Act 1912 rather than the Act.

Investment Activities

Although the four agencies listed below have investment powers under the Act, each failed to obtain the approval of the Treasurer for the appointment of its funds manager, which is a requirement of the Act:

In addition, the Insurance Ministerial Corporation has exceeded its investment powers by investing in property and commercial leases. Subsequent to year-end, the Corporation had its powers under the Act increased which, if held at the time of the investment, would have been sufficient to accommodate these investments.

At 30 June 1999, the Hunter Area Health Service had $375,000 invested in the Central Coast Area Health Service. An area health service is not a recognised investment under the Act.

The agencies listed in the table below held investments despite not being scheduled under the Act for investment purposes. Some of these agencies have sought appropriate powers. Most were also of the view that other legislation gave them the authority to invest.

Broken Hill Water Board

Newcastle Port Corporation

Department of Fair Trading

Port Kembla Port Corporation

Department of Land and Water Conservation

Sydney Ports Corporation

Marine Ministerial Holding Corporation

Waste Planning and Management Boards (seven)

National Parks and Wildlife Service

  

The review noted that there were various provisions in other legislation which may also give agencies the authority to invest. Some agencies relied on these provisions other than seeking authority under the Act.

Because of the degree of apparent non-compliance with the Act and because a number of agencies had indicated that they believed that either the Public Finance and Audit Act 1983 or the Treasury Corporation Act 1983 gave them the power to invest, The Audit Office sought the Crown Solicitor’s advice on whether this was the case. The Crown Solicitor has advised, in summary, that:

The Crown Solicitor did not advise on financial arrangements under Parts 2A, B and C of the Act. The Audit Office also obtained the advice of the Crown Solicitor in relation to the investment powers of controlled entities under the Act. A summary of the advice is contained elsewhere in this Report.

 

WHAT DOES THIS MEAN?

If the intention of the Act is to operate as a control over agencies’ borrowings, derivative transactions, joint ventures and investments, it is ineffective. Agencies scheduled under the Act are not limited by that Act because they are able to use other legislation as an authority for their undertakings. Agencies which, for whatever reason, are not scheduled under the Act have an array of other legislation available to authorise their undertakings. In its present form, the question arises as to why the Act is required? The Crown Solicitor has advised that there is nothing within the Act to suggest that it would be a code with respect to the powers of an agency to enter into financial arrangements. Each Part needs to be considered individually to ascertain whether the powers conferred pursuant to that Part are intended, as a matter of construction, to exclude all other sources of similar power.

When agencies enter into financial arrangements and make investments using powers not given by the Act, the Treasurer and the Government lose some degree of the control afforded to them by the Act. Agencies may pay higher interest rates and not have the benefits of a Government guarantee. Alternatively, earning power may be diminished by poor investments or capital may be jeopardised in high-risk investment activities.

Agencies not encompassed by the Act are operating without having to follow the control procedures imposed by the legislation. Some enabling legislation gives an authority very broad objectives and functions. The Ports Corporatisation and Waterways Management Act 1995, for example, in requiring a Port Corporation to be a successful business, allows it ‘to maximise the net worth of the State’s investment in the Port Corporation’ and further, as a function, the corporation may ‘conduct any business (whether or not related to its principal functions) that it considers will further its objectives’.

The State Owned Corporations Act 1989 gives statutory state owned corporations all the powers of a natural person, including "to do all other things necessary or convenient to be done for, or in connection with, the performance of its functions’.

 

WHAT IS BEING DONE?

Treasury have advised that a review of the Act is currently being undertaken by its officers and external consultants. Resourcing will be considered following completion of the review.

Treasury expects recommendations arising from the review to be implemented during 2000. Depending upon the results of the review, agencies may be advised of relevant provisions in the Act and Regulations.

The desired purpose of the Act will be considered more fully as part of the rewrite of Annual and Financial Reporting Legislation currently being performed by Treasury officers.

 

WHAT ELSE SHOULD BE DONE?

The previous heading in this report sets out the actions already commenced by Treasury prior to the finalisation of this review. Three recommendations are made.

Recommendation 1

Treasury recently commenced a review of the administration of the Act. It is recommended that this review be widened to take into account the desired purpose of the Act. If that purpose is for the Act to be a control over agencies’ financial arrangements and investment practices, then the Act will require amendment.

Recommendation 2

The necessary resources be provided within Treasury to ensure maintenance of the schedules under the Act and Regulation and that these records be regularly updated and amended for new agencies and when agencies are amalgamated or divided.

Recommendation 3

Government agencies be reinformed of in the provisions of the Act and Regulation in order to ensure that they have an understanding of their powers or the need to obtain powers before engaging in financial arrangements or investment activities.

Expenditure on a Ministerial Letter: Political or Governmental

In Volume One of this year’s Report to Parliament (p 24) it was reported that, in the Auditor-General’s view, the issue of a letter by the then Minister for Mineral Resources and Minister for Fisheries to freshwater anglers appeared to be wholly or primarily aimed to achieve political purposes. On that basis, the Auditor-General’s view was that it was not lawful for the Minister’s host agency, the Department of Mineral Resources to have met the costs which could be identified with the issue of the one-page letter.

During Question Time in the Legislative Council on 24 June 1999, the Treasurer stated that he did not agree with the Auditor-General’s view. The Treasurer elaborated by advising that people are entitled to information.

Because of this difference of opinion, the Auditor-General wrote to the Treasurer on 15 July 1999, expressing the wish to seek the advice of the Government’s lawyers on this issue, and inviting the Government’s considered views before seeking that advice. A response to the Auditor-General’s letter was not received, and the matter was referred by the Auditor-General to the Crown-Solicitor on 6 September 1999 for his view. The advising is reproduced in full in the Appendix of this volume.

The advising states that

It is of course a legitimate function of government to provide information (using public moneys), to the community about its licensing schemes, including addressing what it considers to be misinformation about such schemes, even where that perceived misinformation comes from the Opposition. What it cannot do is use public moneys for the substantial purpose of advancing the election prospects of the political party in government.

The advising goes on to state

Given the timing of the facsimiles (they were dated 23 March 1999 and the election was on 27 March 1999) and the fact the only urgency requiring use of the facsimile could have been the upcoming election, it is open to a Court to conclude on the balance of probabilities that the substantial purpose in sending the facsimiles was to encourage freshwater anglers not to vote for the Coalition but to vote for the party in government. That the substantial purpose of the facsimiles may not, on the balance of probabilities, have been to provide information to the public which it needed to know about the licence scheme but was to encourage votes for the Government and not the Coalition, is perhaps reinforced by the fact the letter, said to be an ‘open’ letter, was only sent by facsimile to agents for issuing licences. Presumably, the intention was that they would distribute them to the freshwater anglers.

The Crown Solicitor concludes

My view that it is open to you to form the opinion a Court might, on the balance of probabilities, hold that the facsimiles were for the substantial purpose of advancing the electoral prospects of the party in government, has been expressed in the absence of the considered views of the Government which you sought in your letter to the Treasurer dated 15 July 1999.

Investment Powers of a Controlled Entity under the Public Authorities (Financial Arrangements) Act 1987

CROWN SOLICITOR'S ADVICE

The Audit Office recently sought the Crown Solicitor’s advice regarding the investment powers under the Public Authorities (Financial Arrangements) Act 1987 (PAFA) of controlled entities of statutory bodies (see Appendix AA). Specifically, the question was whether it was possible for a controlled entity to have greater investment powers than the controlling entity. The Crown Solicitor’s advice confirms that this is possible.

In coming to this conclusion, the Crown Solicitor makes the following main observations:

 

IMPLICATIONS

This advice raises a number of issues, in particular regarding the intended scope of the PAFA Act and its effectiveness. It would seem anomalous for a decision to be made regarding the investment powers of a controlling entity without similar criteria and considerations being applied to the investment powers of its controlled entities. It creates a potential ‘loophole’ whereby a scheduled body under the PAFA Act may establish a controlled entity for the purpose of overcoming the legal limitations that have been placed on its own investment powers. This situation may expose agencies and the Government to unwanted risks.

To ensure appropriate risk management by statutory bodies and their controlled entities, it is recommended that this issue be further examined by the Treasury. A possible solution that could be investigated may include the extension of the scope of the definition of ‘authority’ to include controlled entities. This matter has been referred to the Treasurer for his consideration and a reply is expected shortly.

Parliamentary Control Over Consolidated Fund Appropriations

Unlawful Expenditure by government

In recent years, Auditor-General’s Reports to Parliament have identified instances of unlawful spending by government. In the 1997–98 fiscal year expenditure of $5 billion would have been unlawful except for the retrospective application of legislation proclaimed after the end of that financial year.

To address the issue of unlawful spending the Treasury introduced new procedures during 1998–99 aimed at ensuring that:

Notwithstanding the introduction of these revised procedures, instances of unlawful expenditure continued to occur during 1998–99 and as a result of these reported instances the Independent Audit Reports on the financial reports of seven agencies required qualification.

Instances of unlawful expenditure occurred because:

In May 1999 the Government introduced into the Legislative Assembly the Appropriation (1998–99 Budget Variations) Act 1999. This Act, in providing for the retrospective approval of expenditure, was an improvement over similar legislation passed in previous years in that it was introduced to Parliament prior to financial year-end. The retrospective provisions of the Act remain a matter of concern in that they authorise expenditure after the event rather than having parliamentary sanction at the time the expenditure is incurred.

In planning for the 1999–2000 financial year Treasury has indicated that procedures for the approval of additional funds from the Consolidated Fund to agencies have been further reviewed and strengthened. The implementation of the revised procedures will be reviewed during the course of the 1999–2000 audit.

Other Matters Arising From the Appropriation (1998–99 Budget Variations) Act 1999

A review of the Appropriation (1998–99 Budget Variations) Act 1999 revealed the following inaccuracies in the contents of the Act:

To enable Parliament to effectively discharge its responsibilities in ensuring that the Government is held accountable, it is essential that information presented to Parliament should be complete and accurate. This is particularly relevant in the case of legislation relating to the expenditure of taxpayer provided funds.

Unspent Consolidated Fund Moneys

From time to time it has become clear that at year end agencies have in their working accounts (ie bank accounts) unspent Consolidated Fund moneys. The Crown Solicitor on 28 August 1998 advised The Audit Office that these unspent moneys belong to the Consolidated Fund. As appropriations lapse at the end of the financial year agencies should not spend these moneys without further Parliamentary appropriation. The amount of Consolidated Fund moneys held in agencies’ working accounts is, in many instances, difficult to determine because agencies also inter-mingle in these accounts agency revenue from user charges and other activities.

In May 1999 the Government introduced the Public Finance and Audit Amendment Bill 1999, where one stated purpose of the bill was to amend Section 23 of the Public Finance and Audit Act 1983. This amendment would allow an agency to spend in the following year unspent Consolidated Fund moneys held in the agency's working account. The bill was withdrawn after it reached the Legislative Council.

This amendment if passed would have had the effect of reducing Parliament's control over appropriations in future years, as any unspent amounts appropriated in the previous year and remaining in agencies’ working accounts could be spent in the following year without the need for any further parliamentary scrutiny.

The Audit Office is of the view that appropriate procedures and systems should be introduced that will allow unspent Consolidated Fund moneys held in agency bank accounts to be separately identified and accounted for as required by legislation (ie as part of the Consolidated Fund), and not spent by agencies without further Parliamentary appropriation.

Accountability for Consolidated Fund Moneys Expended as Repayable Loans or advances

Certain agencies may, as part of their annual Consolidated Fund allocation, receive funds that enable them to make repayable advances to other organisations. At present there is no formal requirement that repayments of these loans or advances be repaid to the Consolidated Fund.

A case in point has been observed where an agency, the Sustainable Energy Development Authority (SEDA) had made loans to other organisations and had subsequently retained the loan repayments instead of repaying the money to the Consolidated Fund. A request from Treasury to repay the loan moneys to the Consolidated Fund has been queried by SEDA which has sought legal advice as to the legality of the Treasury request. Treasury has advised that the loan moneys have recently been repaid.

It would appear necessary that at the time the allocations are made it be clearly stipulated that funds to be applied to make repayable advances or loans to other agencies are to be subsequently repaid to the Consolidated Fund.

Conclusion

The Legislative Council has recently resolved to request the Council’s General Purpose Standing Committee No. 1 to inquire into the current provisions for the appropriation of moneys and authorisation of expenditure. The findings and recommendations of this Committee will be important for maintaining and enhancing the power of Parliament to oversight Government expenditure.

Indemnifying Public Officers

The commentary elsewhere in this volume regarding the financial operations of the Independent Commission Against Corruption refers to the settlement of legal proceedings brought against the Commissioner by a Member of Parliament.

Following the audit of the settlement of the proceeding, The Audit Office has raised with the Treasurer the potential effect of the application of the Government’s policy which indemnifies public officers in certain circumstances. When the policy is applied to civil defamation cases brought against public officers, the policy appears to support the view that defamation is an act which arises in the course of duty. This ongoing perception may relieve officials, to some extent, of the need to avoid defaming people unless the law allows (e.g. in parliamentary or court proceedings).