The 2021–22 comprehensive revaluation of service concession asset (land titling database) identified that the valuation from 2019 to 2021 were overstated due to incorrect input in the valuation model. These errors were corrected retrospectively in the financial statements by:

• decreasing the prior year comparative for service concession asset by $33.3 million
• decreasing the prior year comparative for accumulated funds by $34.1 million
• increasing the prior year comparative for asset revaluation reserve by $880,000
• increasing the prior year comparative for other losses by $4.8 million
• decreasing 1 July 2020 accumulated funds by $29.4 million.

The department corrected the misstatements arising from incorrect accounting of data centre head lease modification and the impact on data centre sub-lease arrangements relating to:

• understatement of right-of-use assets by $14.4 million and lease liabilities of $18.4 million
• understatement of lease-related expenses and gain from disposal of right-of-use assets by $4 million
• understatement in depreciation expenses by $5.4 million
• understatement in investment income and gain from disposal of leased assets of $5.4 million.

The department corrected the misstatements from equity transfer of certain assets and liabilities from the department to DEIT on 1 April 2022 relating to:

• overstatement of accumulated funds by $9.9 million
• understatement of payables, provisions and other liabilities by $9.1 million
• overstatement of receivables and contract assets by $1.7 million
• understatement in operating expenses by $2 million
• understatement of sales of goods and services by $1.1 million.

The department adjusted the incorrect transfer of funding from the department to the Digital Restart Fund (DRF) by:

• recognising a receivable from DRF of $5.8 million
• reducing grants and subsidies expenses by $5.8 million.

The department wrote-off intangible assets that were no longer in use by:

• derecognising accumulated amortisation by $6.7 million
• recognising impairment loss of $1.8 million
• derecognising intangible assets of $6.7 million
• derecognising depreciation and amortisation expense of $1.8 million.

The department adjusted the incorrect classification of costs from 'consultancy expenses' to 'fees and charges' by $5.1 million.

The authority corrected the classification of the unspent funding of $6.6 million from the Critical Communications Enhancement Program from contract liabilities to other liabilities.

The authority corrected an understatement of $9 million revaluation increment in its interim revaluation of plants and equipment because of valuation indices movements.

The authority adjusted an understatement of $6.3 million make good provision due to increase in costs estimates.

The corporation reassessed when it should recognise building and construction levies as income, and when they are payable to the corporation under instalment plans. Legal advice obtained in 2021–22 supported the recognition of instalment plan levies as income entirely up front, whereas in previous years the corporation recognised the income in line with agreed instalment plans. Based on the new interpretation, the corporation's:

• levy income was overstated, and opening equity understated, by $19.9 million in 2021–22
• levy income and receivables were understated by $19.9 million in 2020–21.

The corporation's net assets at 30 June 2022 are not impacted by the above misstatement. As the corporation assessed the $19.9 million to be immaterial, it was not corrected in its 2021–22 financial statements.

Long Service Levies are payable under the Building and Construction Industry Long Service Payments Act 1986 at the rate of 0.35% of the value of building and construction of $25,000 or above. The levies are due and payable before work commences on the construction of the building.

Significant management judgements and assumptions

Management has not updated the proforma financial statements with significant judgements and assumptions applied when estimating the following transactions and account balances, except for the valuation of land and buildings. The delay was caused by the following unresolved accounting issues at the time of completing early close procedures:

• Valuation of service concession asset (land titling database) which management planned to obtain at 30 June 2022.
• Impact assessment of the change in office accommodation lease arrangements with Property NSW (PNSW).
• Impact assessment of data centre lease modification on its head lease and sub-lease accounting.
• Documentation of key assumptions and judgements applied in the corporate costs and administrative fee allocation models.

Finalise right-of-use assets and lease liability balances

Management has not performed and documented their review of the department’s lease arrangements.

This was due to delay in completing the impact assessment of:

• the change in office accommodation lease arrangements with PNSW
• data centre (secure IT data storage) lease modifications on its head lease and sub-lease with other agencies.

Finalise assessment of all revenue contract 

Management's assessment of funding arrangements and agreements of appropriations (totalling $12.8 billion), and grants and contributions received during the period against TPP21-03 'Administered items', AASB 15 ' Revenue from Contracts with Customers' and AASB 1058 'Income of Not-for-Profit Entities', was incomplete. It did not include the supporting documents for the assessment and lacked analysis to justify its conclusion.

Significant management judgements and assumptions

A paper was not finalised on time for early close to support management's significant judgements and assumptions used when estimating the following transactions and account balances:

• accounting valuation of scheme liabilities
• valuation of financial assets at fair value.

Fair value assessment of property, plant and equipment

At early close, the authority did not complete an:

• annual stocktake of assets including inspection of physical condition and functionality assessment of plant and equipment. The annual stocktake was in progress and the results were not available at early close
• annual review of assets’ useful lives and residual values
• impairment assessment of plant and equipment and work in progress including impact assessment of natural disaster (for example, recent floods).

Revaluation of property, plant and equipment

The authority did not apply relevant indexation to the equipment costs for certain assets as part of its interim valuation of plant and equipment to ensure net carrying amount of plant and equipment remain materially at fair value.

Interim valuation could not be completed due to outstanding annual stocktake and impact assessment of natural disaster (for example, recent floods) on plant and equipment.

Finalise right-of-use assets and lease liability balances

The authority was in the process of migrating lease data from lease system 'Anaplan' to 'SAP RE' at early close and had not finalised its reconciliation between the two systems and the lease-related balances at early close.

Significant management judgements and assumptions

A paper was not finalised on time for early close to support management's significant judgements and assumptions used when estimating the following transactions and account balances:

• Plant and equipment – impairment, useful lives and fair value assessment.
• Receivables and provisions due to delays in its projects construction arising from natural disasters and insurance claims with Insurance and Care NSW (iCare).
• Data centre lease modifications.

Finalise assessment of all revenue contracts

Management did not complete its revenue assessment of the claw back of $90.6 million private insurers' profit under AASB 15 ‘Revenue from Contracts with Customers’ or AASB 1058 ‘Income of Not-for-Profit Entities’.

Inter and intra (cluster) agency transactions and balances

Service NSW did not confirm the transactions and balances for amounts held on behalf of other agencies and administered items.

Significant management judgements and assumptions

Significant management judgements and assumptions applied for the following transactions and events were incomplete:

• Management's assessment of administered items including COVID-19 and flood grant programs against AASB 1050 ' Administered Items' and TPP 21-03 'Administered Items' was incomplete. It did not include supporting documents for the assessment and lacked analysis to support its conclusion.
• No impact assessment of the recovery of fraudulent and non-compliance grants on the financial statements.
• No accounting assessment of administration revenue of $171 million from administering stimulus grant programs.

Finalise assessment of all revenue contracts

Management has not performed and documented their review of Service NSW’s revenue contracts including the administration revenue of $171 million and $18.5 million grants from Digital Restart Fund.

Material transactions are not supported by appropriate delegations

The board did not have delegations in place to expend money from its Rental Bond Interest Account.

Finalise right-of-use assets and lease liability balances

Management did not finalise assessment of its new office accommodation arrangement with the Department of Customer Service against AASB 16 'Leases'.

Prior year Management Letter and Engagement Closing Report

Management was yet to address prior year Management Letter issues related to:

• implementing a financial reporting process to record accruals and provisions
• recognising provision for Independent Legal Assistance and Review Service (ILARS) grants obligations that are subject to uncertainty in timing or amount.

• Derecognition of $324 million of right-of-use assets.
• Derecognition of $425.4 million of lease liabilities.
• Recognition of $101.4 million of other gains.

• Derecognition of $110.6 million of right-of-use assets.
• Derecognition of $120.4 million of lease liabilities.
• Recognition of $7.9 million of other gains.
• Recognition of $1.9 million of lease incentive liability.

Our audit procedures included:

• evaluating and testing the design and implementation of relevant controls in the financial reporting of service concession asset
• assessing the competency, capability and objectivity of management's independent valuation expert
• assessing the appropriateness of the methodology, key assumptions and judgements adopted
• testing the key inputs and mathematical calculation of the valuation model
• assessing the adequacy of the financial statement disclosures against the requirements of applicable Australian Accounting Standards and NSW Treasurer's Directions.

Our audit procedures included:

• evaluating the design and testing operating effectiveness of controls over key administered revenue streams, including land tax, payroll tax, duties, gaming machine taxes and mineral royalties
• recalculating key administered revenue streams for reasonableness against the requirements of the relevant taxation legislation
• testing the adjustments of administered revenue. The adjustments captured material deferrals in lodgements of returns for self-assessed taxes as part of the COVID-19 stimulus packages up until the date of signing the financial statements
• assessing the methodology and assumptions used to estimate the allowance for impairment related to administered taxation receivable against historical recoverability rates and write-off of debt for reasonableness
• recalculating the allowance for impairment recognised for mathematical accuracy
• assessing the adequacy of the financial statement disclosures against the requirements of applicable Australian Accounting Standards and NSW Treasurer’s Directions.

Our audit procedures included:

• evaluating and testing the design and implementation of relevant controls in the financial reporting of property, plant and equipment
• assessing the appropriateness of the methodology, key assumptions and judgements adopted in the valuation and impairment of plant and equipment
• testing the key inputs and mathematical calculation of the fair value and impairment assessment of plant and equipment
• testing the movements in property, plant and equipment on sample basis
• reviewing the results of comprehensive stocktake on plant and equipment and management's action to address the results of stocktake
• assessing the adequacy of the financial statement disclosures against the requirements of applicable Australian Accounting Standards and NSW Treasurer's Directions.

Department of Customer Service

Repeat finding:

Qualifications and control deviations in GovConnect NSW controls assurance reports

The department's Information Technology General Controls (ITGC) internal control assurance report was qualified. The Infosys ITGC report had three control deviations and Infosys payroll report had one control deviation.

The qualification on the department's ITGC report was due to some ineffective controls to ensure all access to systems, applications and data is authorised and appropriate to the user’s job responsibilities during 1 July 2021 to 30 June 2022.

The control deficiencies in ITGC increase the risk of:

• unauthorised transactions, system and configuration changes (such as workflow approvals, three-way match) and modifications to the system reports
• incomplete, invalid and inappropriate system access, segregation of duties and system reports for the GovConnect customers.

While improvement was noted in the number of control deficiencies, the qualification in the department and control deviations in Infosys were repeated. Our 2021 Management Letter and 2021 Customer Service Auditor-General’s Report to Parliament recommended management to perform data analytics on GovConnect transactions. This recommendation was not implemented in 2021–22.

This matter was assessed as high risk, because if not adequately addressed, it had the potential to result in material fraud and error in the department's financial statements and reputation damages. This issue is further discussed later in this chapter.

Department of Customer Service

Repeat finding:

Change management significant control deficiencies

Revenue NSW, a division of the department, has a key role in managing the State’s finances. It administers State taxes, manages fines, recovers State debt, and administers grants and subsidies. A key control over the IT change process is restricting or limiting the access of staff with system development responsibilities to the live business systems. This ensures appropriate segregation of duties, governance and integrity of the IT system change controls process. Bamboo is a tool used by management to release IT changes to the live business systems. We identified the following access control deficiencies within the Bamboo tool:

• Appropriate access controls were not in place within the Bamboo tool to restrict developers from releasing changes to the live business systems.
• Eight developers had access to the Bamboo tool that gives them direct access to the business application servers used for calculating and administering State taxes.

The audit assessed this matter as a high-risk management letter finding because it can significantly affect the integrity of tax calculation, business process approvals, invalid changes to bank accounts, unauthorised refunds and write-offs. While management have taken several steps to remediate this issue, the risk is still unresolved in the 2021–22 financial year.

Service NSW

New finding:

Grant administration revenue recognition and cost recovery

Service NSW administered a range of economic stimulus and disaster recovery support programs in 2021–22. Service NSW signed grant project agreements which had a requirement for the Secretary, NSW Treasury, to sign-off the finalised grant administration costings and funding source for the administration costs once they were determined.

Service NSW recognised $256 million grant administration revenue and withdrew this amount of cash from a few administered bank accounts without NSW Treasury's approval in 2021–22. The audit identified significant controls deficiencies associated with Service NSW's administration and financial reporting of these programs.

The accounting matter discussed above, and these control deficiencies, were assessed as high risk as it could result in material misstatements in the financial statements. This issue is further discussed later in this chapter.

Rental Bond Board

Repeat finding:

Accounting treatment of rental bonds held in trust

The board held rental bonds, totalling $1.8 billion at 30 June 2022 ($1.7 billion at 30 June 2021), paid by tenants to landlords for residential tenancies. The board continues to hold the rental bonds off-balance sheet and disclosed the rental bonds as ‘trust fund’. This treatment is based on management’s judgement that the board does not have control of the bonds.

Previously the board obtained advice from the Crown Solicitors. They stated that in their view the rental bond funds held in the rental bond account were not moneys held in trust and the Residential Tenancies Act 2010 (the Act) should be reviewed and amended to better support its accounting treatment of rental bonds. The board has initiated the need to amend the Act, however the implementation of the legislative amendments is still pending. Our 2020 and 2021 Management Letters and Auditor-General’s Reports to Parliament raised this as a high-risk issue and the matter remains unresolved.

This matter was assessed as high risk, as if not adequately supported, it had the potential to result in material misstatements in the board's financial statements.

Rental Bond Board

New finding:

Delegation instrument for the Rental Bond Interest Account

The Residential Tenancies Act 2010 established a Rental Bond Interest Account from which the board's operating expenses are paid. There is no delegation instrument from the Commissioner for Fair Trading (the Commissioner) to government officers authorising them to approve expenditure. The Rental Bond Board paid $4.6 million in operating expenses from the Rental Bond Interest Account without an authorised delegation from the Commissioner in 2021–22.

This matter was assessed as high risk as this resulted in non-compliance with section 186 of the Residential Tenancies Act 2010 and section 5.5 of the Government Sector Finance Act 2018. This non-compliance is reported in the 2022 Independent Auditor’s Report as an ‘other matter’.

High: 2 repeat ¹

Moderate: 1 new, 9 repeat ²

Low: 5 repeat ³

The financial audits identified opportunities for agencies to improve information technology processes and controls that support the integrity of financial data used to prepare agencies' financial statements. Of particular concern are issues associated with:

• internal control exceptions in information and technology services provided by GovConnect service providers
• inadequate change management controls
• poor user access administration and no monitoring of privileged user activities
• insufficient cyber security controls and processes.

High: 1 new ¹

Moderate: 6 new, 1 repeat ²

Low: 7 new, 2 repeat ³

The financial audits identified internal control deficiencies across key business processes, including:

• significant deficiencies in the cost allocation methodology for administering COVID-19 and flood grant programs, and approval for administration cost recovery
• control exceptions and misstatements identified through data analytics of payroll and accounts payable
• timeliness of review over monthly account balance reconciliations and clearing reconciling items.

High: 1 repeat ¹

Moderate: 4 new, 6 repeat ²

Low: 2 new, 3 repeat ³

The financial audits identified opportunities for agencies to strengthen financial reporting, including:

• uncertainties in legislation to support accounting of rental bonds as funds held in trust
• quality and timeliness of accounting papers for key accounting matters to support their recognition, measurement and disclosures in the financial statements
• improvements required in lease accounting and fixed asset management to ensure accuracy and completeness of recognition, measurement and disclosure of related transactions.

Moderate: 3 new ²

Low: 1 new, 1 repeat ³

The financial audits identified opportunities for agencies to improve governance and oversight processes, including:

• establishing a risk management plan and accounting policy for Transitional Excess Profits and Losses (TEPL) mechanism, which is applied to adjust motor accidents Compulsory Third Party (CTP) insurance fund levies to avoid or minimise transitional excess profits and transitional excess losses in private insurers
• renewing or finalising service arrangement agreements between agencies.

High: 1 new ¹

Moderate: 3 new, 3 repeat ²

Low: 1 new, 1 repeat ³

The financial audits identified the need for agencies to improve its compliance with key legislation and central agency policies, including:

• non-compliance with Residential Tenancies Act 2010 and the Government Sector Finance Act 2018 due to no delegation instrument to authorise expenditure
• non-compliance with contract and procurement management policy
• annual leave in excess of 30 days where Circular 2020-12 'Managing Accrued Recreation Leave Balances' requires agency heads to reduce employee recreation leave balances to 30 days or less.

As patching addresses known vulnerabilities, leaving IT systems unpatched at the operating system, database or application levels increases the opportunity for attackers to exploit those known vulnerabilities. Patching is also used to provide system functionality updates and fix defects.

The long outstanding system patches increase the risk of exploitation.

Late assessment of revenue resulted in misstatements

The financial reporting implications associated with administering these programs was not assessed at early close, including whether it administered or controlled each program, and how it would account for the revenue for administering the programs. These assessments were not performed until requested by the audit.

Grant project agreements were not reviewed by Service NSW’s finance team to identify whether these agreements met criteria for revenue recognition under AASB 15 'Revenue from Contracts with Customers' or AASB 1058 'Income of Not-for-Profit Entities'. Subsequent discussions with NSW Treasury resulted in Service NSW changing the basis of recognition of administration revenue from AASB 15 to AASB 1058.

• Mandated early close procedure was not completed.
• Incorrect recognition of revenue related to the grant administration.

Withdrawal of funds without approval from NSW Treasury

Many of the project agreements required the Secretary, NSW Treasury, to sign-off on the finalised costings and funding source for Service NSW's administration costs. Service NSW recognised $256 million in grant administration revenue and withdrew this amount of cash from bank accounts related to the administered grant programs without prior written sign-off from NSW Treasury.

• Administrative breach of project agreements with NSW Treasury.

Late request for approval to recover 2021–22 grant administration costs

Service NSW did not write to the Secretary, NSW Treasury, for approval of its administration costs until late September 2022 when requested by the audit. In the letter to NSW Treasury, Service NSW requested approval to recover $252 million administration costs from the grant appropriations given to administer grant programs.

The Secretary, NSW Treasury, advised Service NSW that the administration costs it had incurred were reasonable and within an expected range of a program's administration expenditure on 21 November 2022.

• Significant adjusting events may occur that require changes to the financial statements.
• Significant delays to finalise financial reporting and audit.

Unable to quantify administration costs for each grant program

Service NSW had no documentation to support its cost allocation methodology and only prepared assessment at the request of the audit.

The methodology to allocate administration costs to different grant programs was not robust, and Service NSW did not have the financial controls, systems and processes to enable it to accurately quantify the costs incurred in administering each program. The methodology was heavily reliant on high-level judgements and assumptions.

• Incorrect revenue amount being recognised.

System errors resulted in overpayments

Overpayments of grants were caused by system errors where payments were incorrectly triggered more than once. Service NSW is currently reviewing these exceptions before commencing funds recovery.

• Financial loss that the NSW Government that may not be able to recover.