Office of the Independent Review Officer replaced WorkCover Independent Review Office

The Office of the Independent Review Officer (OIRO) is a statutory office established under the Personal Injury Commission Act 2020 effective 1 March 2021. The statutory functions of the OIRO include:

• finding solutions for persons injured at work or in motor vehicle accidents with complaints about their insurers
• managing and administering the Independent Legal Assistance and Review Service
• conducting inquiries into matters arising in connection with the operation of the Personal Injury Commission Act 2020 and the workers’ compensation and motor vehicle accident legislation.

The NSW Government first established the WorkCover Independent Review Office (WIRO) in 2012 as an oversight mechanism across the New South Wales workers’ compensation system. The WIRO is the predecessor of the OIRO.

Establishment of Digital Restart Fund to support digital transformation projects

The Digital Restart Fund (the Fund) is a statutory deposit account established under the Digital Restart Fund Act 2020 (the Act) on 3 August 2020. The purpose of the Fund is to support digital and information and communications technology initiatives across the government sector.

Under the Act, the Minister for Digital and Minister for Customer Service is to control and manage the Fund. Section 14 of the Act requires the Fund to produce an annual report relating to the Fund each year. The report is also to include an audit of the Fund by the Auditor-General on whether the payments from the Fund have been made in accordance with the Act.

The Department of Customer Service administers the Fund. It prepared the Fund's inaugural special purpose financial report for the period from 3 August 2020 to 30 June 2021.

Audit opinions

Unqualified audit opinions were issued on agencies' financial statements

Unqualified audit opinions were issued on all cluster agencies' 30 June 2021 financial statements. Sufficient and appropriate audit evidence was obtained to conclude the financial statements were free of material misstatement.

Unqualified audit opinion was issued on a compliance audit of Digital Restart Fund

The Digital Restart Fund Act 2020 (the Act) created the Digital Restart Fund on 3 August 2020. The Act requires the Fund to prepare an annual report which includes an audit on whether the payments from the Fund have been made in accordance with the Act.

Unqualified audit opinion was issued on the compliance audit. Sufficient and appropriate audit evidence was obtained to conclude, in all material respects, payments from the Fund have been made in accordance with section 9 of the Act for the period 3 August 2020 to 30 June 2021.

The number of identified monetary misstatements decreased in 2020–21

The number of monetary misstatements identified during the audit of the financial statements decreased from 48 in 2019–20 to 46 in 2020–21. A monetary misstatement is an error in amount recognised in the financial statements initially submitted for audit.

Reported corrected misstatements decreased from 41 in 2019–20 to 33 with a gross value of $418.9 million in 2020–21. Reported uncorrected misstatements increased from seven in 2019–20 to 13 with a gross value of $78.0 million in 2020–21.

The table below shows the number and quantum of monetary misstatements for the past two years. 

Source: Engagement Closing Reports issued by the Audit Office of New South Wales.

Refer to Appendix one for details of corrected and uncorrected monetary misstatements by agency.

Of the 33 corrected misstatements, 15 had a gross value of greater than $5.0 million and primarily related to:

• Long Service Corporation initially classified the liability of long service entitlements for some building and construction industry workers as non-current based on their expected settlement date. However, the liability should be classified as current as the workers had an unconditional right to the entitlements. The subsequent correction resulted in a $136.6 million transfer from non-current to current liabilities at 30 June 2021.
• The Department of Customer Service (the department) derecognised appropriations received but not controlled by the department from 'revenue' of $90.7 million to 'transfer payments' in 2020–21 ($69.2 million in 2019–20). These payments were pass-through grants from the department to cluster agencies.
• The department understated the valuation of the land tilting database by $31.5 million. The understatement was caused by inappropriate assumptions and inputs applied in the valuation model.
• The department reclassified $25.2 million administrative fee of Rental Bond Board from 'sale of goods and services from contracts' to 'other revenue'. The department incorrectly applied AASB 15 'Revenue from Contracts with Customers' to this revenue stream as there was no contract between the department and Rental Bond Board for this administrative service.
• The department reclassified $23.0 million of digital restart funding from 'contract liabilities' to 'grants and contributions' revenue as the department met the grant conditions related to the funding. It was no longer a liability for the department.
• Independent Liquor and Gaming Authority (ILGA) recognised $12.5 million revenue and receivable of Bergin Inquiry costs recovered from Crown Resorts Limited; and $12.5 million expense and liability for the transfer of the Bergin Inquiry legal cost recovery to the department. ILGA did not recognise these transactions initially but disclosed it as a post-balance sheet date event as ILGA accepted Crown Resorts Limited's cost recovery offer on 1 July 2021. However, the ability to recover $12.5 million was virtually certain and evidenced by Crown Resorts Limited's offer letter received in May 2021. ILGA has a constructive obligation to return legal cost recovery to the department to the extent of Bergin Inquiry funding provided by the department.
• New South Wales Government Telecommunications Authority (the Authority) incorrectly disclosed transactions relating to major programs totalling $12.1 million as 'administered items'. This treatment was based on management’s judgement that the Authority did not have control of these programs. However, the Authority had discretion to deploy the resources for the achievement of the Authority's objectives. The Authority corrected this misstatement by recognising related assets, liabilities, revenue and expenses of these programs in the financial statements.
• The department wrote off $10.1 million office occupancy related costs receivable from cluster agencies. The office occupancy costs were incurred on behalf of cluster agencies. However, the costs were not subsequently recharged to cluster agencies.
• The department recognised additional $9.6 million impairment of right-of-use assets to reflect the latest published market rent forecast in June 2021.

Of the 13 uncorrected misstatements, four had a gross value of greater than $5.0 million. These were:

• The department recognised new land titling records in the land titling database as a revaluation movement instead of an adjustment to 'grant of the right to the operator' liability ($35.2 million). More details related to the nature of this misstatement is included in Section 2.4 of this report.
• The department overstated property leases related balances by incorrectly applying a collar clause in the event of market rent review ($17.1 million) in the lease calculation model.
• The department incorrectly recognised a liability for grants and subsidies when the department has no present obligations to provide grant funding at 30 June 2021 ($14.0 million).
• The department overstated 'grants and contributions' revenue relating to Digital Restart Fund capital funding at 30 June 2021 ($6.0 million). The funding was yet to be spent therefore the department could not recognise it as revenue but a liability.

These uncorrected misstatements were not material to relevant agencies' financial statements.

New financial reporting provisions became effective from 1 July 2021

The financial reporting provisions in Division 7.2 of the Government Sector Finance Act 2018 (GSF Act) commenced on 1 July 2021. Agencies prepared their annual GSF financial statements for the 2020–21 financial year under Division 7.2 of the GSF Act.

One agency exempted from financial reporting in 2020–21

Part 3A Division 2 of the Government Sector Finance Regulation 2018 (GSF Regulation) prescribes certain kinds of GSF agencies not to be a reporting GSF agency. For 2020–21, the Office of the Greyhound Welfare and Integrity Commission, a staff agency, assessed and determined it met the reporting exemption criteria under the GSF Regulation, and therefore was not required to prepare annual financial statements.

In 2019–20, the Office of the Greyhound Welfare and Integrity Commission was also exempted from financial reporting under Schedule 2 of the Public Finance and Audit Regulation 2015.

Early close procedures

Early close mandatory procedures were not submitted on time

There were eight cluster agencies required by NSW Treasury to perform early close procedures. Only one of the eight agencies met the statutory deadlines for submitting their 2020–21 early close financial statements and other mandatory procedures. Agencies that delayed their submission of certain early close mandatory procedures were:

• Department of Customer Service
• Service NSW
• New South Wales Government Telecommunications Authority
• Long Service Corporation
• Information and Privacy Commission
• Rental Bond Board
• State Insurance Regulatory Authority.

The delay was due to agencies:

• not performing an assessment for accounting standards issued but not yet effective and concluding if these will have a material effect
• not completing their review and documentation of significant management judgements
• not implementing a formal process to confirm all significant inter and intra agency balances and transactions
• not performing or not completing their documented review of property leases.

The table below summarises the agencies' completion of the 16 mandatory early close procedures, noting that some procedures are not relevant to all agencies. The 16 procedures are listed at Appendix one.

Agencies need to improve their completion of early close procedures

Seven cluster agencies did not complete all required procedures at early close. Some procedures were not performed adequately to address the requirements of Treasurer's Directions.

The review of agencies' early close procedures found more work needs to be done to:

• complete the impact assessment of revenue arrangements against AASB 15 'Revenue from contracts with customers', AASB 1058 'Income of Not-for-Profit Entities' and TPP 21-03 'Administered Items'
• finalise comprehensive revaluation of assets in time for early close
• complete inter and intra (cluster) confirmation of balances and transactions
• perform impairment assessment of assets including right-of-use assets
• document significant judgements and estimations applied in preparing the proforma financial statements.

NSW Treasury introduced early close procedures to improve the quality and timeliness of year-end financial statements. In March 2021, NSW Treasury reissued Treasurer’s Direction TD19-02 ‘Mandatory Early Close as at 31 March each year’ (TD19-02) and issued TPP21-01 ‘Agency Direction for the 2020–21 Mandatory Early Close’, requiring GSF agencies listed in Appendix A of TD 19-02 to perform early close procedures and provide the outcomes to the audit team by 26 April 2021. 

Year-end financial reporting

NSW Treasury extended financial reporting deadlines

Due to the COVID-19 pandemic, NSW Treasury extended the year-end financial reporting deadline for agencies listed in Appendix A of Treasury Direction TD21-02 'Mandatory Annual Returns to Treasury' (TD21-02) to 2 August 2021.

During May and June 2021, NSW Treasury issued a suite of Treasurer's Directions, Treasury Circular and policy papers for 2020–21 financial reporting requirements and timetables:

• Treasurer's Direction TD21-02 and Treasury Policy Paper TPP21-04 'Agency Direction for the 2020–21 Mandatory Annual Returns to Treasury' require agencies listed in the Appendix A of TD21-02 to submit their 2020–21 financial statements to both NSW Treasury and the Audit Office by 26 July 2021
• Treasury Circular TC21-04 '2020–21 Mandatory Annual Returns to Treasury for non-GSF agencies' requires NSW public sector agencies not listed in Appendix A of TD21-02 to submit their draft 2020–21 financial statements to NSW Treasury by 26 July 2021
• Treasurer's Direction TD21-03 'Submission of Annual GSF Financial Statements to the Auditor-General' requires reporting GSF agencies that are not listed in Appendix A of TD21-02 to submit their annual financial statements within six weeks after the year-end.

The following agency obtained NSW Treasury's approval to further delay submission of their 30 June 2021 financial statements:

Financial statements were submitted on time

Cluster agencies met the revised or approved reporting deadlines for submitting their 2020–21 year-end financial statements.

On 1 July 2021, the Public Finance and Audit Act 1983 (PF&A Act) was renamed the Government Sector Audit Act 1983 (GSA Act). Whilst the PF&A Act required the Auditor-General to audit agencies' financial statements within ten weeks of their receipt, the GSA Act does not specify the statutory deadline for issuing the audit reports. The audits of all cluster agencies financial statements have been completed.

The table in Appendix three shows the timeliness of the year-end financial reporting for cluster agencies.

The department reported retrospective corrections of prior period errors

Material misstatements identified in the implementation of AASB 1059 ‘Service Concession Arrangements – Grantor’

The department has a service concession arrangement with a private sector entity, Australian Registry Investments (trading as NSW Land Registry Services), to operate the NSW land titling registration concession. A service concession arrangement contractually obliges the private sector operator to create and maintain land titling records on behalf of the Department. Under the concession deed, the department controls the land titling database. The private sector operator is responsible for maintaining and operating the land titling database.

In 2017, the department received $2.7 billion from the private operator in consideration for the right to operate the NSW Land Titling Registry. The $2.7 billion upfront cash consideration was recorded as a 'service concession liability' and subsequently recognised as 'revenue' progressively over the concession period.

In 2020–21 AASB 1059 'Service Concession Arrangements: Grantors' became effective for all NSW public sector agencies. The new standard addressed the lack of specific guidance for public sector grantors or service concessions, and to minimise divergence of accounting practices for arrangements involving these arrangements. The department assessed its service concession arrangement and concluded that it was within the scope of AASB 1059.

The implementation of AASB 1059 had a significant impact on the department's financial statements. Upon initial adoption of AASB 1059 at 1 July 2020, the department recognised:

• an increase in service concession assets of $845 million at 1 July 2019
• an increase in accumulated funds of $845 million at 1 July 2019.

AASB 1059 mandates the use of current replacement cost as the fair value approach to measure service concession assets. The valuation of an intangible service concession asset requires significant judgements and estimations. The majority of valuation data inputs were sourced from the private operator. It is important that the department has appropriate systems, processes and resources to implement the new accounting standard. We found that the department had made some necessary modifications to system and processes to implement AASB 1059 in 2020–21. The main issues identified during the audit include:

• late resolution of valuation judgements and assumptions resulted in delays in submitting related balances and disclosures in the financial statements
• material exceptions in the data and assumptions applied in valuing the land titling database resulted in material adjustments to the financial statements which were corrected
• validation required to verify valuation data input and assumptions applied by the private operator.

The department engaged an external valuer to value the land titling database. There were material exceptions in data and valuation assumptions. These resulted in an increase in the valuation of land titling database from initial valuation of $575 million to $845 million at the first day of implementation (1 July 2019). The department corrected this misstatement before it submitted the financial statements.

The current replacement cost of the database included direct labour costs and overhead costs provided by the private operator. Some of the data, including the allocation of staff across different registers in the database, were not sourced directly from the private operator's audited financial statements. The department is yet to implement a validation process to verify unaudited valuation data and assumptions.

A performance audit of integrity of data in the land titles registry is planned for 2021–22 to 2022–23. It will examine how effectively the Registrar General monitors the private operator's operation of the land titles registry in respect of defined service levels, key performance indicators and the integrity and security of the data in the register.

Uncertainty exists in applying AASB 1059 to account for new land titling records

Under AASB 1059, the department (the grantor) should recognise an increase in service capacity of the land titling database as a service concession asset and a corresponding liability. As the department does not have a contractual obligation to pay cash or another financial asset to the operator for the increase in service capacity of the land titling database, and instead grants the operator the right to earn revenue from third-party users, the department should recognise a 'grant to a right to the operator' (GORTO) liability as the unearned portion of the revenue arising from the exchange of assets between the grantor and the operator.

The department recognised new records in the land tilting database in 2019–20 and 2020–21 as a revaluation movement instead as an increase in GORTO liability. It could be reasonably argued that the new records increase the service potential of the database as they provide currency and completeness of land titling information in the database. In this case, new records would be considered as updates to the database contributed by the private operator and increased the GORTO liability. The accounting difference is $35.2 million which the audit team reported it as uncorrected misstatements in the Department’s financial statements.

Valuation of plant and equipment

New South Wales Government Telecommunications Authority valued its plant and equipment for the first time

The New South Wales Telecommunications Authority (the Authority) obtained an independent valuation of plant and equipment for the first time. At 30 June 2021, The Authority recorded $401.9 million as 'plant and equipment'. Of this amount, $216.6 million was the value of 'assets under construction' relating to the Critical Communications Enhancement Program which is expected to be completed in December 2024.

The audit team identified exceptions in the valuation input testing and assumptions, resulted in material changes to the valuation outcome. The valuation movement changed from $50,000 valuation decrement to $9.4 million valuation increment. Other observations include:

• The valuation was not completed in time for early close due to the complexity of valuing telecommunication assets and the delay in engaging an independent valuer to perform the valuation.
• The allocation methodology of overhead including program management, network integration and construction, design and installation costs to individual assets within plant and equipment was not formalised on a timely basis to ensure consistent and reasonable allocation of these costs.
• Fixed assets register was not used for its annual stocktake and valuation source which raises concern over the completeness, accuracy and existence of assets subject to valuation. The valuer used the asset listing which is used by the Authority's external service provider for its maintenance program. The external service provider's asset listing was not reconciled to the fixed assets register.
• The fixed assets register is yet to be updated to reflect the outcome of the valuation including the revised useful lives of assets.

Delivery of COVID-19 stimulus packages

Material misstatements from accounting of COVID-19 stimulus packages

The Customer Service cluster is responsible for delivering a series of NSW Government’s financial assistance, support measures and tax relief to help businesses and people across the state impacted by the COVID-19 restrictions. These include Dine and Discover NSW voucher scheme, payroll tax concessions, payroll tax deferral and gaming machine tax deferral.

In our early close audit, we reported delays in finalising the accounting assessment of government grants and subsidies, which resulted in material corrected misstatements in the department's financial statements (refer to previous commentary on the department's corrected misstatements and prior period errors relating to administered items).  

Impairment of assets

Impairment of assets due to uncertainty on the direction of an IT program

The department led the implementation of a cross-cluster shared services and Enterprise Resource Planning (ERP) systems rationalisation program named ERP 2.0, a strategic and collaborative five-cluster approach to standardise the ERP programs across five of the eight clusters:

• Treasury
• Customer Service
• Planning, Industry and Environment
• Premier and Cabinet
• Stronger Communities.

The Secretaries Board endorsed this program which started on 1 July 2019 with estimated investment of $177.3 million ($125 million capital and $52.3 million operating) over four years. The program had completed strategic and design phases. The department was originally included in the ERP program scope and was a key player along with the other clusters, however its involvement in the program has been delayed and the program is moving to Stronger Communities as the new sponsor.

The department spent $23.0 million in 2020–21, which is funded by the Digital Restart Fund, on Enterprise Resource Planning (ERP) 2.0 and whole-of-government SAP licenses. At year-end, the department recorded an impairment loss of $21.5 million in the financial statements for costs capitalised during the year. The impairment was based on management assessment that the future economic benefits of these costs to the department expired when the Secretary Board changed the future direction and sponsor of this program on 12 August 2021. Management's view was that there was significant uncertainty on this direction and role of the department under the new arrangement. 

The table below details our specific audit coverage and response over key areas of financial statements risks that had the potential to impact the financial statements of cluster agencies.

Department of Customer Service

The department of Customer Service is an integrated customer service government department. It aims to plan, prioritise, fund and drive digital transformation and customer service across every Cluster in the NSW Government.

Service NSW

Service NSW delivers one-stop-shop services for customers, businesses and partner agencies. It delivers transactional services on behalf of NSW Government agencies. Service NSW holds money in a Trust Fund which it performs only a custodial role in respect of these monies. The Trust Fund cannot be used for the achievement of Service NSW’s own objectives therefore transactions related to the fund are not recognised as 'revenue', 'expense', 'assets' and 'liabilities' in the financial statements. 

Long Service Corporation

Long Service Corporation (the Corporation) administers portable long service schemes in NSW for building and construction industry and contract cleaning industry. 

Rental Bond Board

The Rental Bond Board (the Board) is the independent custodian of rental bonds paid by tenants to landlords for residential tenancies. Landlords must lodge tenants' bond money with the Board.

New South Wales Government Telecommunications Authority

The New South Wales Government Telecommunications Authority (the Authority) leads sector-wide reform and delivery of government operational communications to enable stakeholders to better respond to the NSW community.

State Insurance Regulatory Authority

State Insurance Regulatory Authority (SIRA) regulates motor accidents CTP insurance, workers compensation insurance and the home building compensation scheme in NSW.

Office of Independent Review Officer

The Office of the Independent Review Office (the Office) was newly established on 1 March 2021. The Office manages and administers the Independent Legal Assistance and Review Service (ILARS). Grants of funding are provided by the Office to enable injured eligible workers to obtain independent legal advice, assistance and representation in respect to their rights and entitlements to workers compensation benefits.

Independent Liquor and Gaming Authority

The Independent Liquor & Gaming Authority (the Authority) is a statutory decision-maker responsible for a range of casino, liquor, registered club and gaming machine regulatory functions including determining licensing and disciplinary matters under the gaming and liquor legislation.