Volume Three 2012 focusing on New South Wales State Finances
State’s accounts qualified again
A report released to Parliament today by the NSW Auditor-General, Mr Peter Achterstraat, qualifies the State’s consolidated financial statements again.
There has not been a single year in the past decade when the State has been given a clean audit opinion,” said Mr Achterstraat.
The key issue over the past ten years has been whether the State has recognised all the land it controls. Whilst there has been progress in addressing this deficiency in the past 12 months, more work is required to completely resolve the issue.
Of concern, is a significant new limitation to the State’s consolidated financial statements.
“I could not get enough evidence to support the $18.6 billion value of schools and other education buildings. These values were last updated in 2007. Five years on, there is too much new information that calls into question the way these assets are valued,” said Mr Achterstraat.
“The other problem I faced this year was the late decision to recognise the State’s archives for almost a $1 billion. The size of the archives and the lack of systems to keep track of them meant I could not confirm the quantity or value of the assets,” he added.
On a positive note, the State has addressed deficiencies raised in last year’s report about the evidence to support its investment in Snowy Hydro Limited.
Significant changes in the state budget predictions
The State’s ability to make informed and timely decisions is hampered by limitations in its financial systems and processes. Up-to-date information is crucial to effective decision making.
“Once again there have been large fluctuations throughout the year in the expected Budget Result. This is not acceptable for an entity the size of New South Wales that manages billions of dollars of assets and public funds,” said Peter Achterstraat.
“There is a lack of effective financial management capability in this State and it must improve,” he added.
The State’s audited Budget Result released today was $1 billion higher than predicted in June 2012. Total revenues were almost $600 million higher and total expenses were over $400 million lower than forecast.
While some of these variances were due to policy changes after the 2012-13 Budget Papers were published in June, others appear to be related to the quality of data and the inability to make accurate projections for the final months of the financial year.
Mr Achterstraat concluded:
“The State needs better systems, better processes and appropriately skilled and qualified people to produce the financial information it needs to properly manage public resources.”
Room for improvement in state financial reporting
2011-12 financial reporting
The number of significant errors in the State’s financial reporting information is increasing. There were 37 errors of over $20 million each identified during the audit of the State’s 2011-12 consolidated financial statements.
Errors included mistakes in spreadsheets, data entry errors, errors in end-of-year accruals and poor reconciliation processes.
“My audit process is still identifying very large errors, sometimes in excess of $1 billion,” said Mr Achterstraat. “It is the responsibility of government agencies to ensure the quality of information provided for audit and my job to provide an opinion that the information is materially correct. These errors should be detected by agency quality review processes, before they are submitted to my Office,” he added.
Problems in asset recognition and measurement have plagued the State’s finances for the past decade. New deficiencies in the evidence to support asset values emerged this year.
“My audit opinion on the State’s consolidated financial statements was qualified as a direct result of deficiencies in accounting for assets,” said Mr Achterstraat.
NSW agencies face significant challenges if they are to meet the 2013 target for presenting their annual reports in Parliament two months earlier than the previous years. Particularly, as over a third of the largest agencies did not meet Treasury’s due dates for their 2011-12 financial reports.
“Whilst some action has occurred, current initiatives are not always ensuring accurate year-end financial reporting,” said Mr Achterstraat. “Some agencies are failing to identify potential year-end accounting issues that delay the finalisation of their financial statements. Other agencies’ accounting processes are failing to detect errors,” he added.
State’s liabilities on the rise
The 2012 Report on State Finances, released today shows the State’s liabilities have increased to almost $160 billion, up from $130 billion last year. Liabilities are nearly twice the level of 4 years ago.
Impact of current economic conditions
Economic conditions have meant the State’s superannuation liabilities have increased by 50 per cent in the last 12 months. The difference between the State’s obligations and the assets used to fund them was measured at $50 billion at 30 June 2012, up from $34 billion one year ago. This is even after an extra $4.6 billion was paid in the current year to reduce them. The State has a commitment to eliminate this liability by 2030.
The State’s borrowings have increased by over $10 billion during 2011-12, from $63 billion to $73 billion. About half of this was new borrowings, used to fund capital projects, operating cash flows and part of additional superannuation contributions. The other half is directly related to the bond rate. Generally, when the cash rate falls, bond rates also fall, which causes the value of bonds to go up. The fall in bond rates in 2011-12 increased the fair value of the State’s existing borrowings by around $5 billion.
AAA Credit rating
Whilst the increased liabilities are a consideration for ratings agencies assessing the State’s credit rating, it is not the only factor.
“Last week, Standard & Poor’s confirmed the State’s AAA rating but changed the outlook from stable to negative, with a one in three chance of a downgrade within two years,” said Mr Achterstraat. “Standard & Poor’s cited capital expenditure pressures and revenue risks as creating challenges,” he added.
“Various other states have recently suffered downgrades in their ratings. The New South Wales debt levels are higher than some other states, but the current rating indicates New South Wales may be able to tolerate this higher level,” said Mr Achterstraat.
Governance in NSW public sector agencies improving
A review by the NSW Auditor-General, Mr Peter Achterstraat found agencies are generally complying with the NSW Treasury’s internal audit and risk management policy.
“I am very pleased that corporate governance in NSW public sector agencies has improved in recent years, particularly since the NSW Treasury introduced its internal audit and risk management policy,” said Mr Achterstraat. “Strong corporate governance underpins the success of any organisation,” he added.
“I am pleased agencies have established internal audit functions and are appointing independent people to their audit and risk committees,” Mr Achterstraat said.
“However, while agencies are ticking the right boxes in terms of compliance, some areas need attention,” he added.
Several agencies had long overdue internal audit recommendations. One agency had 58 overdue recommendations. In another, 88 per cent of their outstanding internal audit recommendations had not been implemented by the agreed date.
“It is concerning agencies are not promptly acting on internal audit recommendations they have agreed to implement. This heightens the risk of something going wrong,” Mr Achterstraat said.
”ICAC investigations have highlighted that fraud can happen if management ignore internal audit recommendations,” he added.
Seven of the agencies reviewed are not properly reviewing the performance of their audit and risk committees.
“Agencies must better evaluate the audit and risk committee’s performance. Informal discussions are only the starting point. I would expect to see a formal, documented assessment and feedback process,” Mr Achterstraat said.
The NSW Auditor-General reviewed 24 NSW Government agencies’ compliance with the NSW Treasury’s internal audit and risk management policy for the year ended 30 June 2011.
Contact Barry Underwood (02) 9275 7220; 0403 073 664 or email email@example.com