Machinery of Government (MoG) refers to how the government organises the structures and functions of the public service. MoG changes are where the government reorganises these structures and functions that are given effect by Administrative orders.

The Administrative Arrangements (Administrative Changes - Miscellaneous) Order (No.3) 2023, effective 3 May 2023, transferred the administration of the Independent Pricing and Regulatory Tribunal Act 1992 from the Minister of Customer Service to the Premier. On 1 July 2023, the Cabinet Office was established under the Administrative Arrangements (Administrative Changes – Miscellaneous) Order (No 4) 2023. Independent Pricing and Regulatory Tribunal is shown as an independent agency under the Cabinet Office portfolio in the NSW Government’s Governance Arrangements Chart, effective 1 July 2023.

This report is focused on agencies in the Customer Service portfolio as at 30 June 2023.

Audit opinions

Unqualified audit opinions were issued on agencies’ financial statements

Unqualified audit opinions were issued on all completed 30 June 2023 financial statements audits of the portfolio agencies. Sufficient and appropriate audit evidence was obtained to conclude the financial statements were free of material misstatement.

Two audits are ongoing, including:

• Digital Restart Fund
• NSW Shared Equity Scheme Fund.

The number of identified monetary misstatements decreased in 2022–23

The number of monetary misstatements identified during the audits of portfolio agencies’ financial statements decreased from 39 in 2021–22 to 15 in 2022–23. A monetary misstatement is an error in amount recognised in the financial statements initially submitted for audit.

Reported corrected misstatements decreased from 30 in 2021–22 to nine with a gross value of $102.3 million in 2022–23 ($406 million in 2021–22). Reported uncorrected misstatements decreased from nine in 2021–22 to six with a gross value of $12.4 million in 2022–23 ($31.8 million in 2021–22).

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

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

Of the nine corrected monetary misstatements, three had a gross value of greater than $5 million and related to the following:

Of the six uncorrected monetary misstatements, none had a gross value of greater than $5 million.

Early close procedures

Some portfolio agencies did not submit certain early close mandatory procedures on time

NSW Treasury introduced early close procedures to improve the quality and timeliness of year-end financial statements. In February 2023, NSW Treasury reissued Treasurer’s Direction TD19-02 ‘Mandatory Early Close as at 31 March each year’ (TD19-02) and reissued Treasury Policy and Guidelines TPG22-11 ‘Agency Direction for the 2022–23 Mandatory Early Close’. These pronouncements require the GSF agencies listed in Appendix A of TD19-02 to perform the mandatory early close procedures and provide the outcomes to the audit team by 27 April 2023. The 17 mandatory procedures are listed in Appendix two.

Three portfolio agencies met the statutory deadline for submitting their 2022–23 early close financial statements and other mandatory procedures. The following five agencies did not submit certain early close procedures on time:

• Department of Customer Service
• Service NSW
• New South Wales Government Telecommunications Authority
• State Insurance Regulatory Authority
• Office of Independent Review Officer.

These were due to delays in resolving accounting issues and not performing certain early close procedures. The remaining four portfolio agencies are  not required to perform mandatory early close procedures under TD 19-02.

Agencies need to improve their completion of early close procedures

The following portfolio agencies did not complete all mandatory early close procedures:

The review of agencies’ early close procedures found more work needs to be done to ensure timely completion and submission of early close procedures, particularly relating to the quality and timeliness of accounting papers for key accounting matters to support their recognition, measurement and disclosures in the financial statements.

During the year, there were significant delays in completing the accounting papers to support its accounting treatment of significant transactions and events in the department and Service NSW.

The department did not resolve and finalise the accounting assessment of the following transactions at early close:

• impact of grant administration costs recovery by Service NSW from the appropriations received by the department
• accounting and financial reporting of Service NSW’s grants programs funding received by the department
• accounting and financial reporting of transactions related to Project Remediate
• accounting and financial reporting of transactions related to NSW Shared Equity Scheme Fund.

Service NSW did not resolve and finalise the accounting assessment of new grant programs and related funding at early close.

The late resolution of accounting issues could result in material misstatements in the financial statements and significant delays in completing the audit.

The 2022 Auditor-General’s Report to Parliament recommended the department and Service NSW:

• implement a process in identifying significant accounting issues, and assign clear responsibilities over assessment and reporting
• improve the timeliness and quality of accounting papers to support accounting treatment by early close
• ensure all analysis is well-supported and audit trail is kept for review purpose.

The Audit Office acknowledges continuous efforts from the department and Service NSW to improve the timeliness and quality of financial reporting. This is evidenced by the reduced volume and size of misstatements reported in 2022–23. Further improvements are recommended to avoid delays in financial reporting and audits.

Year-end financial reporting

NSW Treasury required all agencies to submit their financial statements by 1 August 2023

In June 2023, NSW Treasury issued a suite of Treasurer’s Directions and Treasury Policy and Guidelines for 2022–23 financial reporting requirements and timetables:

• Treasurer’s Direction TD21-02 ‘Mandatory Annual Returns to Treasury’ (TD21-02) and Treasury Policy and Guidelines TPG23-13 ‘Agency Direction for the 2022–23 Mandatory Annual Returns to Treasury’ require agencies listed in the Appendix A of TD21-02 to submit their 2022–23 financial statements to both NSW Treasury and the Audit Office by 1 August 2023.
• Treasury Policy and Guidelines TPG23-14 ‘Agency guidelines for the 2022–23 Mandatory Annual Returns to Treasury for New South Wales public sector agencies that are not included in TD21-02’ requires New South Wales public sector agencies not listed in  Appendix A of TD21-02 to submit their draft 2022–23 financial statements to NSW Treasury by 1 August 2023.

NSW Treasury extended the year-end submission deadline for agencies to provide the note to the financial statements that provides disclosures on appropriations to 11 August 2023. The submission date for the rest of the financial statements (that is, excluding the appropriations disclosures) remained as 1 August 2023. The extension was granted under clause 7A of TD21-02.

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 for audit within six weeks after the year end.

Financial statements were submitted on time with two exceptions

Nine of the eleven agencies met the reporting deadlines for submitting their 2022–23 financial statements. The Board of Surveying and Spatial Information delayed their submission of the financial statements by one business day due to unexpected staff leave.

Financial statements were not prepared for Finance Co Trust (Fin Co), a special purpose trust created by the department as part of its project to replace flammable cladding for eligible residential apartment buildings. This is a breach of the Government Sector Finance Act 2018 (GSF Act). Further information on this issue in included at section 2.4.

The Government Sector Audit Act 1983 does not specify the statutory deadline for issuing the audit reports. At the date of this report, the audits of ten portfolio agencies’ financial statements have been completed. The audits of two special deposit accounts’ special purpose financial reports are ongoing.

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

Valuation of a service concession asset

The service concession asset was overstated by $42.5 million due to incorrect data

The department’s service concession asset (land titling database) is managed by a private service concession operator. The valuation of this asset is complex and involves significant judgements and assumptions. Many of the valuation inputs are provided by the private service concession operator.

As part of early close procedures, management completed an interim valuation of the land tilting database at 31 March 2023. The valuation used the data provided by the private operator at 31 December 2022 which was annualised to estimate the value of database at 30 June 2023. Management recognised a valuation increment of $33.7 million in the financial statements.

The audit review of key assumptions and data at year-end identified an overstatement of $42.5 million in the valuation. This error is mainly contributed by:

• differences of actual data at 30 June 2023 compared to estimated data at 31 December 2022
• human errors in inputting data and computation in the valuation model.

Management updated the valuation model and financial statements to correct the error.

The 2022 Auditor-General’s Report to Parliament recommended the department:

• continue to enhance the data validating process of the valuation of the service concession asset
• include the valuation of the service concession asset as part of early close procedures to reduce the risk of material misstatement in the financial statements.

While the department improved the timeliness of valuation at early close, the data validation process requires further improvement.

Financial reporting and compliance requirements of Finance Co Trust

The department controls Finance Co Trust established in Project Remediate

Project Remediate is a voluntary program delivered by the department to replace flammable cladding for eligible class 2 residential apartment buildings. The department provides financial support and quality assurance and program management services to eligible owners corporations (EOCs).

Finance Co Trust (Fin Co) is a special purpose trust created in Project Remediate to facilitate borrowing from a capital provider to fund loans to EOCs. Fin Co is a controlled entity of the department under AASB 10 ‘Consolidated Financial Statements’ because the department has:

• power over Fin Co’s relevant activities including managing loans in default via a service provider; procuring and selecting finance providers; and refinancing
• exposure to variable returns and the ability to use power to influence variability in returns from its involvement with Fin Co. This is evidenced by the department’s payment of interest subsidies and financial guarantee; and obligations to purchase loans from a capital provider if not refinanced. The department also has exposure to non-financial risks and opportunities given that Project Remediate was specifically set up to meet the government’s social policy function to replace flammable cladding for eligible buildings.

The department acknowledge that Fin Co is a controlled entity of the department, but determined it was immaterial to be consolidated into the department’s financial statements.

Finance Co Trust has not complied with the requirements of GSF Act

Under section 2.4 of Government Sector Finance Act 2018 (GSF Act), Fin Co becomes a GSF agency as a controlled entity of the department. The relevant provisions of the GSF Act that Fin Co has not complied with include:

• notification of the Treasurer and the Auditor-General of the new GSF agency (section 2.8)
• financial arrangements for GSF agencies (section 6.22)
• borrowings to be obtained from New South Wales Treasury Corporation (section 6.24)
• financial reporting (Part 7, Division 7.2)
• annual reporting information for reporting GSF agencies (Part 7, Division 7.3).

Retrospective correction of prior period errors

Material prior period errors identified in the stocktake of plant and equipment

The New South Wales Government Telecommunications Authority (the authority) corrected a prior period error retrospectively in the financial statements. The authority completed its first comprehensive stocktake of plant and equipment during the year and found some assets in the fixed assets register could not be physically verified. This is due to weak controls in fixed assets management, which was reported in the Audit Office’s observations on early close procedures, management letters and Report to Parliament in the prior years.

The authority corrected these misstatements in the financial statements:

• decreased the prior year comparative property, plant and equipment by $10.2 million
• decreased the prior year comparative accumulated funds by $8.9 million
• decreased the prior year comparative reserves by $1.3 million
• decreased the 1 July 2021 equity by $14.5 million.

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 significant portfolio agencies.

Department of Customer Service

The Department of Customer Service (the department) delivers value by making or enabling sustained improvements to services in NSW. It aims to deliver excellence in customer service, digital leadership and innovation in government services, and safe and secure markets.

Service NSW

Service NSW makes it easier to access government services for people and businesses across NSW. Service NSW administers grants on behalf of other agencies to support individuals and businesses through bushfires, floods and the COVID-19 pandemic. These grants 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 a long service payments scheme for the building and construction industry in New South Wales.

New South Wales Government Telecommunications Authority

The New South Wales Government Telecommunications Authority (the authority) delivers critical radio communications to first responders and essential services to keep people and places in NSW safe.

The number of findings reported to management has decreased, and 51% were repeat issues

Breakdowns and weaknesses in internal controls increase the risk of fraud and error. Deficiencies in internal controls, matters of governance interest and unresolved issues were reported to management and those charged with governance of agencies. The Audit Office does this through management letters, which include observations, related implications, recommendations and risk ratings.

In 2022–23, there were 41 findings raised across the portfolio (64 in 2021–22). Fifty-one per cent of all issues were repeat issues (53% in 2021–22). The most common repeat issues related to weaknesses in controls over information technology user access to systems and data.

A delay in implementing audit recommendations increases the risk of intentional and accidental errors in processing information, producing management reports and generating financial statements. This can impair decision-making, affect service delivery and expose agencies to fraud, financial loss and reputational damage. Poor controls may also mean agency staff are less likely to follow internal policies, inadvertently causing the agency not to comply with legislation, regulation and central agency policies.

2022–23 audits identified a high-risk finding that has been raised previously and still needs to be resolved as a matter of urgency

A repeat high-risk finding was reported in Service NSW in relation to its grant administration and financial reporting.

In response to emergency events and natural disasters, Service NSW administered a range of economic stimulus and disaster recovery support programs. It paid $814 million (2022: $11.6 billion) across 22 different programs in 2022–23 (2022: 17) to support the people of NSW through these difficult times. While the size of Service NSW’s administered grant programs has decreased the number of programs this year was higher.

The table below summarises our observations in the gaps in Service NSW’s policies, systems, and processes in administering and financial reporting of grant programs.

The number of moderate risk findings decreased from the prior year

Twenty-six moderate risk findings were reported in 2022–23, representing a 28% decrease from 2021–22. Of these, 15 were repeat findings, and 11 were new issues.

The table below describes the common issues identified across the portfolio by category and risk rating.

Unqualified audit opinions issued for internal controls in GovConnect service providers

In 2022–23, Infosys and the department were co-providers of business processes and information technology services that constitute the GovConnect environment (GovConnect NSW).

The controls assurance service auditor, a private sector accounting firm appointed by the department, issued seven reports under the ASAE 3402 ‘Assurance reports on controls at the service organisation’ covering business process controls and information technology general controls provided by Infosys and the department. For the first time since its establishment in 2015, GovConnect NSW received unqualified audit opinions for business processes internal controls and information technology general controls managed by service providers. There were no control deviations reported in the control assurance reports.