The effectiveness of the financial arrangements and management practices in four integrity agencies

Media release

The Auditor-General for New South Wales, Margaret Crawford, released a report today examining the effectiveness of the financial arrangements and management practices of four integrity agencies: the Independent Commission Against Corruption, the NSW Electoral Commission, the NSW Ombudsman, and the Law Enforcement Conduct Commission. The audit also included NSW Treasury and the Department of Premier and Cabinet (DPC) because both departments are involved in the processes that lead to decisions about funding for the integrity agencies and managing access to this funding. The Hon. Don Harwin MLC, Special Minister of State, requested this audit under section 27(B)(3)(c) of the Public Finance and Audit Act 1983.

The audit found that the current approach to determining and administering annual funding for the integrity agencies presents threats to their independent status. The approach used by NSW Treasury and DPC is consistent with the legislative and Constitutional framework for financial management in New South Wales, but it does not sufficiently recognise that the roles and functions of the integrity agencies that are the focus of this audit are different to other departments and agencies. Specific mechanisms that present threats to the independence of the integrity agencies include the absence of transparency in decisions about funding for the integrity agencies, the means of applying efficiency dividends and budget savings and reform measures, the process of providing additional funding from DPC to the integrity agencies, and requests for the integrity agencies to report to DPC on their activities and outcomes.

The Auditor-General outlined the principles that inform the report’s recommendations in order to strengthen the financial arrangements for the integrity agencies. These principles are:

  • There should be structured oversight by Parliament of the performance and financial management of the integrity agencies.
  • Parliament’s role in the budget process should be expanded to ensure Cabinet is provided with more independent advice on the funding requirements for the integrity agencies.
  • There should be transparency to Parliament and the relevant agency for decisions made about funding for the integrity agencies.
  • The integrity agencies should be required to demonstrate their accountability as prudent managers of their financial resources.

The report also notes that the NSW Parliament should be consulted when considering the report’s recommendations.

Read full report (PDF)

Auditor-General's foreword

This audit examined the effectiveness of the financial arrangements and management practices of four integrity agencies. It was conducted with reference to the legislative and Constitutional framework that is currently in place for financial management in New South Wales.

This report appropriately recognises that the government of the day is responsible for the prudent and responsible management of the state’s finances. It identifies several areas of ambiguity in the way the current financial arrangements apply to the integrity agencies that are the subject of this audit. It also highlights threats to the independence of the integrity agencies that may arise from the involvement of the Executive Government in the decision making about funding. The report argues these risks are not mitigated sufficiently under the current financial arrangements.

The recommendations in this report outline the principles that should inform the financial arrangements for the integrity agencies. Consistent with the Audit Office of NSW’s role in auditing NSW Government departments and agencies, the recommendations are directed to NSW Treasury and the Department of Premier and Cabinet. However, the report recognises that the current role of these entities in the funding arrangements for the integrity agencies poses a threat to their independence. Consequently, it is important to recognise the important role of the NSW Parliament in determining the appropriate funding model for the integrity agencies. The audited agencies should consult closely with the NSW Parliament when considering these recommendations to ensure the views of Parliament are reflected appropriately in any changes arising from the implementation of these recommendations. This recognises the appropriate role of the NSW Parliament in safeguarding the independence of its integrity agencies.

Executive summary

On 4 November 2019, the Hon. Don Harwin MLC, Special Minister of State, requested this audit under section 27(B)(3)(c) of the Public Finance and Audit Act 1983.

Consistent with the Minister’s request, this audit assessed the effectiveness of the financial arrangements and management practices of four integrity agencies - the Independent Commission Against Corruption (ICAC), the NSW Electoral Commission (NSWEC), the NSW Ombudsman (NSWO) and the Law Enforcement Conduct Commission (LECC). The audit also included NSW Treasury and the Department of Premier and Cabinet (DPC) because both departments are involved in the processes that lead to decisions about funding for the integrity agencies and managing access to this funding.

The NSW Government, through the Treasurer, is responsible to the citizens of New South Wales for the prudent and responsible management of the state’s finances. The annual budget is the primary process that the NSW Government uses for financial management. Decisions about funding for the integrity agencies are made through this budget process. NSW Treasury provides guidance to all government departments and agencies, including the integrity agencies that are the focus of this audit, on the Government’s priorities for the budget. NSW Treasury also reviews and provides advice to the Expenditure Review Committee of Cabinet on proposals for funding through the budget.

The integrity agencies are subject to the application of ‘efficiency dividends’ and ‘budget savings and reform measures’, which limit their access to the full funding that has been approved by Parliament. NSW Treasury and DPC manage the application of these limits to the integrity agencies. The integrity agencies are grouped within the DPC ‘cluster’, which is an administrative arrangement created by the NSW Government. Clusters do not have legal status but are used for administrative and financial management. DPC has provided additional funding during the financial year to some of the integrity agencies in the years covered in this audit. DPC also oversees the involvement of the integrity agencies in developing and reporting on their outcomes. This is a requirement of NSW Treasury’s outcome budgeting reforms, which are currently being implemented.

Each of the integrity agencies is overseen by a parliamentary committee that includes members of both houses of the NSW Parliament. These committees are responsible for reviewing the performance of the integrity agencies that they oversee. They do not have a role in funding decisions. ICAC and LECC each have additional oversight from an Inspector. The Inspector of the ICAC’s role is to oversee the operations and conduct of ICAC to ensure that it complies with the law. The Inspector of the LECC’s role is to oversee the way LECC carries out its functions, with a focus on the legality of LECC’s use of its powers. Neither of these Inspectors has a role in funding decisions.

The Audit Office of NSW is an independent integrity agency that receives some of its revenue through the NSW Government’s budget process and sits within the DPC cluster. We have taken the following actions to preserve our independence and mitigate potential conflicts of interest that could arise in conducting this audit:

  • not considering or commenting on the financial arrangements for our office
  • requesting a deferral of our office’s evidence to an inquiry by the NSW Legislative Council’s Public Accountability Committee that is considering the budget process for integrity agencies. The inquiry includes the four integrity agencies that are the subject of this audit and our office
  • seeking independent legal advice on the framework for the financial arrangements for the integrity agencies
  • using additional internal review processes to provide quality assurance to audit conclusions.

Conclusion

The current approach to determining annual funding for the integrity agencies presents threats to their independent status. The approach is consistent with the legislative and Constitutional framework for financial management in New South Wales, but it does not sufficiently recognise that the roles and functions of the integrity agencies that are the focus of this audit are different to other departments and agencies.

The government of the day is responsible to the citizens of New South Wales for the prudent and responsible management of the state’s finances. Accordingly, the government of the day has a central role in decisions about funding for departments and agencies and in determining the financial management processes to be applied. This is clearly established in the legislative framework and conventions for managing public funds in New South Wales. This system is primarily designed to determine the funding for departments and agencies that are responsible to ministers. It is less appropriate for integrity agencies because it does not provide additional protection against the risk that funding decisions could be influenced by previous or planned investigations by the integrity agencies. This risk has the potential to limit the ability of the integrity agencies to fulfil their legislative mandate. The extent and nature of this risk differs for each of the integrity agencies. This is outlined in the key findings section below and described in detail in Chapters 2–5 of this report.

Aspects of the financial management mechanisms used to administer funding for the integrity agencies create tensions with their independent status. These mechanisms include the means of applying efficiency dividends and budget savings and reform measures, the provision of additional funding from DPC to the integrity agencies, and requests for the integrity agencies to report to DPC on their activities and outcomes.

NSW Treasury and DPC have administered efficiency dividends and budget savings and reform measures to the integrity agencies. This results in the integrity agencies not being able to access the full funding approved by Parliament. There are two competing interpretations of appropriation legislation that lead to different conclusions about whether there is a clear legal basis for doing this. NSW Treasury and DPC focus on the fact that the Appropriation Act provides funding for the integrity agencies to a Premier, rather than the agency, and does not state that a Premier must provide the full amount of funding approved to the agency. This interpretation leads to the view that a Premier can restrict access to appropriation funding that was approved by Parliament. An alternative interpretation of the Appropriation Act would consider factors specific to the integrity agencies that differentiate them from other agencies subject to these measures. These factors include that the integrity agencies are independent of ministerial control, accountable to Parliament for performing specific legislated functions, and some may conduct investigations that involve a Premier, or DPC or NSW Treasury. If this alternative interpretation is used, then the reduction of the integrity agencies’ access to appropriation funding approved by Parliament could diminish the independent status of the integrity agencies and limit their ability to fulfil their legislative mandate.

DPC has given additional funding to three of the integrity agencies in recent years in response to requests from the agencies. If the integrity agencies require additional funding during the year, the only mechanism available is to seek funding from DPC. This creates a potential threat to the independence of the integrity agencies. Asking DPC to make decisions about funding allocations between an integrity agency and another agency in the DPC cluster is inappropriate because DPC is not responsible for the functions or actions of an integrity agency. It is also possible that DPC could be the subject of an investigation conducted by an integrity agency. DPC has advised that it considers these risks more theoretical than real.

DPC’s provision of $2.5 million in additional funding to ICAC in 2019–20 may not have been consistent with the Appropriation Act 2019 (the Act), because of a change to the Act compared to previous appropriation legislation. The additional funding that was provided to ICAC in 2019–20 by DPC had been appropriated to DPC under Part 2 of the Act. The Act specified that funding appropriated under Part 2 could only be used for the purposes specified in that Part. ICAC receives its appropriation under Part 4 of the Act. It is contestable as to whether the purpose of an appropriation under Part 2 of the Act would include providing funding for an agency that receives an appropriation under another part of the Act.

The integrity agencies have been asked to report on activities and outcomes to DPC as part of the outcome budgeting reforms that are being implemented by NSW Treasury. This is inconsistent with their independent status because the integrity agencies are accountable to Parliament for their activities, not DPC or a Premier.

Our audit also assessed the integrity agencies’ systems for planning, budgeting and monitoring the efficiency of their work. We did not find major deficiencies in the management practices of the integrity agencies. We did identify opportunities for improvement in each agency. These are specific to the circumstances of each agency and are outlined in the key findings section below and Chapters 2–5 of this report.

1. Key findings

The role of the Executive Government in deciding annual funding for the integrity agencies presents threats to their independence

The financial arrangements used to determine the funding for the integrity agencies are based on the legislative and Constitutional framework in New South Wales. These arrangements reflect the fact that the government of the day is responsible for managing the state’s finances. Under this framework, the government of the day initiates funding legislation, funding is given to a minister for the services of the agencies, and the minister retains ultimate accountability to Parliament for the expenditure of the funding. Accordingly, the Executive Government – through Cabinet, NSW Treasury and DPC - is involved in the processes that determine the funding for the integrity agencies that are the focus of this audit. This system principally exists to enable funding decisions for NSW Government departments and agencies. These departments and agencies are created by the Executive Government and ministers oversee them directly.

The role of the integrity agencies includes providing independent scrutiny of the Executive Government. Work done by the integrity agencies can potentially have a negative impact on the NSW Government, or individual ministers or senior public servants. As a result, there is a risk that the previous or planned work of the integrity agencies could influence the decisions made about their funding.

The existing safeguards to this risk are not sufficient. Decisions about funding for integrity agencies are not transparent and there are no mechanisms for the agencies to question or challenge decisions made. The NSW Parliament reviews appropriation legislation but is not involved in the process of developing the annual NSW budget and does not see budget proposals that were made by the integrity agencies during the budget development process. Agencies can report to their parliamentary committees, but these committees do not have a role in decisions about their funding. The impact of potential threats to the independence of the integrity agencies, and their ability to fulfil their legislative mandates, is specific to each agency due to differences in their functions and jurisdiction. These are discussed separately for each agency in this report.

The legal basis for restricting the integrity agencies’ access to appropriation funding is contestable

Limits on access to the full appropriations approved by Parliament have been applied to the integrity agencies in recent years. These have been set by the ERC and administered by NSW Treasury and DPC. There are two competing interpretations of appropriation legislation that lead to different conclusions about whether a Premier has a clear legal basis for restricting access to funding that has been appropriated for the integrity agencies.

NSW Treasury and DPC have interpreted the Appropriation Act in a way that concludes a Premier is able to restrict the integrity agencies’ access to appropriation funding. This interpretation is based on the following key points:

  • The Appropriation Act specifically appropriates funding to a Premier, rather than to the head of an integrity agency. This reflects the established Westminster convention that a minister is ultimately accountable to Parliament for the expenditure of public funds.
  • The Appropriation Act specifies a maximum amount of funding that can be withdrawn for the services of each of the integrity agencies, but it does not specify that a Premier must provide the full amount of funding approved to the agencies.
  • The Government Sector Finance Act 2018 contemplates the existence of unused appropriations by making provision for the return of any funds that are not used within the financial year to the Consolidated Fund.

NSW Treasury and DPC’s interpretation is consistent with relevant financial legislation and financial administration conventions in New South Wales, but it does not sit well alongside the legislated role and functions of the integrity agencies. An alternative approach to interpreting the Appropriation Act would consider the contextual factors and legislation specific to each integrity agency. These include:

  • The appropriations for the integrity agencies are made under a discrete Part of the Appropriation Act. This indicates an intention to distinguish between appropriations for integrity agencies and appropriations for other government departments and agencies.
  • The integrity agencies are established by separate Acts of Parliament which give them independence from ministers. This is different to the arrangements for other departments and agencies, which are established by Executive order and cannot act independently of their minister.
  • The Appropriation Act provides for appropriations to a Premier for the services of the integrity agencies that are specified in legislation. The integrity agencies are accountable to Parliament for performing these functions.
  • An integrity agency may undertake an investigation that involves a Premier or DPC or NSW Treasury.

If this alternative interpretation is used, then a Premier would require an express source of power to limit the availability of appropriation funding to the integrity agencies. If a Premier could reduce the integrity agencies’ access to funding that was appropriated by Parliament, their independence could be compromised and their ability to fulfil their legislative mandate could be diminished.

The system for providing additional funding to the integrity agencies creates potential threats to their independence

ICAC, NSWEC and NSWO each received additional funding from DPC during the financial year in the period 2014–15 to 2018–19. To access this funding, the heads of the integrity agencies wrote to the DPC Secretary requesting additional funding and providing a brief description of the reason it was needed. Most of the requests for additional funding related to the cost of conducting work that was not anticipated at the time the annual appropriations for the integrity agencies were set.

If the integrity agencies require additional funding during the year, the only mechanism available is to seek funding from DPC. This creates a potential threat to their independence. Asking DPC to make decisions about funding allocations between an integrity agency and another agency in the DPC cluster is inappropriate because the integrity agencies are not accountable to DPC and DPC is not responsible for the functions or actions of the integrity agencies. In addition, it is possible that DPC could be the subject of an investigation conducted by an integrity agency. There are no criteria or guidelines for integrity agencies seeking additional funding from DPC. This means there is very little transparency to Parliament about the requests made and the reasons that they were granted.

DPC’s provision of additional funding to ICAC in 2019–20 may not have been consistent with the Appropriation Act 2019

DPC provided an additional $2.5 million to ICAC in 2019–20 in response to ICAC’s request for funding to cover the cost of a public inquiry that arose during the financial year. This was provided outside the annual budget process. DPC sourced the funding from within its appropriation funding from that year.

DPC received its appropriation funding under Part 2 of the Appropriation Act 2019. Section 25 of the Act stated that this funding could only be used for the purposes specified in Part 2 of the Act. The appropriation for ICAC was made under Part 4, a different part of the Appropriation Act 2019. It is contestable as to whether the purpose of the appropriation for DPC could extend to giving additional funding to ICAC, which was funded under a different part of the Act.

The Appropriation Acts in the years 2014–15 to 2018–19 did not include provisions stating that funding appropriated under Part 2 could only be paid out for the purposes specified in Part 2. This indicates that the additional funding provided from DPC to integrity agencies in those years would not necessarily have been inconsistent with the relevant Appropriation Acts.

Asking the integrity agencies to report to DPC on their activities and outcomes is inconsistent with the independence of the integrity agencies

Outcome budgeting was introduced as a management practice in New South Wales in 2017–18. Under this approach to budget development, agencies are required to link their budget submissions to a ‘state outcome’. The state outcomes are assigned by NSW Treasury to the departments that have been designated as ‘principal departments’ for each cluster. These departments are then responsible for achieving the outcomes assigned to them.

The integrity agencies have been asked by DPC to develop plans and report to it against the state outcome of ‘accountable and responsible government’. DPC is accountable to the Premier and the Cabinet for delivering this outcome. The outcome itself is broad enough to be consistent with the general role and functions of the integrity agencies. However, the integrity agencies are not subject to direction by a minister or department in their activities and report directly to Parliament on their functions. This makes it inappropriate for the integrity agencies to be asked to report against objectives and outcomes that are set by the NSW Government and administered by DPC.

Some comparable jurisdictions give parliament a more direct role in funding for integrity agencies

In several comparable jurisdictions, parliamentary committees provide advice on the budgets for integrity agencies. In some of these jurisdictions, the heads of integrity agencies are formally classified as Officers of Parliament to signify a more direct relationship with Parliament. The use of these mechanisms in other jurisdictions is intended to provide a clearer distinction between integrity agencies and other government departments and agencies. This aims to provide additional safeguards to the independence of integrity agencies, while also improving the transparency of the decision-making for integrity agency budgets and improving the transparency of integrity agency performance to Parliament and the public.

ICAC’s financial arrangements and management practices

ICAC’s legislation establishes it as an independent agency that is accountable to Parliament. Decisions about the annual appropriation for ICAC are made by Cabinet, with advice from NSW Treasury. Members of Cabinet or NSW Treasury could be the subject of, or more broadly affected by, an ICAC investigation. NSW Treasury advises that it provides ICAC's funding submissions directly to Cabinet without making changes. However, NSW Treasury does provide separate advice to Cabinet on these submissions. There is no independent advice on ICAC’s funding requirements and there is no transparency to Parliament about the reasons for decisions made about ICAC’s budget. The absence of these safeguards in the current financial arrangements creates a threat to ICAC’s independence and has the potential to limit its ability to fulfil its legislative mandate.

ICAC submitted budget proposals seeking increases to its appropriation funding in several recent years. The budget proposals related to funding to expand its workforce to respond to increases in the volume and complexity of its work. Some of these proposals were rejected without reasons being provided. There are no formal mechanisms available to ICAC to question or challenge these decisions. The process available to ICAC to request additional funding outside the annual budget creates further risks to its independence, as described above.

ICAC’s management practices are suitable for its needs. Its staff use structured processes for prioritising work against its legislative mandate and it has conducted recent reviews to assess its operational efficiency. ICAC's internal budgeting processes are adequate but could be improved with better documentation of the reasons for its budget decisions.

NSWEC’s financial arrangements and management practices

NSWEC’s legislation states that it should conduct elections and investigate potential breaches of electoral law independently and be accountable to Parliament. Decisions about the annual appropriation for NSWEC are made by Cabinet. It is possible that NSWEC’s investigations of electoral integrity could include members of Cabinet or the political party that holds government. There is a risk that decisions about its funding could be influenced by the conduct of these investigations. If realised, this would be a threat to NSWEC’s independence and ability to fulfil its legislative mandate. NSWEC has not received the full funding amount it has requested in recent years. There is inadequate transparency about how funding decisions were made and there are no formal mechanisms to question or challenge these decisions.

The conduct of elections is a key element of a democratic system and under-funding this function could have serious implications. NSWEC’s requests for additional appropriation funding are assessed alongside the priorities of the government of the day. Its role transcends these immediate priorities and there is a risk that its funding requirements may not be prioritised.

NSWEC’s management practices are suitable for its needs. Its internal budgeting processes and efficiency programs are clear and well documented. NSWEC has identified options to improve its operational and corporate efficiency but has not implemented all of these.

NSWO’s financial arrangements and management practices

NSWO’s legislation makes it clear that it should operate independently of the agencies it oversees and be accountable to Parliament. NSWO’s investigations do not include members of Cabinet, except in relation to Public Interest Disclosures made about a minister, so the risk that decisions about its budget could be affected by its investigations is relatively lower. However, NSWO's investigations can comment on and make recommendations about government policies, which may have been endorsed by Cabinet or an individual minister, and its investigations cover systemic issues for which ministers and the heads of government departments are responsible. NSWO faces a further challenge in its ability to make compelling budget proposals under the current financial arrangements. Its funding requests are assessed alongside the government’s priorities, but its work is unlikely to align directly with these priorities.

NSWO’s management practices are suitable for its needs. NSWO has assessed its operational and corporate efficiency recently and has implemented major changes to its operating model in response to this. Its internal budgeting process is adequate but could be improved by being documented more thoroughly.

LECC’s financial arrangements and management practices

LECC’s legislation states it should operate independently of the agencies it oversees and be accountable to Parliament. LECC’s jurisdiction does not include members of Cabinet, NSW Treasury or DPC. However, LECC’s investigations have the potential to have an impact on a Minister for Police, who is a member of Cabinet, and the government of the day. There is a risk that decision makers for LECC’s funding could be influenced by these considerations. While LECC has not sought increases to its appropriation funding in recent years, there are no formal mechanisms to question or challenge these decisions if it did have concerns about its funding in the future. Unlike the other integrity agencies in this audit, LECC is not classified as a separate GSF agency under the Government Sector Finance Act 2018. This difference means that LECC has less independence from the Executive Government, because LECC would have to comply with a Treasurer’s Direction even if it believes it is not consistent with the independent exercise of its functions.

LECC's management practices are suitable for its needs. LECC's internal budgeting processes are clear and documented and it has identified and implemented operational and corporate efficiency savings in several areas. LECC published a new strategic plan in July 2020. Over the first three years of its operations from 2017, LECC had not conducted effective strategic planning, which made it difficult for LECC to demonstrate that it had a cohesive approach to its operations across the agency during this time.

2. Recommendations

Recommendations to NSW Treasury and the Department of Premier and Cabinet (DPC):

1. Acknowledging that the government of the day is responsible for the financial management of the state, NSW Treasury and DPC should implement a funding model for the integrity agencies that addresses potential threats to their independence while ensuring their accountability. This should be based on the following principles:

  • The integrity agencies are required to demonstrate their accountability as prudent managers of their financial resources.
  • Parliament’s role in the budget process should be expanded to ensure Cabinet is provided with more independent advice on the funding requirements for the integrity agencies.
  • There should be transparency to Parliament and the relevant agency for decisions made about funding for the integrity agencies.
  • There should be structured oversight by Parliament of the performance and financial management of the integrity agencies.

2. NSW Treasury and DPC should reassess whether the process used to apply efficiency dividends to the integrity agencies is consistent with appropriation legislation and the independence of the integrity agencies.

3. NSW Treasury and DPC should ensure that the use of cluster-based financial management arrangements does not diminish the independence of the integrity agencies and is consistent with the requirements of appropriation acts and other relevant legislation. This includes ensuring that:

  • the provision of additional funding to the integrity agencies outside the budget process is consistent with appropriation legislation and includes sufficient safeguards to protect the independence of the integrity agencies
  • any request for the integrity agencies to report on activities and outcomes as a part of outcome budgeting reforms is consistent with their independence.

Note: These recommendations should be read in conjunction with the Auditor-General’s foreword to this report, which provides necessary context for their implementation.

1. Introduction

On 4 November 2019, the Hon. Don Harwin MLC, Special Minister of State, requested this audit under section 27(B)(3)(c) of the Public Finance and Audit Act 1983.

Consistent with the Minister’s request, this audit assessed the effectiveness of the financial arrangements and management practices of four integrity agencies - the Independent Commission Against Corruption (ICAC), the NSW Electoral Commission (NSWEC), the NSW Ombudsman (NSWO) and the Law Enforcement Conduct Commission (LECC). The audit also included NSW Treasury and the Department of Premier and Cabinet (DPC) because both departments have a role in the financial arrangements for the integrity agencies. NSW Treasury manages the budget process that determines the annual funding for the integrity agencies. DPC has a role in managing access to this funding because the integrity agencies are placed within the DPC ‘cluster’.

The Audit Office of NSW is an independent integrity agency that receives some of its revenue through the NSW Government’s budget process and sits within the DPC cluster. We have taken the following actions to preserve our independence and mitigate potential conflicts of interest that could arise in conducting this audit:

  • not considering or commenting on the financial arrangements for our office
  • requesting a deferral of our office’s evidence to an inquiry by the NSW Legislative Council’s Public Accountability Committee that is considering the budget process for integrity agencies and the NSW Parliament, including the four integrity agencies in this audit and our office
  • seeking independent legal advice on the framework for the financial arrangements of the four integrity agencies in this audit
  • using additional internal review processes to provide quality assurance to audit conclusions.

1.1 Financial arrangements for the integrity agencies

NSW Government budget process

The integrity agencies are classified as a part of the general government sector, which means they are grouped with other departments and agencies for budget purposes. The budgets for the integrity agencies are set out in the budget papers each year. The agencies are also given an indication of their likely budgets for the following three years, which are described as forward estimates. If an integrity agency wants an increase to its appropriation funding from the amount previously advised in the forward estimates, it must prepare a budget proposal using a format specified by NSW Treasury.

NSW Treasury’s role as manager of the budget process includes deciding on the timelines, providing advice to agencies on their budget proposals, and reviewing integrity agency budget proposals. NSW Treasury prepares annual budget guidelines that set out the government’s priorities and include any limitations on proposals for increases to appropriation funding. For example, NSW Treasury placed a cap on the number of budget proposals that agencies could make for the 2019–20 budget.

The integrity agencies are classified as ‘independent entities’ in NSW Treasury’s budget guidelines. This means their budget proposals can be made directly to NSW Treasury, rather than being prioritised within the DPC cluster as are proposals by other DPC cluster agencies. However, once submitted to NSW Treasury, the integrity agencies’ budget proposals are subject to the same processes and considerations as proposals from other government departments and agencies. For example, NSW Treasury may request changes to integrity agency budget proposals and may choose to not progress a proposal to the Cabinet Expenditure Review Committee (ERC) if it judges that the proposal does not meet the budget guidelines.

After the integrity agencies submit their budget proposals, NSW Treasury provides briefings to the ERC on the proposals that have been progressed for consideration. The ERC makes the final decisions about the budgets for the integrity agencies. Discussions held in ERC meetings are considered ‘Cabinet-in-Confidence’, so the reasons for decisions made by the ERC are not made public or provided to the integrity agencies. Briefings that NSW Treasury provides to the ERC during the budget development process are also considered Cabinet-in-Confidence and are not made public or shared with the integrity agencies.

Appropriation framework

The Constitution Act 1902 states that appropriations from the Consolidated Fund can only be made under an Act that specifies the purposes of the appropriation. The decisions made during the budget development process are reflected in an annual Appropriation Bill that specifies the amount that can be withdrawn from the Consolidated Fund and describes the purposes for which the funding can be used. An Appropriation Bill is introduced in the Legislative Assembly by the Treasurer. Under the Constitution Act 1902, all Bills relating to the appropriation of funding must originate in the Legislative Assembly and a Bill relating to appropriations can become law without the approval of the Legislative Council. This reflects the principle that it is the role of the government of the day to initiate appropriation legislation.

Members of Parliament are provided with the Bill and the budget papers. The budget papers provide further information about the funding amounts specified in the Appropriation Bill, but do not form a part of the legislation itself. Parliament is not involved in the process of developing the annual NSW budget and does not see budget proposals that were made by the integrity agencies during the budget development process.

An annual Appropriation Act appropriates funding for the integrity agencies to a Premier, rather than directly to the heads of the integrity agencies. This means that an Appropriation Act itself does not give the integrity agencies the authority to withdraw or spend this funding. This reflects the principle that ministers are ultimately accountable to Parliament for the expenditure of public funds. In practice, a Premier will delegate the authority for the expenditure of funding that was appropriated under an Appropriation Act to the head of each integrity agency. This delegation is made under the Government Sector Finance Act 2018 and allows the integrity agencies to make decisions about the expenditure of appropriated funding.

Financial management mechanisms applied to the integrity agencies

As a part of the budget development process, the ERC makes decisions about any limits it wishes to apply to government agencies’ access to the appropriations approved by Parliament. These are described as ‘efficiency dividends’ and ‘budget savings and reform measures’. The integrity agencies are subject to these limits.

Until 2018–19, NSW Treasury oversaw the implementation of efficiency dividends across all government agencies, including the integrity agencies. NSW Treasury applied the efficiency dividends by directing the agencies to submit a revised budget proposal that was lower than the amount approved by Parliament in the Appropriation Act. In 2019–20, DPC oversaw the budget savings and reform measures for the integrity agencies. There were no limits imposed on funding appropriated for the integrity agencies in 2019–20. However, DPC informed the integrity agencies of estimated limits on appropriation funding for each of the next nine years.

The integrity agencies are grouped within the DPC cluster for administrative and financial management purposes. Clusters are an administrative arrangement created by the NSW Government that do not have any formal legal status. According to the NSW Government, cluster management aims to assist with pursuing common objectives across agencies, integrating services, and allocating resources between agencies. The use of clusters for the management of the integrity agencies has the potential to create tensions with their independent status. This is discussed in detail in Chapter 6 of this report.

Some of the integrity agencies have requested and received additional funding from DPC during the financial year. This was not a part of the annual budget process and involved the reallocation of funding that had been appropriated for the services of DPC.

The requests from the integrity agencies were made when the agencies required additional funding to conduct work required to fulfil their legislative functions. To access this funding, the heads of the integrity agencies wrote to the DPC Secretary requesting additional funding and providing a brief description of the reason it was needed. In some cases, the integrity agencies also wrote directly to the Premier.

DPC oversees the involvement of the integrity agencies in developing and reporting on their activities and outcomes. This is a part of NSW Treasury’s outcome budgeting reforms, which are currently being implemented. The integrity agencies are asked to report to DPC because they have been placed within the DPC cluster. As noted above, clusters do not have a legal basis, so the requests are a result of management decisions by NSW Treasury and DPC.

The application of these financial management mechanisms to the integrity agencies is analysed in Chapter 6 of this report. Where relevant, these processes are also discussed for individual agencies in Chapters 2–5 of this report.

The integrity agencies are subject to the Government Sector Finance Act 2018 (GSF Act), which sets the framework and principles for financial management in NSW Government agencies. The objects of the GSF Act include:

  • promoting and supporting sound financial management, budgeting, performance, financial risk management, transparency and accountability in the government sector
  • requiring the efficient, effective and economical use and management of government resources in accordance with the principles of sound financial management
  • promoting appropriate stewardship of government resources and related money.

Three of the integrity agencies – ICAC, NSWEC and NSWO – are classified as ‘separate GSF agencies’. This means that they are not required to comply with whole of government financial management directions if they consider these are inconsistent with the independent exercise of their functions. If one of the agencies chooses to exercise this, it must provide a written document stating the reasons for non-compliance to the Treasurer and include this information in its annual report. LECC is not a separate GSF agency, so it does not have this exemption.

Each of the integrity agencies is overseen by a parliamentary committee that includes members of both houses of the NSW Parliament. These committees are responsible for reviewing the performance and the Annual Reports of the agencies that they oversee. They do not have a role in relation to funding for the agencies. ICAC and LECC each have additional oversight from an Inspector. The Inspector of the ICAC’s role is to oversee the operations and conduct of ICAC to ensure that it complies with the law. The Inspector of the LECC’s role is to oversee the way LECC carries out its functions, with a focus on the legality of LECC’s use of its powers. Neither of these Inspectors has a role in funding for the agencies.

1.2 Arrangements for integrity agencies in comparable jurisdictions

In several comparable jurisdictions, parliamentary committees provide advice on the budgets for integrity agencies. In Victoria, the Independent Broad-based Anti-corruption Commission (IBAC) and the Ombudsman are overseen by the Parliamentary Committee on Integrity and Oversight. This Committee oversees the agencies by reviewing their performance and proposed annual work programs. Draft budgets are determined in consultation with this Committee. IBAC makes a distinction between 'core work' that must be covered by the budget, and additional projects or hearings that are evaluated on a case-by-case basis before proceeding. A business case must be provided to the Committee for consideration if IBAC believes it requires more funding for additional work during the year.

The ACT Electoral Commission receives ongoing recurrent funding that is determined in consultation with the Parliamentary Committee for the Electoral Commission. The Treasurer can veto the sum agreed upon but must table a document in Parliament that explains the reasons for the decision.

In New Zealand, the Officers of Parliament Committee oversees several integrity agencies. These integrity agencies submit their budget proposals to the Committee in a process that takes place before the New Zealand Government’s full budget process. The Committee takes evidence from the heads of the agencies and seeks advice from the New Zealand Treasury on the budget proposals. The Committee then makes its recommendation on the budget proposals to the Parliament. The Committee also assesses financial and performance matters of the Offices, including: recommending appointments of the heads of the Offices; appointing external auditors; and developing or reviewing codes of conduct.

In five comparable jurisdictions – Victoria, Queensland, Western Australia, the Australian Capital Territory, and New Zealand – the heads of selected integrity agencies are formally designated as Officers of Parliament. Several of these are the equivalents of the integrity agencies in this audit, including Ombudsmen, Electoral Commissioners and Anti-corruption Commissioners. In these jurisdictions, the term Officer of Parliament aims to provide a clearer relationship to Parliament and greater separation from the Executive Government. However, it does not give agencies any additional functions, powers, or rights.

There are four other jurisdictions in Australia that do not use an equivalent classification to Officers of Parliament for their integrity agencies, as shown in Exhibit 1.

 

Exhibit 1: Use of the Officers of Parliament classification in comparable jurisdictions
  Ombudsman Electoral Commissioner Anti-corruption Commissioner
Commonwealth
N/A
Victoria
Queensland
Western Australia
South Australia
Tasmania
ACT
Northern Territory
New Zealand
N/A
Key
Equivalent agency is classified as an ‘Officer of Parliament’.
 
Equivalent agency is not classified as an ‘Officer of Parliament’.
  N/A Equivalent agency does not exist in this jurisdiction.

Source: Audit Office research

1.3 About the audit

This audit assessed the effectiveness of the financial arrangements and management practices at four integrity agencies – the Independent Commission Against Corruption, the Law Enforcement Conduct Commission, the NSW Electoral Commission, and the NSW Ombudsman. In making this assessment, this audit considered the following questions:

  1. Do funding models effectively support integrity agencies to fulfil their legislative mandate?
  2. Have integrity agencies assessed the requirements for fulfilling their legislative mandate
  3. Are the internal budgeting processes at integrity agencies effective?
  4. Do integrity agencies monitor how efficiently they use their funding?

More information about the audit scope, criteria, and approach can be found in Appendix Two.

2. Independent Commission Against Corruption - financial arrangements and management practices

Conclusion

Financial arrangements for ICAC

ICAC's main functions are to investigate and prevent corruption in the public sector. Its legislation establishes it as an independent agency that is accountable to Parliament.

Decisions about the annual appropriation for ICAC are made by the Cabinet, with advice from NSW Treasury. Members of Cabinet or NSW Treasury could be involved in or affected by an ICAC investigation. There is no independent advice to Cabinet on ICAC’s funding requirements and there is no transparency to Parliament about the reasons for decisions made about ICAC’s budget. The absence of these safeguards in the current financial arrangements creates a threat to ICAC’s independence and have the potential to limit its ability to fulfil its legislative mandate.

ICAC submitted budget proposals seeking increases to its appropriation funding in several recent years. The budget proposals related to funding to expand its workforce to respond to increases in the volume and complexity of its work. Some of these proposals were rejected without reasons being provided. There are no formal mechanisms available to ICAC to question or challenge these decisions. The process available to ICAC to request additional funding outside the annual budget creates further risks to its independence.

ICAC’s management practices

ICAC’s staff use structured processes for prioritising work against its legislative mandate and it has conducted recent reviews to assess its operational efficiency. ICAC's internal budgeting processes are adequate but could be improved with better documentation of the reasons for its budget decisions.

2.1 Overview of the Independent Commission Against Corruption (ICAC)

ICAC's main roles are investigating allegations of corruption in the public sector and providing advice and education on preventing corruption. ICAC's jurisdiction covers all NSW public sector agencies except for the NSW Police Force and the NSW Crime Commission, which are overseen by the Law Enforcement Conduct Commission. ICAC’s jurisdiction also includes staff and elected representatives of local councils, ministers and other Members of Parliament, the judiciary, and the Governor. ICAC has extensive investigation powers, which include using covert evidence collection techniques, holding public hearings, and compelling witnesses to provide evidence.

ICAC’s legislation establishes it as an independent agency that is accountable to Parliament. The objects of the Independent Commission Against Corruption Act 1988 (ICAC Act) include a statement that ICAC is an ‘independent and accountable body.’ ICAC is treated as an independent entity under financial and management legislation. Funding for ICAC is appropriated under a discrete part of the Appropriation Act, as one of nine special offices. This is different to the way other government departments and agencies receive appropriation funding. ICAC is subject to the Government Sector Finance Act 2018 but is classified as a separate GSF agency. This means that it is not required to comply with whole of government financial management directions if it considers these are inconsistent with the independent exercise of its functions. If ICAC chooses to exercise this, it must provide a written document stating the reasons for non-compliance to the Treasurer and include this information in its annual report.

ICAC is accountable to Parliament in several ways, including:

  • The Parliamentary Committee on the Independent Commission Against Corruption (ICAC Committee) considers ICAC’s annual reports and can conduct ad hoc hearings and inquiries relating to ICAC’s operations. ICAC can present reports directly to the Parliament.
  • ICAC’s activities are overseen by the Inspector of the Independent Commission Against Corruption, who reports directly to Parliament.
  • ICAC Commissioners have fixed tenure and can only be removed by the Governor after a vote in both Houses of Parliament. The ICAC Act has a provision for a standing appropriation for the remuneration of Commissioners and Assistant Commissioners, although this has not been used to provide funding for ICAC.

ICAC is led by a Chief Commissioner who is supported by two Commissioners. The Commissioners make final decisions about which matters to investigate and how to conduct those investigations after receiving advice from staff. The day-to-day management of ICAC is overseen by a CEO who is responsible for leading the executive management team. The CEO’s role also includes assisting the Commissioners in their decision-making, resource allocation and strategic planning. ICAC's organisational structure is summarised in Exhibit 2.

ICAC organisational chart showing how the divisions report to the CEO and they in turn report to the Chief Commissioner who also has two commissioners alongside them
Exhibit 2: Independent Commission Against Corruption organisation structure
Source: ICAC Annual Report, 2018–19.

Under the ICAC Act, the ICAC Commissioners have the discretion to decide which matters to investigate and how to conduct investigations. ICAC’s standard process begins with staff conducting an initial assessment of every matter received. These initial assessments consider whether the matter meets the standard of potentially ‘serious and systemic’ corruption required to justify further action. ICAC also considers whether it would be appropriate to refer the matter to another NSW Government agency. ICAC Commissioners then decide whether a matter warrants further investigation after taking advice from relevant staff. Options for further investigation include a preliminary investigation, a full investigation, and a public inquiry. ICAC’s main corruption investigation and prevention activities are summarised in Exhibit 3.

A decision to commence a public inquiry must be approved by the Chief Commissioner and at least one other Commissioner. These decisions were previously made at the discretion of the Chief Commissioner alone. The NSW Government made these changes through amendments to the ICAC Act in 2016 that were intended to strengthen the governance of ICAC’s decision making.

 

Exhibit 3: ICAC's corruption investigation and prevention activity, 2014–15 to 2018–19
Activity 2014–15 2015–16 2016–17 2017–18 2018–19
Corruption investigation          
Matters received and assessed 3,146 2,436 2,489 2,751 2,743
Preliminary investigations commenced 42 41 27 41 18
Full investigations commenced 14 10 10 12 12
Number of public inquiries 7 6 2 4 4
Number of days on public inquiries 64 48 31 47 133
Corruption prevention          
Requests for corruption prevention advice 134 94 105 139 180
Corruption prevention training sessions 85 107 74 126 111

Source: ICAC Annual Reports.

The number of matters referred to ICAC for assessment ranged from 2,400 to 3,100 over the five years between 2014–15 and 2018–19, as shown in Exhibit 3. This is influenced by factors including the incidence and awareness of corruption in the NSW public sector.

In 2018–19, ICAC commenced 18 preliminary investigations in response to matters that were referred to it. The number of matters proceeding to a full investigation remained consistent over the five years between 2014–15 and 2018–19, ranging from ten to 14 in each year. ICAC conducted four public inquiries in 2018–19, which required a total of 133 hearing days. This was a large increase in the number of hearing days compared to the previous four years, when hearings totalled between 31 and 64 days per year.

The changes in the type and duration of investigations conducted by ICAC are influenced by factors including the nature of matters referred to ICAC for assessment, the decisions made by the ICAC Commissioners about how to investigate matters, and the complexity of investigating the matters. The variation in the volume and nature of matters referred to ICAC makes it difficult to predict ICAC’s workload with precision and creates a need for flexibility in ICAC’s funding arrangements to ensure it can fulfil its legislative role. This is especially the case for matters that lead to full investigations and public inquiries, which can arise unexpectedly and require significant resources due to their complexity.

There were some fluctuations in the volume of ICAC's corruption prevention work during the period 2014–15 to 2018–19. The number of requests received for corruption prevention advice ranged from 94 in 2015–16 to 180 in 2018–19. The number of training sessions on corruption prevention that ICAC delivered was between 74 and 126 per year. ICAC has more discretion over the volume and nature of its corruption prevention work compared to its investigation work. However, there are some external factors that influence the demand for ICAC’s corruption prevention activities, including changing awareness of corruption in the public sector and changes in the number of requests for advice and training.

2.2 Funding for ICAC

ICAC receives most of its revenue from appropriation funding. This is determined annually through the NSW Government’s budget process. It has also received a significant amount of additional funding from DPC during the financial year in most recent years, as shown in Exhibit 4.

Exhibit 4: ICAC's revenue (actuals), 2014–15 to 2018–19
  2014–15 2015–16 2016–17 2017–18 2018–19
  $m $m $m $m $m
Appropriation revenue* 27.1 20.2 21.1 21.1 25.4
Additional funding from DPC** 1.6 1.3 0.1 1.7 1.7
Other revenue*** 0.9 2.6 (0.6) 1.1 1.5
Total revenue 29.6 24.1 20.6 23.9 28.6

Notes:
*  Appropriation revenue is the amount received by ICAC. This may be lower than the amount approved in the Appropriation Act for reasons including: the application of ‘efficiency dividends’; staffing changes leading to lower employee expenditure requirements; changes to project timelines leading to lower capital expenditure requirements.
**  Funding was provided from the funds that were appropriated to DPC under Part 2 of the Appropriation Act in each year.
*** ICAC’s other revenue includes: acceptance by the Crown Entity of employee benefits and other liabilities; sales of goods and services; and investment revenue.
Source: ICAC financial statements 2014–15 to 2018–19.

ICAC's total revenue reduced by $9.0 million between 2014–15 to 2016–17. This was largely due to a reduction of almost $7.0 million, or 25 per cent, in the amount of appropriation funding from 2014–15 to 2015–16. After remaining around that level for the following two years, ICAC’s appropriation revenue increased to $25.4 million in 2018–19.

ICAC’s expenditure has been higher than its revenue in most recent years

ICAC’s expenditure exceeded the amount of funding it received in four of the five years between 2014–15 and 2018–19, as shown in Exhibit 5. This indicates that the reduction in the amount of funding appropriated for ICAC in 2015–16 made it difficult for ICAC to operate within its budget. While ICAC’s funding was reduced significantly, demand for assessments of potential corrupt conduct remained steady and ICAC’s investigation activities increased, as shown in Exhibit 3 above. 

Exhibit 5: ICAC's revenue and expenditure, 2014–15 to 2018–19
  2014–15 2015–16 2016–17 2017–18 2018–19
Revenue (dark mauve in graph above) 29,575,000 24,104,000 20,629,000 23,899,000 28,581,000
Expenditure (light mauve in graph above) 25,709,000 26,906,000 21,280,000 25,799,000 29,088,000
 
Source: ICAC financial statements 2014–15 to 2018–19.

ICAC made proposals to increase its appropriation funding by $1.9 million through the annual budget process in both 2015–16 and in 2016–17. ICAC had prepared budget proposals in line with the requirements of NSW Treasury’s budget guidelines to support these budget proposals. Neither of the proposals were approved and ICAC was not provided with reasons for this. ICAC’s proposal for an increase to its appropriation funding of $3.6 million in 2018–19 was approved. This restored ICAC’s funding to a similar level to its funding in 2014–15.

ICAC made a single proposal for increased appropriation funding in 2019–20 in which it sought $4.1 million. The request was to pay for additional staff, which ICAC argued was required to support the larger number of public hearings it was holding. An ICAC-commissioned report that analysed its workforce requirements was provided to support this proposal. This request was not approved and ICAC was not provided with reasons for the rejection of this budget proposal.

The process for determining the annual appropriation funding for ICAC does not recognise ICAC’s status as an independent agency

The Cabinet Expenditure Review Committee (ERC) makes the decisions about the budget proposals that are presented to it from ICAC. Members of Cabinet could potentially be investigated directly by ICAC and ICAC's investigations have the potential to damage the reputation of government more broadly. There is a risk that these factors could influence the ERC’s decision-making about funding for ICAC. Cabinet conventions mean that all discussions held at ERC are considered Cabinet-in-Confidence and are not made public or shared with agencies or Parliament. The limited transparency about why decisions about ICAC’s funding were made means that it is not possible for Parliament to understand the basis for decisions about ICAC's funding.

In the absence of additional safeguards, the involvement of NSW Treasury in deciding whether to progress ICAC’s proposals for increases to its appropriation funding is a potential threat to ICAC’s independence. NSW Treasury advises that it provides ICAC's funding submissions directly to Cabinet without making changes. However, NSW Treasury does provide separate advice to Cabinet on these submissions. For the 2019–20 budget, NSW Treasury put a cap on the number of proposals agencies could make and limited the criteria to ‘urgent and unavoidable’ requests. NSW Treasury’s budget guidelines said this was necessary because it was an election year and there would be limited funding available for new budget proposals once government election commitments had been funded. NSW Treasury's guidance stated that any proposals must have the prior approval of the NSW Treasury Secretary, or they would not be progressed for consideration by the ERC.

ICAC is classified as an independent entity in NSW Treasury’s budget guidelines. However, ICAC was still limited to making a single budget proposal in 2019–20 and its budget proposals still required the approval of the NSW Treasury Secretary to be progressed. This is not consistent with ICAC’s accountability arrangements, in which it is accountable to Parliament, rather than a minister or the secretary of a department. There are currently no additional safeguards to this risk, such as independent advice and greater transparency to Parliament.

The Executive’s involvement in the funding decisions for ICAC can create tensions which could limit the effectiveness of the current financial arrangements. Good governance principles suggest that an effective decision-making process should ensure that those who could be investigated do not determine the funding of the investigating body. In the case of ICAC, this is very difficult to achieve because of its broad remit. However, including additional safeguards in the process for determining appropriation funding would provide better protection against risks to ICAC’s independence and its ability to fulfil its legislative mandate.

The safeguards to threats to ICAC’s independence are not sufficient

There are several safeguards to the risk that funding decisions about ICAC could be compromised, but each of these has some limitations. The appropriation for ICAC must be approved by the NSW Parliament, via the passage of the annual Appropriation Act, as described in Chapter 1 of this report. However, Members of Parliament do not receive the initial budget proposals that were made by ICAC. Nor do they see the advice that was provided by NSW Treasury on ICAC’s budget proposals. This means that Members of Parliament are not aware of funding proposals that were rejected or only partially granted after NSW Treasury or ERC decisions.

There are several avenues that ICAC can use to communicate directly with Parliament about its funding requirements. These include:

  • ICAC can make a special report to Parliament on administrative or policy matters relating to its functions. ICAC did this in May 2020 when it tabled a special report on its funding process. This was the first time ICAC has tabled this type of report.
  • ICAC and the ICAC Inspector raised concerns about ICAC’s budget at hearings of the ICAC Committee in 2019. This committee subsequently published a report recommending that the funding model for ICAC should be reconsidered to ensure ICAC's independence is maintained and it is sufficiently funded. The NSW Government response to this report did not respond directly to this recommendation but noted that it had asked the Auditor-General to examine the matter in this audit.
  • Budget Estimates Hearings are conducted annually by NSW Parliament Portfolio Committees. At these hearings, members of the Committee can question ministers and senior NSW Government officials about their budget allocations and spending decisions. Appearances at the Committee hearings are by invitation from the Committee and in 2019, ICAC was not invited to appear.

These mechanisms allow ICAC to raise concerns about funding decisions. However, they do not allow the funding amounts to be reconsidered or changed because Parliament does not have any formal role in ICAC’s budget development process.

ICAC does not have an appropriate mechanism to seek additional funding

The number of matters referred to ICAC have remained broadly consistent, as shown in Exhibit 3 above. However, ICAC cannot always predict which matters will require more comprehensive investigations or which will lead to public inquiries at the time when its annual budget is set. This means that ICAC needs a mechanism to access additional funding to ensure it can fulfil its legislative role.

ICAC has requested and received additional funding from DPC during the financial year in each of the five years examined for this audit. To access this funding, ICAC wrote to the DPC Secretary requesting additional funding and providing a brief description of the reason it was needed. In some cases, ICAC also wrote directly to the Premier due to concerns about the timeliness of responses to its requests. ICAC made these requests to DPC because it is grouped within the DPC cluster, as described in Chapter 1.

Additional funding was paid from DPC’s appropriation funding to ICAC after consultation between the Secretaries of DPC and NSW Treasury and approval by the Premier. Each of ICAC’s requests for additional funding during this period were approved. This funding made up more than ten per cent of ICAC’s total revenue in 2015–16 and was more than five per cent of its revenue in four of the five years, as shown in Exhibit 6.

Exhibit 6: Additional funding from DPC to ICAC, 2014–15 to 2018–19
  2014–15 2015–16 2016–17 2017–18 2018–19
Additional funding provided $1.6m $2.6m $0.1m $1.7m $1.7m
Additional funding as % of total revenue 5.4% 10.9% 0.6% 7.0% 6.0%

Source: ICAC financial statements, 2014–15 to 2018–19.

The role of DPC and NSW Treasury in making decisions about additional funding for ICAC creates risks to ICAC’s independence. Asking a DPC Secretary to make decisions between funding for ICAC and another agency in the DPC cluster is inappropriate because neither a DPC Secretary nor a Premier is responsible for ICAC’s functions or actions. Further, ICAC’s jurisdiction means it could be seeking additional funding to investigate a senior government official. If funding requests were not granted, this could create a perception that decisions about ICAC’s funding were compromised. The DPC Secretary stated in evidence to Parliament that he did not scrutinise requests from ICAC in any detail because of concerns that this could be perceived as inappropriate.

However, DPC has engaged in some financial management discussions with ICAC. For example, in July 2019, DPC wrote to ICAC stating that ICAC should participate in a NSW Treasury-led review of its budget management process. DPC also requested that ICAC provide DPC and NSW Treasury with detailed financial information on a quarterly basis so ICAC's expenditure against its budget could be monitored. In previous years, DPC maintained a greater distance from the financial management of ICAC. For example, a letter from the then-DPC Secretary to ICAC in 2012 specified that ICAC should deal directly with NSW Treasury on budget matters.

ICAC raised a separate issue relating to the lawfulness of DPC and NSW Treasury’s involvement in its funding arrangements in a Special Report to Parliament in May 2020. ICAC’s report drew on legal advice it commissioned and states that ‘because aspects of the current funding arrangements, namely the involvement of Executive Government in those arrangements, are incompatible with the Commission’s independence, they are unlawful’. In our view, the Executive’s involvement in making decisions on appropriations for the integrity agencies is in accordance with the legislative framework for appropriations and Westminster conventions, in which decisions about appropriations are initiated by the government of the day and ministers are accountable for the expenditure of public money. However, the involvement of DPC, NSW Treasury and Cabinet in funding decisions for ICAC creates threats to ICAC’s independence that are not mitigated adequately under the current financial arrangements, as described above.

2.3 ICAC’s management practices

ICAC has structured processes for prioritising work against its legislative mandate

ICAC has systems for assessing and prioritising its work in line with its legislative role and functions. Staff are provided with established processes for assessing matters referred to it and detailed guidance on how to apply these. Briefs that analyse whether matters referred to ICAC should be progressed for further investigation are prepared for consideration by an assessment panel. This panel meets regularly and includes ICAC's Commissioners and senior executives.

ICAC’s approach to conducting investigations and corruption prevention projects is guided by policy frameworks and processes and is overseen by an executive committee. The examples of briefings that we viewed mostly followed ICAC’s established processes and frameworks and presented clear information against ICAC's decision-making criteria. We identified some examples that varied from documented procedures. Briefs did not include detailed analysis of the likely costs or timeframes for the work being proposed. ICAC’s policy stated that this should be included.

ICAC has conducted recent reviews to assess its operational efficiency

ICAC monitors its overall productivity through reporting on activities including the volume and timeliness of its assessment of matters referred to it and the number of investigations it conducts. Some of ICAC’s investigation work is unpredictable. As a result, it is not always possible to estimate the time or cost of individual investigations or inquiries meaningfully. ICAC's quality standards for its investigations are informed by a range of external sources, including legislation, common law principles, policies of the Office of the DPP and the Attorney-General for NSW, and relevant professional standards.

ICAC commissioned an external review in October 2018 that included an assessment of ICAC's workforce and processes since the implementation of the new organisational structure comprising three Commissioners and a CEO. This review made several observations on the efficiency of ICAC's routine operational processes, including:

  • ICAC could improve the way it prioritises its work to understand where effort should be applied to get the most benefit and manage demand efficiently.
  • There may be opportunities to achieve corruption prevention outcomes using less formal approaches than those used by ICAC.
  • ICAC’s frontline investigation staff spent considerable time on manual processes that reduce the time they can spend on their primary investigation duties.

ICAC used this review to support a budget proposal for an increase to its appropriation funding. This was not approved, as discussed above. During this audit, ICAC advised that it is considering ways to control its legal costs, but this approach has not been formalised and is not reflected in ICAC's current procurement policy. ICAC's expenditure on external legal fees was around $1 million in 2017–18 and almost $1.8 million in 2018–19.

ICAC has identified some corporate efficiency savings but has not reviewed its overall corporate structure recently

ICAC has done some work to assess the efficiency of its corporate functions. It commissioned a review of its ICT strategy in 2017 which identified potential savings of around $1.3 million over ten years if it changed its approach to purchasing IT equipment. ICAC previously made bulk orders using appropriation funding provided once every five years. ICAC made a successful budget proposal in 2018–19 to receive annual appropriation funding for IT equipment which allowed it to make smaller, more regular IT purchases at lower overall cost.

ICAC commissioned a review that included a comparison to the corporate costs of three similar agencies in 2018. It has not conducted a comprehensive review of its corporate services division to determine whether its current size and structure best meet the organisation's needs. As a result, there have been no major changes to the structure of the Corporate Services Division since the introduction of the organisational structure comprising three Commissioner and a CEO in 2016. Without this analysis, it is difficult for ICAC to demonstrate that its corporate functions are being delivered in the most efficient way possible.

ICAC's internal budgeting processes are suitable for its needs but could be better documented

Our previous financial audits included an assessment of ICAC's key financial controls. Audits in the last five years did not identify any high-risk deficiencies in ICAC's financial systems and unqualified audit opinions with respect to ICAC’s financial statements were issued in each year. Budget documentation that is prepared for executives includes draft annual budgets and monthly financial reporting that includes variance analysis.

ICAC advised that its annual budget is developed by its senior executives and involves considering operational needs and options for reprioritisation of expenditure where required. ICAC does not document its approach in an overall budget policy or strategy and does not record minutes of its meetings or document decisions made. ICAC advised that it does not think it needs to document this because it is a small organisation and most of its costs are fixed.

Given the wide discretion ICAC Commissioners have, it is important that ICAC accounts for the way it uses its funding in as much detail as possible, without disclosing sensitive details of its operations. ICAC could improve its internal budgeting process by:

  • documenting its budget policy or strategy
  • incorporating budget responsibilities in the relevant staff position descriptions
  • analysing the reasons for variances between budgeted and actual expenditure in more detail.

3. NSW Electoral Commission - financial arrangements and management practices

Conclusion

Financial arrangements for NSWEC

NSWEC conducts elections and is responsible for maintaining the integrity of the electoral system in New South Wales. NSWEC’s legislation states that it should conduct elections and investigate potential breaches of electoral law independently and be accountable to Parliament. Decisions about the annual appropriation for NSWEC are made by the Cabinet. It is possible that NSWEC’s investigations of electoral integrity could include members of Cabinet or the political party that holds government. There is a risk that decisions about its funding could be influenced by the conduct of these investigations. If realised, this would be a threat to NSWEC’s independence and ability to fulfil its legislative mandate. NSWEC has not received the full funding amount it has requested in recent years. There is inadequate transparency about how funding decisions were made and there are no formal mechanisms to question or challenge these decisions.

The conduct of elections is a key element of a democratic system and under-funding this function could have serious implications. NSWEC’s requests for additional appropriation funding are assessed alongside the priorities of the government of the day. Its role transcends these immediate priorities and there is a risk that its funding requirements may not be prioritised.

NSWEC’s management practices

NSWEC’s internal budgeting processes and efficiency programs are clear and well documented. NSWEC has identified options to improve its operational and corporate efficiency but has not implemented all of these.

3.1 Overview of the NSW Electoral Commission (NSWEC)

NSWEC’s main roles are to conduct elections and maintain the integrity of the electoral system in New South Wales. NSWEC's integrity functions include investigating potential breaches of electoral and political funding laws. Its jurisdiction for these matters includes ministers and other Members of Parliament, local councillors, political party officials, and private citizens including people who make donations to political candidates or parties.

NSWEC’s legislation makes it clear that it should conduct elections and investigate potential breaches of electoral law independently and be accountable to Parliament. The Electoral Act 2017 (Electoral Act) makes it clear that NSWEC should operate as an independent agency. The objects of the Electoral Act include constituting ‘an independent Electoral Commission with an independent Electoral Commissioner’. The Electoral Act also states that NSWEC is not subject to the control or direction of a minister in the exercise of its functions and that NSWEC must undertake its work in a way that is not unfairly biased against or in favour of any individuals or organisations.

NSWEC is treated as an independent entity under financial and management legislation. Funding for NSWEC is appropriated under a discrete part of the Appropriation Act, as one of nine special offices. This is different to the way other government departments and agencies receive appropriation funding. NSWEC is classified as a separate agency under the Government Sector Finance Act 2018. This means that it is not required to comply with whole of government financial management directions if it considers these are inconsistent with the independent exercise of its functions. If NSWEC chooses to exercise this, it must provide a written document stating the reasons for non-compliance to the Treasurer and include this information in its annual report.

NSWEC is accountable to Parliament in several ways, including:

  • The Joint Standing Committee on Electoral Matters considers NSWEC’s annual reports and can conduct hearings to examine its operations.
  • The NSWEC reports directly to Parliament on electoral donations and the administration of elections. However, the NSWEC's post-election review is given to the Premier, who must present it in Parliament within one month.
  • Electoral Commissioners are appointed for a period of up to ten years. The Electoral Commissioner is appointed by the Governor and can only be removed by the Governor with the approval of both Houses of Parliament.

The NSW Electoral Commissioner leads the NSWEC. There are four divisions within the current structure of NSWEC that cover the areas of Elections Funding, Disclosure and Compliance, Information Services, and Corporate Services. NSWEC’s organisational structure is summarised in Exhibit 7.

Org chart of NSW Electoral Commission that shows the organisational divisions report to the Electoral Commissioner
Exhibit 7: Office of the NSW Electoral Commissioner organisation structure
Source: NSWEC website.

NSWEC's main role is conducting state government elections, which take place every four years. NSWEC can be engaged by local governments and non-government organisations to organise their elections. NSWEC aims to provide these services on a cost-recovery basis.

In addition to delivering elections, NSWEC has several functions that require ongoing maintenance or monitoring. This includes maintaining the NSW electoral roll and NSW’s electronic voting technology and providing public education about the electoral system. The Electoral Act 2017 and the Electoral Funding Act 2018 gave NSWEC additional functions relating to the integrity of the electoral system. These include investigating possible breaches of electoral funding and political lobbying laws and administering public funding for political parties.

In 2018–19, NSWEC conducted 192 investigations relating to potential breaches of state electoral laws and 128 matters relating to third-party lobbying laws. NSWEC also recorded and published almost 5,000 disclosures of political donations.

3.2 Funding for NSWEC

NSWEC receives most of its revenue from appropriation funding. This is determined annually through the NSW Government’s budget process. The annual budget is approved by the Cabinet Expenditure Review Committee (ERC), as described in Chapter 1 of this report. NSWEC's funding changes significantly from year to year according to the stage in the electoral cycle, as shown in Exhibit 8. For example, NSWEC’s revenue from appropriation funding was $143.3 million in 2018–19, which was an election year, compared to $68.8 million in 2017–18.

The Electoral Act includes provision for a standing appropriation for election expenses. This does not provide a mechanism for direct access to funding because it requires the approval of the Governor, which can only be given on the advice of the government of the day.

Exhibit 8: NSWEC's revenue (actuals), 2014–15 to 2018–19
  2014–15 2015–16 2016–17 2017–18 2018–19
  $m $m $m $m $m
Appropriation revenue* 96.3 57.2 68.4 68.8 143.3
Additional funding from DPC** 1.4 -- -- 2.4 --
Other revenue*** 1.7 5.1 3.2 0.3 2.3
Total revenue 99.4 62.3 71.6 71.5 145.5

Notes:
* Appropriation revenue is the amount received by NSWEC. This may be lower than the amount approved in the Appropriation Act for reasons including: the application of ‘efficiency dividends’; staffing changes leading to lower employee expenditure requirements; changes to project timelines leading to lower capital expenditure requirements.
** Funding was provided from the funds that were appropriated to DPC under Part 2 of the Appropriation Act in each year.
*** NSWEC’s other revenue includes: sales of goods and services (including provision of election services to local government); acceptance by the Crown Entity of employee benefits and other liabilities; and investment revenue.
Source: NSWEC financial statements 2014–15 to 2018–19.

NSWEC had multiple requests for increases to its appropriation funding rejected in recent years

In 2019–20, NSWEC made 13 separate proposals for increases to its appropriation funding totalling $33.8 million. NSWEC commissioned external reviews and developed business cases to support these proposals. The ERC approved an increase of $8.4 million to NSWEC’s appropriation funding, which was about 25 per cent of the total funding amount requested. The requests for appropriation funding increases related to the implementation of its workforce strategy and several IT projects to improve data and cyber security.

For the 2019–20 budget, NSW Treasury put a cap on the number of proposals agencies could make and limited the criteria to ‘urgent and unavoidable’ requests. NSW Treasury’s budget guidelines said this was necessary because it was an election year and there would be limited funding available for new budget proposals once government election commitments had been funded. NSW Treasury's budget guidelines stated that any proposals for increases to appropriation funding must have the prior approval of the NSW Treasury Secretary, or they would not be progressed for consideration by the ERC.

NSWEC is described as independent agency in NSW Treasury’s budget guidelines. This meant that NSWEC did not have to submit its budget proposals via DPC. However, NSWEC was still limited to making a single budget proposal in 2019–20 and its budget proposals required the approval of the NSW Treasury Secretary to be progressed to the ERC. NSWEC was not informed which, if any, of its budget proposals for 2019–20 were considered by the ERC because NSW Treasury considers this information Cabinet-in-Confidence.

The process for determining the annual appropriation for NSWEC considers electoral funding alongside the NSW Government’s policy commitments

The ERC makes the decisions about budget proposals that are presented to it from NSWEC. These decisions are made with reference to the priorities and commitments of the government of the day. For the 2019–20 budget, the five stated priorities were:

  1. A strong economy, quality jobs and job security
  2. High quality education
  3. Well-connected communities with quality local environments
  4. Putting the customer at the centre of government services
  5. Breaking the cycle of intergenerational disadvantage.

NSWEC’s funding requirements may not be appropriately prioritised if they are being considered against requests for funding to fulfil government election commitments or other high-profile policies or projects. NSWEC’s functions do not make a direct contribution to the achievement of any of the government policy priorities listed above. The integrity of elections and the broader electoral system is a fundamental element of the democratic system in New South Wales, but the consequences of inadequately funding the NSWEC may not have a direct impact on the government of the day.

NSWEC’s main accountability is to the NSW Parliament, but Members of Parliament have limited opportunities to engage in the details of funding decisions about the NSWEC. Members of Parliament do not receive the initial budget proposals that were made or see the advice that NSW Treasury and DPC provided to the ERC. This means that Members of Parliament are not aware of funding proposals from NSWEC that were rejected or only partially granted following NSW Treasury’s consideration and ERC deliberations. The Electoral Commissioner can communicate directly with Parliament by tabling reports and appearing at Parliamentary Committees including the Joint Standing Committee on Electoral Matters or at Budget Estimates hearings. However, these mechanisms do not allow funding decisions to be reconsidered because none of these have any role in the budget development process.

NSWEC does not have an appropriate mechanism to request additional funding outside the appropriation process

NSWEC received additional funding from DPC twice in last five years. In 2014–15, NSWEC received $1.4 million for costs associated with delivering the state government election. In 2017–18, NSWEC received $2.4 million from DPC for work required to implement the Electoral Act 2017. NSWEC made these requests to DPC because it is grouped within the DPC cluster, as described in Chapter 1. Both of NSWEC’s requests for additional funding during this period were approved. This additional funding was paid from DPC’s appropriation funding to NSWEC after approval by the Premier.

Asking a DPC Secretary to make decisions between funding for NSWEC and another agency in the DPC cluster is inappropriate because neither a DPC Secretary nor a Premier is responsible for the functions or actions of NSWEC. Further, if the only mechanism available for NSWEC to seek additional funding is via a DPC Secretary, this could lead to a situation in which NSWEC is seeking funding from the potential subject of an investigation.

3.3 NSWEC’s management practices

NSWEC has proposed changes to improve the efficiency of its operations

NSWEC commissioned an assessment of its workforce structure in 2019. The review found that almost half of its staff, including Director-level staff, were in temporary positions. Weaknesses of this model which have impacted NSWEC in recent years include paying higher rates to contractors and losing organisational knowledge due to high staff turnover. NSWEC argues that reclassifying positions from temporary to ongoing is justified by its expanded legislative mandate, which now includes investigating possible breaches of electoral funding and political lobbying laws, and an increasing requirement for ongoing maintenance of electronic voting and cybersecurity systems.

To implement these changes, NSW Treasury would need to authorise an adjustment to NSWEC’s labour expense cap, which sets the maximum amount that an agency can spend on employees in ongoing roles. NSWEC submitted a request to NSW Treasury to increase its labour expense cap to allow it to implement the recommendations of its workforce review, which included a formal business case. This proposal was not approved and NSWEC was not given a reason for this.

NSWEC conducted a review of its organisational structure in 2018. Some recommended changes have been implemented, while others are still being considered by the NSWEC executive. NSWEC advised the key reasons for this are that some recommendations require increases to its appropriation funding to implement and the delivery of the 2019 state election took precedence over broader strategic work. NSWEC’s program of internal audits over the last three years has included several reviews that considered its operational efficiency. Areas examined included project management for the 2019 state government election and processes used for managing investigations. Several of these reviews have noted recent improvements in its efficiency in areas including project management and governance.

NSWEC has some discretion to manage its election costs by changing service levels in areas such as security of ballots, waiting times for voters, and vote counting times. NSWEC's service levels are detailed in project planning documents and approved by an escalation process through its governance committees. Decisions about election service levels are complex and have implications for cost and the risk to successful delivery of elections. The conduct of an election is a high-risk project because the consequences of parts of the process failing are significant. NSWEC must also consider the expectations of stakeholders including voters, political parties, individual candidates, and the media.

NSWEC has identified options to improve its corporate efficiency but has not implemented all of these

NSWEC has applied its own 'efficiency program' annually since 2016–17. This has involved reviewing costs across the organisation with the aim of finding efficiency improvements. This program has included the review of cross-organisation spending in areas including procurement, consultants and travel, 'line by line' analysis of costs in each division, and review of staff positions to identify duplication of roles. This program is governed by an internal steering committee that reviews recommended changes. This program has identified that NSWEC’s corporate support systems including records management and IT systems are out of date and need upgrading.

NSWEC’s IT costs have risen recently due to cyber security requirements and online voting systems. However, the Electoral Commissioner stated in NSWEC’s 2018–19 Annual Report that it is not compliant with NSW Government cyber security policy. Gaps included: the absence of a formal information security strategy and processes; weaknesses in the way access to systems was controlled; and a lack of a formal process to detect and respond to cybersecurity incidents. The Electoral Commissioner noted that NSWEC was attempting to address these issues but was constrained because its request for increased appropriation funding to implement recommendations of a review it commissioned in 2017 was not approved. In previous years, our financial audit reports have noted weaknesses in NSWEC’s IT security, including the absence of monitoring of information systems privileged user activities.

NSWEC’s internal budgeting processes are suitable for its needs

Our previous financial audits included an assessment of NSWEC's key financial controls. Audits in the last five years did not identify any high-risk deficiencies in NSWEC's financial systems and unqualified audit opinions with respect to NSWEC’s financial statements were issued in each year.

NSWEC has a Strategy, Performance and Budget Committee that oversees its budget process and broader financial strategy. The Committee's membership includes the Electoral Commissioner and senior executives from each business unit. Organisational objectives and identified organisational risks are considered in financial decision making at this Committee. NSWEC projects and initiatives are assessed against consistent criteria that test how they align with the NSWEC’s strategic plan.

There are clear and documented financial delegations, and budget responsibilities are included in the performance plans of senior executives. Business units are involved in the budget setting process, as Directors are responsible for setting budgets for their respective units. All Divisions provide monthly financial reporting on actual expenditure against the budget, including variance analysis. NSWEC monitors project costs through financial reporting to Portfolio and Project Steering Committees. This includes month to month tracking of expenditure associated with each project.

4. NSW Ombudsman - financial arrangements and management practices

Conclusion

Financial arrangements for NSWO

NSWO oversees government agencies and some government-funded private sector bodies that provide services to the community or exercise administrative functions. NSWO’s legislation makes it clear that it should operate independently of the agencies it oversees and be accountable to Parliament.

NSWO’s investigations do not include members of Cabinet, except in relation to Public Interest Disclosures made about a minister, so the risk that decisions about its budget could be affected by its investigations is relatively lower. However, NSWO's investigations can comment on and make recommendations about government policies, which may have been endorsed by Cabinet or an individual minister, and its investigations cover systemic issues for which ministers and the heads of government departments are responsible. NSWO faces a further challenge in its ability to make compelling budget proposals under the current financial arrangements. Its funding requests are assessed alongside the government’s priorities, but its work is unlikely to align directly with these priorities.

NSWO’s management practices

NSWO has assessed its operational and corporate efficiency recently and has implemented major changes to its operating model in response to this. Its internal budgeting process is adequate but could be improved by being documented more thoroughly.

4.1 Overview of the NSW Ombudsman (NSWO)

NSWO’s main role is providing independent oversight of government agencies and some government-funded organisations that provide services to the community or exercise administrative functions. NSWO's jurisdiction includes NSW Government departments and agencies, local government councillors and staff, public universities in NSW, and some non-government organisations that provide services on behalf of the NSW Government, including corrections and community services. NSWO does not have jurisdiction over Members of Parliament, ministers, the judiciary, the NSW Police Force or the NSW Crime Commission.

NSWO’s legislation makes it clear that it should operate independently of the agencies it oversees and be accountable to Parliament. When conducting investigations or reviews, NSWO has free access to NSW Government staff and information required to conduct its work. NSWO is treated as an independent entity under financial and management legislation. Funding for NSWO is appropriated under a discrete part of the Appropriation Act, as one of nine special offices. This is different to the way other government departments and agencies receive appropriation funding. NSWO is classified as a separate agency under the Government Sector Finance Act 2018. This means that it is not required to comply with whole of government financial management directions if it considers these are inconsistent with the independent exercise of its functions. If NSWO chooses to exercise this, it must provide a written document stating the reasons for non-compliance to the Treasurer and include this information in its annual report.

NSWO is directly accountable to Parliament in several ways, including:

  • NSWO is overseen by the Parliamentary Committee on the Ombudsman, the Law Enforcement Conduct Commission and the Crime Commission.
  • NSWO presents reports directly to the President of the Legislative Council and the Speaker of the Legislative Assembly.
  • The Ombudsman can only be removed following a vote in both Houses of Parliament.

NSWO is headed by the NSW Ombudsman, with a Deputy Ombudsman for Reviews, Investigations and Community Services and a Deputy Ombudsman for Engagement and Aboriginal Programs, as shown in Exhibit 9.

This chart shows the Assistant Ombudsman (2) both report to the Deputy Ombudsman of Review, Investigations and Community Services who along with the Deputy Ombudsman Engagement and Aboriginal Programs, Director of Corporate Services and Director of Governance and Risk report to the Ombudsman.
Exhibit 9: NSW Ombudsman organisation structure
Source: NSWO internal documents.

NSWO’s main functions are specified in the Ombudsman Act 1974. NSWO also has functions under the Community Services (Complaints, Reviews and Monitoring) Act 1993, and the Public Interest Disclosures Act 1994. NSWO's main areas of work are:

  • responding to complaints about government agencies and service providers, which can come from members of the public and staff at the agencies
  • providing regular oversight and review of government systems and processes, including correctional facilities, the child protection system, and the public interest disclosures system
  • monitoring and assessing state government aboriginal programs
  • Reviewing 'reviewable' deaths (people with disability in supported group accommodation, children in care, and children whose deaths occur in circumstances of abuse or neglect) and convening the NSW Child Death Review Team
  • providing education and training to NSW Government agencies.

Most of NSWO's workload comes from responding to matters referred to it from members of the public or staff at government agencies. NSWO describes these as 'contacts'. In 2018–19, NSWO received approximately 40,000 contacts, as shown in Exhibit 10. Of these, around 19,000, or 48 per cent, were assessed by NSWO as complaints that were within its jurisdiction. One third of the contacts related to matters that were out of NSWO's jurisdiction, with the remainder requests for advice (11 per cent) and notifications required under legislation (eight per cent), such as deaths of people in state government care. These figures have remained stable over the past five years, which indicates that NSWO's overall operational workload is relatively predictable.

Exhibit 10: Contacts to NSWO by type, 2018–19
Contact type    
Complaints 19,463 48%
Requests for advice 4,555 11%
Notifications 3,338 8%
Out of jurisdiction 13,298 33%
Total 40,654 100%

Source: NSWO Annual Report 2018–19, p.12.

A large amount of NSWO's work involves ensuring accountability for government services that are provided to vulnerable people. Among the contacts to NSWO classified as complaints, 26 per cent concerned custodial services, eight per cent were about community services, and eight per cent were about Housing NSW (formerly FACS Housing).

NSWO initiated seven formal investigations in 2018–19, which arose from a combination of complaints and NSWO’s own research and intelligence. NSWO also conducts a large number of less formal reviews. These involve investigatory work but are not classified as formal investigations requiring the use of NSWO's full investigatory powers. While NSWO conducts a small number of formal investigations, they take up significant time and resources, with some running over several years. Recent investigations by the NSW Ombudsman include a report on compliance and enforcement of water regulations and sharing of information on vulnerable children between NSW Government agencies. NSWO has also conducted reviews of the operations of broader government systems on topics including complaint handling processes in NSW Government agencies and abuse and neglect of people with disabilities.

4.2 Funding for NSWO

NSWO received almost all its revenue from appropriation funding in 2018–19, as shown in Exhibit 11. In previous years, NSWO received up to 20 per cent of its revenue through grants for the provision of services to other agencies, including monitoring disability services, child protection, and aboriginal programs. The transfer of functions from NSWO to other agencies or jurisdictions led to a reduction in its revenue of almost $8 million between 2017–18 and 2018–19. NSWO received additional funding from DPC of around $2 million in 2014–15 and 2015–16. This funding was for the costs of an investigation relating to the NSW Police Force. NSWO has not sought additional funding from DPC since this investigation concluded.

Exhibit 11: NSWO's revenue (actuals), 2014–15 to 2018–19
  2014–15 2015–16 2016–17 2017–18 2018–19
  $m $m $m $m $m
Appropriation revenue* 24.7 24.3 28.9 29.7 26.6
Additional funding from DPC** 2.1 2.1 0.3 -- --
Other revenue*** 5.1 7.0 5.2 7.8 2.9
Total revenue 31.9 33.5 34.4 37.4 29.5

Notes:
* Appropriation revenue is the amount received by NSWO. This may be lower than the amount approved in the Appropriation Act for reasons including: the application of ‘efficiency dividends’; staffing changes leading to lower employee expenditure requirements; changes to project timelines leading to lower capital expenditure requirements.
** Funding was provided from the funds that were appropriated to DPC under Part 2 of the Appropriation Act in each year.
*** NSWO’s other revenue is mostly grants from other agencies to provide services on their behalf, e.g. oversight of Aboriginal programs.
Source: NSWO financial statements 2014–15 to 2018–19.

Several functions that were provided by NSWO have been transferred to other agencies or jurisdictions in recent years. This has reduced NSWO’s size and revenue. Responsibility for the oversight of the NSW Police Force’s handing of complaints was transferred to LECC in 2016–17. Most of NSWO’s responsibilities for monitoring disability services were transferred to the Commonwealth Government in 2018–19 after the introduction of the National Disability Insurance Scheme. Some NSWO staff were transferred to the Office of the Children’s Guardian, another independent statutory office, during 2019–20 as a part of reforms in child protection. NSWO has considered options to share resources or consolidate functions with other oversight agencies, with the goal of finding efficiency and effectiveness improvements.

The process for determining the annual appropriation funding for NSWO does not fully recognise its independence

The Cabinet Expenditure Review Committee (ERC) makes the decisions about the annual appropriation for NSWO. NSWO’s jurisdiction does not include ministers, except in relation to Public Interest Disclosures made about a minister. Its investigations typically make findings about government departments, rather than individual senior officials. However, NSWO's reviews can comment on and make recommendations about government policies, which may have been endorsed by Cabinet or an individual minister. In addition, ministers are ultimately responsible for all of the actions of their departments and agencies.

While the risk that decisions about NSWO's funding could be influenced by these factors is relatively lower, the existing safeguards are not comprehensive. If realised, this risk would reduce NSWO’s ability to fulfil its legislative functions independently of the Executive Government.

NSWO's priorities are not directly linked to government priorities

The decisions about NSWO’s appropriation funding are made with reference to the priorities and commitments of the government of the day. For the 2019–20 budget, the five stated priorities were:

  1. A strong economy, quality jobs and job security
  2. High quality education
  3. Well-connected communities with quality local environments
  4. Putting the customer at the centre of government services
  5. Breaking the cycle of intergenerational disadvantage.

Some of NSWO's work could make an indirect contribution to some of these priorities. For example, NSWO’s complaint handling and investigation functions cover areas including education and services for vulnerable people. However, NSWO’s work is less likely to align with government priorities compared to projects and programs run by government departments and agencies. This may make it difficult for NSWO to make a compelling case for increases to its appropriation funding if these are required deliver its statutory functions. NSWO's statutory secrecy requirements for formal investigations may also limit its ability to provide complete information to NSW Treasury to support proposals for additional funding.

4.3 NSWO’s management practices

NSWO has done recent work to clarify its core roles and functions

NSWO commissioned a major strategic review in 2018. This led to an organisational restructure that aimed to improve the alignment of its resources to the delivery of its legislative mandate and enable more consistent approaches to delivering its main functions.Work conducted since the review has focused on developing more consistent approaches to prioritisation of quality and service standards. Recent improvements to these processes include establishing an executive committee that has scheduled meetings every two months. The committee considers and decides on proposals for new investigations and major projects, maintains a watching brief over emerging complaints and systemic issues that may warrant future investigations and projects, has developed templates for proposals, plans and post-project reviews, and tracks the progress of investigations and projects against their plans.

NSWO has considerable discretion in fulfilling its legislative functions, particularly in the number and scope of larger investigations it conducts. There are several areas where the extent of work required to fulfil its mandate remains ambiguous. For example, some of NSWO's legislative functions include mandated minimum standards while others do not.

Areas of work that could be clarified further include:

  • the number of audits of the operation of the public interest disclosure (PID) system it should do. NSWO has responsibility for oversight of more than 400 public authorities and 130 local councils that are required to use the PID system, but only conducted one audit for 2018–19
  • the amount of support it should provide to people who contact them with issues that are not within its jurisdiction.

NSWO's internal budgeting process is suitable for its needs

Our previous financial audits included an assessment of NSWO's key financial controls. Audits in the last five years did not identify any high-risk deficiencies in NSWO's financial systems and unqualified audit opinions with respect to NSWO’s financial statements were issued in each year.

NSWO does not have a documented budget policy that sets out processes such as roles and responsibilities, reporting, and risk escalation. NSWO has made recent changes to improve its internal budget process, including improving the documentation of its processes. Senior executives were engaged with the budget process in 2019–20, including considering the alignment of spending decisions with organisational objectives. Senior executives were given accountability for cost centres and regular reporting including variance analysis was provided to executives.

NSWO has assessed its operational efficiency recently and has made changes

Around 80 per cent of NSWO's expenditure was on staff-related costs in each of the last five years. NSWO has begun trialling options to improve its project management and costing information. NSWO's case management system gives it some information on the timeliness of complaint resolution and staff utilisation but it does not allow it to track the costs of its major investigations and projects.

Work conducted since its strategic review in 2018 has identified several further efficiency opportunities. These include encouraging the use of its online complaints function and developing an automated call system to improve the efficiency of its telephone complaints service.

NSWO has identified and begun implementing several corporate efficiency savings

NSWO recently reviewed its corporate structure and has developed a plan that aims to modernise and better support the organisation. NSWO has identified the need for upgrades in systems to support corporate and operational efficiency, including IT, project management and costing, and records management. NSWO has not identified options for funding this. It has recently completed analysis of the funding required and the risks associated with not making the improvements for the 2020–21 budget process.

NSWO has conducted preliminary analysis of options to share resources or merge functions with other organisations that have comparable or complementary roles, as noted earlier in this chapter. NSWO has identified potential agencies with which it could share resources, including office space and corporate services functions. These considerations are in the early stages and have not yet been developed or costed by NSWO. Further work in this area may help NSWO to mitigate the effects of the reduction in its mandate and staff headcount in recent years. In the case of proposals to share resources, this must be balanced with the need for NSWO and any other agencies involved to protect their independence.

5. Law Enforcement Conduct Commission - financial arrangements and management practices

Conclusion

Financial arrangements for LECC

LECC's main functions are to investigate allegations of misconduct by law enforcement and oversee police handing of complaints. LECC’s legislation states it should operate independently of the agencies it oversees and be accountable to Parliament. LECC’s jurisdiction does not include members of Cabinet, NSW Treasury or DPC. However, LECC’s investigations have the potential to have a negative impact on a Minister for Police, who is a member of Cabinet, and the government of the day. There is a risk that decision makers for LECC’s funding could be influenced by these considerations. While LECC has not sought increases to its appropriation funding in recent years, there are no formal mechanisms to question or challenge these decisions if it did have concerns about its funding in the future.

Unlike the other integrity agencies in this audit, LECC is not classified as a separate GSF agency under the Government Sector Finance Act 2018. This difference means that LECC has less independence from the Executive Government, because LECC would have to comply with a Treasurer’s Direction even if it believes it is not consistent with the independent exercise of its functions.

LECC's management practices

LECC's internal budgeting processes are clear and documented and it has identified and implemented operational and corporate efficiency savings in several areas. LECC published a new strategic plan in July 2020. Over the first three years of its operations since 2017, LECC had not conducted effective strategic planning which made it difficult for LECC to demonstrate that it had a cohesive approach to its operations across the agency during this time.

5.1 Overview of the Law Enforcement Conduct Commission (LECC)

LECC's main roles are to investigate allegations of misconduct by law enforcement officers and to oversee the way law enforcement agencies handle complaints from the public. Its jurisdiction covers the NSW Police Force and the NSW Crime Commission. LECC does not have jurisdiction over Members of Parliament, ministers, or the judiciary.

The objects of the Law Enforcement Conduct Commission Act 2016 (LECC Act) include providing independent oversight and review of investigations. The LECC Act states that LECC and its Commissioners are not subject to the control or direction of the minister in the exercise of their functions. LECC Commissioners have fixed tenure and can only be removed by the Governor.

Funding for LECC is appropriated under a discrete part of the Appropriation Act, as one of nine special offices. This is different to the way other government departments and agencies receive appropriation funding. LECC is not classified as a separate GSF agency under the Government Sector Finance Act 2018, as the other three integrity agencies in this audit are. LECC is accountable to Parliament in several ways, including:

  • LECC is overseen by the Committee on the Ombudsman, the Law Enforcement Conduct Commission and the Crime Commission.
  • LECC is also overseen by the Inspector of the Law Enforcement Conduct Commission, who reports directly to Parliament.
  • LECC presents its reports to the President of the Legislative Council and the Speaker of the Legislative Assembly.

LECC commenced operations in July 2017. This followed a review of the police oversight system that recommended the establishment of the single agency to oversee the conduct of law enforcement agencies in NSW. The review provided detailed advice on the structure, operations and funding of the new agency. This included specifying that the new agency should have separate divisions for its two main functions of investigating misconduct and overseeing complaints handling. The establishment of the LECC drew together functions previously undertaken by the Police Integrity Commission, the NSW Ombudsman and the Inspector of the Crime Commission. These agencies and divisions were abolished when LECC commenced operations.

LECC’s organisation structure currently includes three commissioners - a Chief Commissioner, a Commissioner for Integrity and a Commissioner for Oversight, as shown in Exhibit 12. The Chief Commissioner is the head of the organisation and oversees initial assessments of matters referred to LECC and LECC's prevention and education work. The Commissioner for Integrity oversees LECC's investigation work, and the Commissioner for Oversight is responsible for LECC's oversight of the internal complaint handling processes of the NSW Police Force and the NSW Crime Commission. The position of Commissioner for Oversight became vacant in early 2020 and the ongoing status of this position is currently under review. LECC also has a CEO who is responsible for the management of corporate functions. LECC’s current CEO is also the General Counsel for the agency.

org chart of LECC shows the Commissioner for Integrity, Commissioner for Oversight and Chief Commissioner responsibility when it comes to divisions. For an accessible version, email communications@audit.nsw.gov.au
Exhibit 12: Law Enforcement Conduct Commission organisation structure
Source: LECC internal documents.

LECC’s functions are set out in the LECC Act. These include:

  • investigating matters that could amount to serious misconduct or serious maladministration by members of the NSW Police Force and NSW Crime Commission
  • making recommendations on education and prevention programs concerning misconduct or maladministration in law enforcement
  • overseeing the NSW Police Force's handling of complaints against police officers and the NSWCC's handling of complaints against its officers.

Almost all LECC’s investigation and oversight work relates to the NSW Police Force, because the NSW Crime Commission is a small agency whose officers have limited contact with the public. LECC assessed around 2,500 complaints about the NSW Police Force in both 2017–18 and 2018–19, as shown in Exhibit 13. LECC staff make an initial assessment of complaints to determine whether they are examples of serious misconduct or maladministration. A committee of senior executives including the Commissioners then make the decisions about which matters should be investigated further by LECC.

In both 2017–18 and 2018–19, LECC conducted around 150 preliminary enquiries or preliminary investigations of complaints. In 2017–18, 28 of these were progressed to full investigations, while in 2018–19 this number grew to 49. LECC advised that the larger number of full investigations undertaken was due to filling vacant positions, which lifted its capacity to conduct full investigations.

LECC’s legislative powers include the ability to hold public hearings into matters it is investigating. Four of LECC’s investigations over the last two years have involved public hearings. These hearings took between one and four days to complete. LECC's prevention and education team conducted three major projects in 2018–19 relating to systemic issues identified at the NSW Police Force.

Through its role overseeing the NSW Police Force’s complaints handing system, LECC monitored over 1,200 internal investigations in each of the years 2017–18 and 2018–19 as part of its oversight function.

Exhibit 13: LECC's main police integrity activities, 2017–18 and 2018–19
Activity 2017–18 2018–19
Complaints assessed 2549 2547
Preliminary enquiries and investigations* 151 158
Full investigations commenced 28 49
Number of compulsory appearances before the Commission 44 78
Number of police investigations overseen 1261 1254

* Figures combined from LECC Annual Report categories of ‘preliminary enquiries’ and ‘preliminary investigations’.
Source: LECC Annual Reports, 2017–18 and 2018–19.

5.2 Funding for LECC

LECC has received almost all its revenue from appropriation funding, as shown in Exhibit 14. LECC received around $20.0 million in both 2017–18 and 2018–19, its first two full years of operation.

Exhibit 14: LECC's revenue (actuals), 2017–18 and 2018–19*
  2017–18 2018–19
  $m $m
Appropriation revenue** 20.2 20.8
Additional funding from DPC -- --
Other revenue*** 0.7 1.2
Total revenue 20.9 22.0

Notes:
* LECC commenced operations in July 2017, so funding data is only shown from 2017–18 onward.
** Appropriation revenue is the amount actually received by LECC. This may be lower than the amount approved in the Appropriation Act for reasons including: the application of ‘efficiency dividends’; staffing changes leading to lower employee expenditure requirements; changes to project timelines leading to lower capital expenditure requirements.
*** LECC’s other revenue includes: acceptance by the Crown Entity of employee benefits and other liabilities; sales of goods and services; and investment revenue.
Source: LECC financial statements 2017–18 to 2018–19.

LECC has been operating for a relatively short time and did not reach its full staff complement in 2017–18 or 2018–19. As a result, it is difficult to provide meaningful analysis on trends in its funding or expenditure. LECC operated within its budget in its first two years of operation. LECC did not make any proposals for increases to its annual appropriation funding in these years and did not seek any additional funding from DPC during the financial year.

The process for determining the annual appropriation funding for LECC does not fully recognise its independence

The Cabinet Expenditure Review Committee (ERC) makes the decisions about LECC’s annual appropriation funding. LECC’s jurisdiction does not include ministers. However, LECC’s investigations have the potential to impact the reputation of a Minister for Police and the government more broadly. While ERC members are unlikely to have a direct personal interest in LECC’s work, there is a risk that decisions about LECC’s funding could be influenced by these broader concerns.

LECC could raise concerns about its funding or the budget process with the Parliamentary Committee on the Ombudsman, the Law Enforcement Conduct Commission and the Crime Commission. It could also potentially raise concerns with the Inspector of the LECC. However, these bodies do not have any formal role in the budget process.

LECC has less independence than the other integrity agencies because of its status under the Government Sector Finance Act 2018

LECC is not classified as a separate GSF agency under the Government Sector Finance Act 2018, as the other integrity agencies in this audit are. There are no specific reasons for LECC's omission from the group of separate GSF agencies in extrinsic materials such as the explanatory memoranda or second reading speech. NSW Treasury advised during this audit that Cabinet decided which agencies were classified as separate GSF agencies.

This difference means that LECC has less independence from the Executive Government, because LECC would have to comply with a Treasurer’s Direction even if it believes it is not consistent with the independent exercise of its functions. While LECC has not needed to exercise this, there is a risk that LECC’s independence could be reduced by directions from the Executive.

5.3 LECC’s management practices

Some of LECC’s management practices have not been consistent across the organisation but recent improvements have been made

LECC has systems and standard procedures for assessing and prioritising its work and providing guidance to staff. However, guidance documents we examined during the audit varied in form and quality across the organisation, and the status of some of these documents was unclear.

LECC did not conduct effective strategic planning in its initial years of operation. It did not report against the outcomes set out in its 2017–2020 Strategic Plan or update or revise the plan during that time. Individual divisions developed their own business plans in 2019–20, but most made little reference to the priorities or outcomes articulated in the overall plan. LECC’s 2018–19 annual report did not provide clear summaries of its activities across the organisation or compare activity and performance between the current year and previous year.

When LECC was established in 2017, it brought together several existing agencies with different organisational cultures and management practices. This created a significant challenge in establishing consistent management and operational practices across the organisation. The former Chief Commissioner decided in mid-2018 not to continue the full-time CEO position. In June 2019, the CEO position was reclassified as a part-time role. This may have reduced the attention given to addressing these challenges. LECC began streamlining some operational processes in early 2020 to reduce backlogs and improve consistency, and LECC published a new strategic plan in July 2020.

LECC has identified and implemented some operational and corporate efficiency savings

LECC has conducted several minor restructures within divisions over the past two years. These were cost-neutral and aimed to improve the structure of teams in relation to operational needs. LECC does not have any organisation-wide project management systems to monitor the time and cost of its major investigations. LECC has conducted some individual initiatives to assess its corporate efficiency, including:

  • replacing its case management system, with the aim of improving data quality and management reporting capability
  • completing a rent review against NSW Government policy and market conditions before extending its lease.

LECC's internal budgeting processes are suitable for its needs

Our previous financial audits included an assessment of LECC's key financial controls. Audits in the last two years did not identify any high-risk deficiencies in LECC's financial systems and unqualified audit opinions with respect to LECC’s financial statements were issued in each year.

LECC documents its approach to budgeting in its accounting manual. This sets out the overall budget strategy, process and timing, and roles and responsibilities. It includes the broad criteria to decide whether to seek increases to its appropriation funding. The Directors of Divisions stated that they are accountable for their budgets, but this is not documented. LECC's budget reporting includes variance analysis and commentary. Monthly finance reports are prepared by the Finance Manager and provided to Commissioners and senior executives.

The LECC executive team decides the annual budget allocations for each division. For the 2019–20 budget process, LECC Commissioners held a dedicated meeting early in the financial year. However, spending decisions were not clearly linked to organisational objectives. For example, descriptions of the operational needs for capital bids were provided, but the contribution the capital item would make to achieving business unit or organisational objectives was not described. LECC stated that it does not need to document the way its spending decisions are made because the Commissioners understand the links between spending and organisational objectives.

6. Financial management mechanisms used by NSW Treasury and DPC

Conclusion

Aspects of the financial management mechanisms used by NSW Treasury and DPC to administer funding for the integrity agencies create tensions with their independent status.

NSW Treasury and DPC have administered efficiency dividends and budget savings and reform measures which results in the integrity agencies not being able to access the full funding approved by Parliament. There are two competing interpretations of appropriation legislation that lead to different conclusions about whether there is a clear legal basis for doing this. NSW Treasury and DPC take the view that the Appropriation Act provides funding for the integrity agencies to a Premier and does not state that a Premier must provide the full amount of funding to the agencies. This interpretation leads to the view that a Premier can restrict access to appropriation funding that was approved by Parliament. An alternative approach to interpreting the Appropriation Act would consider the contextual factors specific to the integrity agencies. These factors include: the integrity agencies are independent of ministerial control, the integrity agencies are accountable to Parliament for performing specific legislated functions, and the integrity agencies may conduct investigations that involve a Premier, or DPC or NSW Treasury. If this alternative interpretation is accepted, then the reduction of the integrity agencies’ access to appropriation funding could diminish the independent status of the integrity agencies.

DPC has given additional funding to three of the integrity agencies in recent years in response to requests from the agencies. If the integrity agencies require additional funding during the year, the only mechanism available is to seek funding from DPC. This creates a potential threat to the independence of the integrity agencies. Asking DPC to make decisions about funding allocations between an integrity agency and another agency in the DPC cluster is inappropriate because DPC is not responsible for the functions or actions of an integrity agency. It is also possible that DPC could be the subject of an investigation conducted by an integrity agency. Separately, DPC’s provision of $2.5 million in additional funding to ICAC in 2019–20 may not have been consistent with the Appropriation Act 2019. The appropriations for DPC and ICAC were made under different parts of the Act. Appropriation funding can only be paid out for the purpose specified in each part of the Act. It is not clear whether it is permissible to transfer funding between agencies that receive appropriations from different Parts of the Act.

The integrity agencies have recently been asked to report activity and outcome measures to DPC, as the principal department for the cluster that they have been placed in, under the outcome budgeting reforms that are being implemented by NSW Treasury. This is inconsistent with their independent status because the integrity agencies are accountable to Parliament for their activities, not DPC or a Premier. DPC has advised that it considers the risks to the independence of the integrity agencies described above to be more theoretical than real.

6.1 Restricting the integrity agencies’ access to appropriation funding approved by Parliament

NSW Treasury and DPC have restricted the integrity agencies’ access to the full appropriation funding that was approved by Parliament

As a part of the budget development process, in some years the Cabinet Expenditure Review Committee (ERC) has specified a limit on government agencies’ access to the appropriations approved by Parliament. In those years, the ERC decided the size of the limit and which agencies, if any, were exempted. These have been described as efficiency dividends or budget savings and reform measures and they have been applied to the integrity agencies in recent years.

In 2018–19, NSW Treasury oversaw the implementation of efficiency dividends across all government agencies, including the integrity agencies. After the Appropriation Act 2018 passed, NSW Treasury wrote to the integrity agencies about the application of an efficiency dividend of three per cent to the amount of funding approved by Parliament. NSW Treasury directed the agencies to resubmit a final budget proposal for a total amount of funding that was lower than the amount approved in the Appropriation Act 2018. The impact of the efficiency dividends on the integrity agencies’ access to the funding approved by Parliament is shown in Exhibit 15.

Exhibit 15: Appropriation approved for integrity agencies and limits imposed by NSW Treasury through efficiency dividends, 2018–19
Agency Amount approved by NSW Parliament in Appropriation Act 2018 Efficiency dividend applied by NSW Treasury Maximum funding accessible to the agency
ICAC $25,617,000 $210,000 $25,407,000
NSWEC $158,699,000* $1,183,000 $157,516,000
NSWO $27,113,000 $277,000 $26,836,000
LECC $23,554,000 $308,000 $23,246,000

* The appropriation amount approved for NSWEC included approximately $70m in funding that was exempt from the efficiency dividend.
Source: Integrity agency internal financial reporting documents.

The NSW Government budget for 2019–20 included savings and reform measures totalling around $3.2 billion across the NSW Government. DPC oversaw the budget savings and reform measures for the integrity agencies in 2019–20. There were no limits imposed on funding appropriated for the integrity agencies in 2019–20. However, DPC informed the integrity agencies of the estimated limits that would be placed on their appropriations in each of the next nine years. The integrity agencies’ access to approved appropriations will be reduced by around $10 million each over this period.

The legal basis for restricting the integrity agencies’ access to appropriation funding is contestable

The efficiency dividends and budget savings and reform measures described above have been administered by either NSW Treasury or DPC in recent years. While these departments have managed the practical application of these financial management mechanisms, the legal authority for managing the appropriations for the integrity agencies lies with a Premier. There are two competing interpretations of appropriation legislation that lead to different conclusions about whether a Premier has a clear legal basis for restricting access to funding that has been appropriated for the integrity agencies.

NSW Treasury and DPC have interpreted the Appropriation Act in a way that concludes a Premier is able to restrict the integrity agencies’ access to appropriation funding. Its interpretation is based on the following key points:

  • The Appropriation Act specifically appropriates funding to a Premier, rather than the head of the integrity agency. This reflects the established Westminster convention that a minister is ultimately accountable to Parliament for the expenditure of public funds.
  • The Appropriation Act specifies a maximum amount of funding that can be withdrawn for the services of each of the integrity agencies. It does not specify that a Premier must provide the full amount of funding approved to the agencies.
  • The Government Sector Finance Act 2018 contemplates the existence of unused appropriations by making provision for the return of any funds that are not used within the financial year to the Consolidated Fund.

NSW Treasury and DPC’s interpretation appears to be consistent with relevant financial legislation and financial administration conventions in New South Wales, but it does not sit well alongside the legislative role and functions of the integrity agencies. An alternative approach to interpreting the Appropriation Act would consider the context in which the Appropriation Act operates and the outcome that would flow from NSW Treasury and DPC’s interpretation. This alternative interpretation would emphasise the importance of contextual factors specific to the integrity agencies, which include:

  • The appropriations for the integrity agencies and for other government departments and agencies are made under discrete Parts of the Appropriation Act. This indicates an intention to distinguish between appropriations for integrity agencies and appropriations for government departments.
  • The integrity agencies are established by separate Acts of Parliament which give them independence from ministers. This is different to the arrangements for other departments and agencies, which are established by Executive order and cannot act independently of their minister.
  • The Appropriation Act expresses the appropriations to a Premier as ‘for the services of’ the integrity agencies. The integrity agencies have functions that are specified in legislation and are accountable to Parliament for performing these functions.
  • An integrity agency may be obliged to undertake an investigation that involves a Premier or a senior government official.

These factors point to the need for an integrity agency to be properly funded to fulfil its functions and for that funding to be free from intervention by a Premier or the Executive Government. Under this alternative interpretation, a Premier would require an express source of power to limit the availability of appropriation funding to the integrity agencies. If a Premier could reduce the integrity agencies’ access to funding that was appropriated by Parliament, the independent status of the integrity agencies could be diminished.

Ministers can retain control of certain types of expenditure by integrity agencies through decisions about delegations

There are some circumstances in which a minister can maintain control of the expenditure of an integrity agency. Under the current framework, funding is appropriated to a minister, not a department or agency, so a department or agency must have a delegation from the minister before it can incur expenditure. This applies to the integrity agencies as well as other departments and agencies. A minister can impose terms and conditions on these delegations, but these must not be inconsistent with the purposes for which the appropriation was given. This means that for the integrity agencies, a Premier could not impose a term or condition on a delegation that prevented expenditure on a specific investigation but could impose a term or condition that did not interfere with the integrity agencies’ ability to exercise its functions.

In February 2019, we tabled a report that found LECC did not comply with the current framework for expenditure delegations because the minister had not delegated approval for expenditure by LECC on overseas travel, and the former LECC Chief Commissioner incurred this expenditure on overseas travel without the minister’s approval. The report also noted that ministers should take care not to unduly interfere with the functions of independent agencies in the way they use this control over the expenditure of integrity agencies.

6.2 Use of clusters for the financial management of the integrity agencies

DPC has given additional funding to three of the integrity agencies in recent years following requests from the integrity agencies

ICAC, NSWEC and NSWO each received additional funding from DPC during the financial year in the period 2014–15 to 2018–19. ICAC’s requests for additional funding mostly related to covering the cost of large inquiries and public hearings that had not been anticipated. ICAC cannot predict which matters will require more comprehensive investigations or which will lead to public inquiries at the time when its annual budget is set. NSWEC’s requests for additional funding related to delivering the state government election (2014–15) and implementing new legislation (2017–18). NSWO’s requests for additional funding covered costs associated with a major inquiry that was significantly more complex and lengthier than most matters it investigates. LECC did not make any requests to DPC for additional funding during this period, as shown in Exhibit 16.

Exhibit 16: Additional funding from DPC to integrity agencies, 2014–15 to 2018–19
  2014–15 2015–16 2016–17 2017–18 2018–19
  $m $m $m $m $m
ICAC 1.6 1.3* 0.1 1.7 1.7
NSWEC 1.4 -- -- 2.4 --
NSWO 2.1 2.2 0.3* -- --
LECC -- -- -- -- --

* Excludes grant from DPC for redundancies.
Source: Integrity agency financial statements 2014–15 to 2018–19.

To access this funding, the heads of the integrity agencies wrote to the DPC Secretary requesting additional funding and providing a brief description of the reason it was needed. In some cases, the integrity agencies also wrote directly to the Premier. The integrity agencies made these requests to DPC because they are grouped within the DPC cluster for financial management and administrative purposes. The NSW Government’s cluster arrangements do not have legal status, as described in Chapter 1 of this report. However, if the integrity agencies require additional funding during the year, the only mechanism available is to seek funding from DPC.

All requests for additional funding made by the integrity agencies in the years shown in Exhibit 16 above were approved. Additional funding was paid from DPC to the integrity agencies after discussions between the Secretaries of DPC and NSW Treasury and approval by the Premier.

The system for providing additional funding to the integrity agencies creates potential threats to their independence

The practice of the integrity agencies seeking additional funding from DPC creates a potential threat to their independence. Asking DPC to make decisions about funding allocations between an integrity agency and another agency in the DPC cluster is inappropriate because DPC is not responsible for the functions or actions of an integrity agency. In addition, it is possible that DPC could be the subject of an investigation conducted by an integrity agency.

There are no criteria or guidelines for integrity agencies seeking additional funding from DPC and integrity agencies are not required to provide any specific information in support of their requests. There is very little transparency to Parliament about the requests made and granted. DPC does not record any details about the reasons for granting the funding requests and the additional funding provided is only recorded in the disaggregated section of the financial statements of the integrity agencies in annual reports published the following year. Accounting standards do not require departments to publish this information in a detailed manner in their financial statements.

The NSW Public Sector Governance Framework, which was published in 2013, stated that while integrity agencies were placed within a cluster, they would not generally receive grant funding from the principal department in that cluster. Further, requiring the integrity agencies to apply to DPC for additional funding could lead to a situation in which one of the integrity agencies is seeking funding from a potential subject of the investigation. This would not be consistent with good practice approaches to governance.

DPC’s provision of additional funding to ICAC in 2019–20 may not have been consistent with the Appropriation Act 2019

DPC provided $2.5 million to ICAC in 2019–20 in response to ICAC’s request for additional funding to cover the cost of a public inquiry. DPC consulted with NSW Treasury on this decision and provided this funding in its capacity as the principal department for the cluster. DPC sourced this funding from within its appropriation funding for that year. DPC’s provision of additional funding to ICAC using its appropriation funding may not have been consistent with the legislative purpose for which the appropriation was made.

Part 2 of the Appropriation Act 2019 (the Act) provided funding for the services of DPC. The Act specified that funding could be reallocated in some circumstances, but funding appropriated under Part 2 of the Act could only be paid out for the purposes specified in that Part. An appropriation for the services of DPC would ordinarily extend to making grants to agencies which have been administratively grouped within the DPC cluster and the integrity agencies are grouped within the DPC cluster. However, the appropriations for the services of the integrity agencies were made under Part 4 of the Appropriation Act 2019. It is contestable as to whether it was within the purpose of the appropriation for DPC to provide this additional funding to an agency which received its appropriation from another part of the Act.

In the years 2014–15 to 2018–19, the Appropriation Acts did not include a provision stating that funding appropriated under Part 2 may only be paid out for any of the purposes specified in Part 2. This indicates that additional funding provided from DPC to integrity agencies in those years would not have been inconsistent with the relevant Appropriation Acts.

Asking the integrity agencies to report to DPC on their activities and outcomes is inconsistent with the independent status of the integrity agencies

Outcome budgeting was introduced as a management practice in New South Wales in 2017–18. Under this approach to budget development, agencies are required to link their budget submissions to a state outcome. The state outcomes are assigned by NSW Treasury to the relevant cluster principal department, which is then responsible for delivering its assigned outcomes.

The integrity agencies have been asked by DPC to develop plans to report to it against the state outcome of ‘accountable and responsible government’. DPC is accountable to the Premier and Cabinet for delivering this outcome. The outcome itself is broad enough to be consistent with the general role and functions of the integrity agencies. However, the integrity agencies are not subject to direction by a minister or department in their activities and report directly to Parliament on their functions. This makes it inappropriate for the integrity agencies to be asked to report against objectives and outcomes that are set by the NSW Government and administered by DPC.

Appendices

Appendix one – Response from agencies

Appendix two – About the audit

Appendix three – Opinion from the Crown Solicitor’s Office

 

 

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