SECTION ONE: Special Reviews

Across the Board Reviews

Other Reviews

Across the Board Reviews

An ‘across the board’ review is an audit which is focused on a type of transaction or activity and is not necessarily undertaken to test compliance with legislation or direction. It is undertaken to facilitate a commentary on how the particular type of transaction, risk or activity has been dealt with across a number of agencies within the New South Wales public sector.

The reviews undertaken during 1998–99 were on the following matters:

The report on each review follows. Treasury and Premier’s Department representatives were given the opportunity to comment regarding action taken or proposed by them on each matter raised. Where a comment was made, it is recorded at the conclusion of each review.

 

Billings by Major Telecommunications Carrier

Background

Several instances have been reported in other jurisdictions and within the local government sector in New South Wales of customers of a major telecommunications carrier being over-charged by the company.

In 1997–98, at least one instance is known to have happened in the New South Wales public sector. An agency received an invoice for around $400,000, which it did not pay. A subsequent investigation of the customer’s account by the company resulted in a refund to the agency of some $700,000.

The ordering of telecommunication services, monitoring and payments is the responsibility of individual agencies. There is no centralised information on individual agency bills or communication networks.

The Department of Information Technology and Management has only a minor regulatory role with agencies and is not required to monitor charges or changes to service provider account lists.

What is the Potential Risk?

The key risk is that Government agencies pay invoices without ascertaining the veracity of the amount and therefore suffer what may be substantial losses.

What Did We Do?

The review was undertaken across 80 New South Wales public sector agencies, of varying size, which use the carrier, in order to determine whether they had control procedures in place to assess the reasonableness of the carrier’s charges. Total charges for these agencies were in the order of $120m.

What Did We Find?

It was pleasing to find that 78 agencies have adequate systems in place to assess the reasonableness of any billing received from the carrier.

Of the 80 agencies, half had at least once in the past two years, challenged the telecommunications carrier about some aspect of its billing. Thirty-four agencies were successful in obtaining adjustments to their accounts following the lodging of a complaint with the carrier. The adjustments varied in amount from under one thousand dollars up to $1m, which was recovered by one agency. In total, at least $3.5m was recovered.

The carrier can provide to larger customers a software product that streamlines the processing and validation of accounts on a monthly basis. This allows agencies to undertake reasonableness checks and bill validation, to study usage patterns and investigate unusual charges. The product is free to agencies and most users of the software have been able to recover some overcharged amounts.

What Does This Mean?

The extent of overcharging revealed in the eighty agencies included in the review indicates that across the whole of the State public sector, the instances of overcharging by the carrier may be extensive.

What Should Be Done?

Recommendation

The Treasurer should issue directions that require:

What will be Done?

As noted by the Premier’s Department, telecommunication services is the responsibility of individual agencies. Treasury will discuss telecommunication services with Premier’s Department, the Department of Public Works and Services and the Department of Information Technology and Management. The most appropriate of these agencies will be requested to issue guidance to all public sector organisations.

 

Dividend Payments by Agencies to Consolidated Fund

Background

An important part of the Government’s budget revenue is that received from agencies that pay dividends to Consolidated Fund. Ten years ago, 8 agencies contributed $261m in dividends or contributions as they were then titled. In 1998–99, over thirty agencies contributed $992m. The State budget’s reliance on dividends remains high.

What Does the Legislation Require?

Section 59B of the Public Finance and Audit Act 1983 (the Act) defines a ‘dividend’ payable by a prescribed statutory authority as ‘an amount calculated by applying a rate, determined by the Treasurer, to the assets, or some portion of the assets, of the statutory authority’.

The Crown Solicitor has advised The Audit Office that there is no definition of ‘asset’ in the Act, but that in section 59B, the term ‘assets’ is open to two interpretations. The first ‘could be restricted to such real and personal property of a statutory authority as not to include revenue receipts and profits, viz its capital assets’. The Crown Solicitor, however, questions that approach and favours the second view of ‘all property of whatsoever kind available to meet liabilities’. This would result, the Crown Solicitor concludes, in any ‘net surplus’ to be ‘assets’ for the purpose of section 59B of the Act.

The Crown Solicitor further advised that there is no prescription of a ‘statutory authority’ in the Act. However, clause 21 of the Public Finance and Audit (General) Regulation 1995 provides ‘for the purposes of section 59B of the Act, the statutory authorities specified in Schedule 2 to the Act are prescribed.’ Effectively then, the Treasurer may require any or all of the agencies listed at any time in Schedule 2 to pay a dividend.

Under the State Owned Corporations Act 1989, a statutory State Owned Corporation (SOC) is deemed to be a statutory authority for the purposes of section 59B of the Act and thus may be required at any time by the Treasurer to pay dividends.

What is the Potential Risk?

The prime risk is that if the processes of the legislation are not followed, that is, the Treasurer determining a rate to be applied to the assets of a prescribed statutory authority, then the dividend paid may be viewed as being an illegal payment by the agency.

The possibility also exists that the payment of a dividend to Consolidated Fund could result in a statutory authority becoming financially unstable if its ability to pay and maintain viability is not taken into account when the Treasurer determines the amount of the dividend. The authority may then be forced to increase its levies or charges, to borrow funds or reduce its services, in order to be in a position to pay the dividend.

What Did We Do?

A review was undertaken by The Audit Office of the basis used to determine the quantum of each dividend payment at all agencies which were required by the Treasurer to pay a dividend to Consolidated Fund based on their 1998–99 operations.

What Did We Find?

All agencies were unable to produce evidence of receiving a formal determination by the Treasurer as to the dividend payable. In one instance the Treasurer made a ‘direction under Section 59B of the Public Finance and Audit Act 1983’, but this related to the net proceeds of a sale of a property. The Treasurer acknowledged that the direction was issued at the insistence of the agency.

Generally, in terms of a dividend payment, most statutory authorities and SOCs are paying an amount based on that set out in their Statement of Corporate Intent or their Statement of Financial Performance. These are forecasts of dividends and tax equivalent payments set out in the ‘agreement’ between the agency and the Treasurer. In most agencies, the payment represents a stipulated percentage of adjusted profits, agreed to by the agency and the Treasury.

Adjusted profits would seem to fit the preferred definition of ‘assets’ as advised by the Crown Solicitor. The stipulated percentage varies from agency to agency, but is normally between 70% and 90%.

The final payment made by an agency may, however, differ from that forecast in the agreement.

The basis for payments by other agencies included, as mentioned earlier, the net proceeds of the sale of a parcel of land, or an amount as advised by Treasury (sometimes additional to amounts calculated against adjusted profits), or an amount determined by the agency’s Board.

There seems to be a need for clarification as to whether these ‘processes’ fit the requirements of section 59B of the Act. In addition, some agencies with commercial activities, but which are regarded as a department and not a statutory authority, are paying dividends. These are the Department of Public Works and Services and the Land Titles Office.

What Does This Mean?

The provisions of section 59B of the Act may not have been applied correctly in respect of prescribed statutory authorities. As a result dividends paid or payable by such authorities may be invalid.

What Should Be Done?

Recommendation 1

The procedures required by section 59B of the Public Finance and Audit Act 1983 should be followed or the Act amended to reflect the various processes currently being applied.

Recommendation 2

If the Public Finance and Audit Act 1983 remains as the authority for the determination of dividends, the definition of ‘assets’ as applied in section 59B of the Act needs to be clearly stated (perhaps, in accounting terms), so as to avoid misinterpretation either by the Treasury or by agencies.

Recommendation 3

Legislative action should be taken to clarify the application of section 59B of the Public Finance and Audit Act 1983 to statutory authorities, which do not operate or are not reasonably likely to operate on a commercial basis.

What will be Done?

Treasury staff advise that the Treasurer has overall responsibility for the State’s finances. This responsibility may reasonably be considered to override the aims and objectives of individual agencies. For this reason the law does not limit the power of the Treasurer to require Schedule 2 agencies to pay a dividend. (To limit this legislative power may benefit individual agencies at the expense of the State.)

A draft Treasury paper ‘A Financial Distribution Policy for Government Businesses’ notes that dividend policy should consider the financial health, cash flow requirements and capital structure of an organisation. After an extensive period of consultation, this paper is being finalised. The paper will provide agencies with a framework for the intended use of the Treasurer’s power under Section 59B.

 

Review of Rostered Overtime

Background

Over many years, Auditor-General’s Reports to Parliament have contained comments about the level and nature of overtime paid by individual agencies to employees. The reports have drawn Parliament’s attention to many problems with overtime payments including individuals or groups who have received abnormally large amounts of overtime. It has not been unusual to report instances where overtime payments have effectively doubled the annual salary of the recipient. In some instances, the individuals and groups benefiting the most from overtime payments were employed under rostering arrangements.

What Is the Potential Risk?

The use of overtime can be an effective way for management to use existing personnel to meet occasional, unpredictable or minor peak staffing needs. However the receipt of overtime can also be a very effective way for employees to increase their overall salary.

Equity issues would suggest that overtime should be available to all employees with the necessary skills who are willing to work, not just a small number of, perhaps, favoured individuals. The working of excessive hours by individuals can also raise the likelihood of occupational health and safety breaches in the work place.

What Did We Do?

The Audit Office initially chose nineteen agencies where overtime payments represented a high percentage of annual payroll expenses. The agencies were requested to provide to The Audit Office details of payments of overtime to individuals. This data was downloaded from the agency’s computer records and interrogated, using an audit software package. As one agency was unable to provide the data, the review was limited to the remaining eighteen agencies. The validity and reasons for possible excessive payments were then investigated.

What Did We Report?

As a result of the reviews, aspects relating to overtime payments have been brought to Parliament’s attention in the individual agency reviews contained within Volume Two and within this Volume of the Auditor-General’s Report to Parliament for 1999. The agencies concerned are:

Volume Two

Volume Three

Police Service of NSW
Department of Corrective Services

Freight Rail Corporation
Rail Services Australia
Roads and Traffic Authority
State Rail Authority
State Transit Authority
Sydney Water Corporation
Waste Recycling and Processing Service of NSW

Management of excessive overtime payments to individuals appears most effective in agencies where audit reports in previous years have drawn management’s attention to the existence of some extremes in the pattern of payments to some individuals.

RECOMMENDATION

Agencies should manage and control overtime costs as a matter of principle. One of the means of doing this is by applying similar computer based interrogation procedures as used by The Audit Office.

WHAT DO WE INTEND TO DO IN THE FUTURE?

The review indicated that in 9 of the 18 agencies there were some matters, especially the many instances of high overtime paid which required further investigation. It is the current intention of the Audit Office to extend this review to other agencies in the current financial year and report further to Parliament next year.

 

Management of Leased Accommodation

Background

In October 1998, the Director General of the Department of Public Works and Services (DPWS) wrote to all agencies regarding their management of commercial leases. Particularly highlighted were negotiations by agencies for new leases, lease renewals and rent reviews.

Agencies were asked to review their current leases to ensure relevant staff were familiar with their obligations and critical dates.

What Does the Premier’s Memorandum Require?

Premier’s Memorandum 97–2, ‘Government Office Accommodation and Property Disposal’ sets out the Government office accommodation leasing procedures to be followed by all agencies, except those referred to later. The procedures differ for Government Trading Enterprises and State Owned Corporations (SOCs). Other non-budget sector agencies are required to consult Treasury regarding the application of the procedures.

A recently issued memorandum from the Premier has indicated that while memoranda and circulars may be adopted by SOCs, they are not compulsory, except for seven memoranda and circulars nominated by the Treasurer. Premier’s Memorandum 97–2 was not nominated.

The main elements of the procedures are:

The preparation of a facility plan involves the calculation of total area requirements based on staff numbers and the evaluation of current facilities and space. Optimum floor layouts need to be established and diagrams drawn up to show space allocation.

These procedures do not apply to accommodation such as schools, courthouses, and hospitals. Procedures for these agencies are in the Government’s Total Asset Management Manual.

What is the Potential Risk?

The Audit Office has been advised that one of the reasons the Premier raised this issue because some agencies had been negotiating leases above market rentals. Besides costing the agency itself money, there can be an adverse flow-on to other government leases in that market. Some agencies had not allowed sufficient time for negotiation of renewal of expiring leases and had effectively lost the option of relocation to other premises. Other renegotiation difficulties arose when the lessor became aware that the tenant was either unwilling or physically unable to relocate before the existing lease expired.

What Did We Do?

A review was undertaken at 51 public sector agencies of varying size, where leased accommodation is utilised. The review aimed to determine whether accommodation leases were managed effectively, to the extent that the main elements of the Premier’s Memorandum were followed.

What Did We Find?

Early Preparation of Facility Plan

The timing of this review by The Audit Office in relation to some long-term leases held by agencies meant that fifteen of them were not yet required to commence their facility planning. Four of the fifteen had, however, commenced the procedures. Of the remaining 36 agencies (four of which were SOCs), 13 (one SOC) had not determined the future lease requirements at least twelve months before the expiration of existing leases, as required by the Premier’s Memorandum.

Completeness of Facility Plan

Of the 36 agencies, 22 (including 3 of the 4 SOCs), had a facility plan in existence. Nineteen of these facility plans complied with the majority of the components required of the plan by the Premier’s Memorandum. A further plan was incomplete but planning appeared to be progressing satisfactorily. An essential requirement of the facility plan is the preparation of a needs analysis for the agency. All plans prepared adequately addressed this aspect.

The remaining agencies did not have a facility plan at the time of the review.

Agency Involvement of Treasury and the Department of Public Works and Services

The requirement within the Premier’s Memorandum for the agency to involve Treasury and DPWS at appropriate times was generally followed by agencies. Some minor deviations to this requirement were, however, noted.

Completeness of Accommodation Options

Again, 22 of 36 agencies had prepared their accommodation options to a satisfactory level of compliance with the Premier’s requirements, with one agency still in the process of doing so.

Completeness of Strategic Office Accommodation Management Plan

A total of 20 out of 36 agencies submitted an annual Total Asset Management Strategy to DPWS that had a component entitled the Strategic Office Accommodation Management Plan. In all but three agencies, the plans contained substantially all the required information. One agency’s strategy was commenced, but incomplete.

What Does This Mean?

The requirements of the Premier’s Memorandum are being followed by only a little more that half the agencies included within the audit sample. It is therefore likely that the risks mentioned above are not being appropriately addressed to the overall detriment of the Public Sector.

What Should Be Done?

Recommendation

As the Premier’s Memorandum is very specific in its requirements, agencies should have no difficulties carrying out its requirements. However, all agencies should be reminded of its existence and what responsibilities each has in meeting the requirements.

What Has Been Done?

In June 1998, the Government Asset Management Committee was established to ensure asset and accommodation management occurred in a whole-of-government context. In its first year, the Committee initiated a strategy to reduce Government accommodation costs in the Sydney CBD Core and relocated two agencies away from Sydney. The Committee also reported that a reduction in accommodating each public sector employee had dropped 6% since 1996.

 

Budget Sector Debtors

Appendix 1 to this Report, lists the gross debtors of Budget Sector agencies, showing the value of debtors aged less than 90 days, the value more than 90 days and the value not aged by the agency. Gross debtors are before any provision for doubtful debts and comprises trade debtors only.

When compared with the previous year, gross debtors in total have risen almost 10% to $926.1m. The agencies with the highest level of debtors were Treasury, $226.2m ($244.9m as at 30 June 1998), the Attorney General’s Department with $191.3m ($160.2m) and the Department of Health, which includes Area Health Services and others, at $114m ($127.8m).

At 30 June 1998, $277m or 33% of the total debt was not aged. This has risen to $474m at the end of 1998-99, which is 51% of the total.

The largest increase in debtors relates to the Technical and Further Education Commission where debtors rose from $17.4m to $92.4m due mainly to an amount of funding ($79.4m) not being transferred to the Commission from the Department of Education and Training by year end.

 

Debts Written Off During 1998-99

Debts written off by both Budget and Non-Budget Sector agencies are listed by type in Appendix 2 to this Report.

Write offs in the Budget Sector during the year were $34.7m, down $25m from the previous year. The higher level in the previous year was due mainly to the write off of $33m by the Attorney General’s Department. Large write offs in 1998-99 were processed by Treasury, $12.8m ($13.7m in 1997-98) for various State taxes and the Health sector, $13.8m ($10.8m), mainly patient fees.

On the other hand, Non-Budget Sector write offs rose from $30.3m in the previous year to $43.4m this year. Energy Australia wrote off almost $11m in trade debt ($3.1m in 1997-98), while other large write offs were processed by the Land and Housing Corporation, $8.7m ($3.1m), being mainly rental debtors and the Fair Trading Administration Corporation, $6.2m ($2.2m) in respect of insurance claims.

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