A report released today by the Auditor-General for New South Wales, Margaret Crawford, presents key findings from four years of performance audits. The report findings are presented around six areas of government activity including planning for the future, meeting community expectations for key services, investment in infrastructure, managing natural resources, ensuring good governance and digital disruption.

In this report, we present common findings and lessons from the past four years of performance audits, and offer insights to the public sector on elements of effective performance. We have analysed the key findings and recommendations from 61 performance audits tabled in the NSW Parliament between July 2014 and June 2018, spanning varied areas of government activity. We will also use this report to help determine areas of unaddressed risk across all parts of government, and to shape our future audit priorities.

Governments play an important stewardship role. Their decisions need to consider intergenerational equity by ensuring that investment strategies are sustainable. Governments also need to consider the impact of their decisions on different parts of the community. We recognise that governments face challenges in delivering programs and services, targeting complex social issues with finite resources.

Governments are changing how they deliver services to respond to citizen needs and deliver greater value for money. In this section, we reflect on audits that looked at how government entities are planning their activities to meet the needs of the community into the future.

State and local government exist to provide services to citizens, and citizens are playing a greater role in defining what services they want or need. Expectations about consultation, ease of access, timeliness, and customisation of services are rising. Governments face challenges to continually improve the way they plan and deliver services to meet these expectations. Governments also need to provide quality services for a growing and ageing population whilst working within a constrained financial environment.

Over the past four years, our performance audits have assessed aspects of State and local government services, including education, health services, disability support, corrective services, and many others. In this section, we draw together common findings that government entities should reflect on when providing services to the community.

The NSW Government’s 2018–19 Budget forecasts an $87.2 billion infrastructure investment program over the next four years. Infrastructure investment of this size carries significant opportunities and risks. Competition for resources is high and maintaining the capability to manage and deliver projects effectively is challenging. Governments also need to plan effectively to ensure infrastructure built today will meet future needs.

Over the past four years, we have looked at some of the ways NSW Government agencies justify and prioritise projects for funding, work with contractors to deliver projects, and track and report on progress. In this section, we draw together common findings from our audits that government entities should consider when planning future infrastructure projects.

Governments face challenges in balancing the use of natural resources to meet diverse interests, while supporting a sustainable natural environment for the future. They need to supply communities with water, produce energy, protect natural habitats, and support farming, industry, and economic development.

Some of our recent audits have considered how government agencies are managing natural resources and protecting the environment for future generations. In this section, we have drawn together common findings across our audits that government entities should consider in managing the environment and natural resources.

A range of checks and balances is needed to support public confidence in government decision making. To maintain trust, government agencies should act transparently, and in accordance with relevant legislation and policy. This is particularly important as the public sector increasingly engages with external partners to deliver services and provide a more contestable environment.

Good governance arrangements should result in improved service delivery and more effective and efficient use of resources. Our audits have looked at many different elements of governance, including making sure the necessary processes and workplace cultures are in place to help government entities achieve their aims. In this section, we have drawn together various aspects of governance that government entities should consider.

The global increase in digital technology provides governments with opportunities to interact with citizens in more immediate and responsive ways than was previously possible. Data can be used in powerful ways such as predicting future demand for services, targeting interventions, responding to crises, and evaluating outcomes. Governments face challenges in doing this while maintaining secure digital environments that protect citizen interests, privacy, and autonomy.

Our audits have assessed some of the ways that government entities are incorporating digital change into their work. In this section, we draw together common themes that governments could consider in protecting their digital assets, or expanding their digital capabilities.
 

Appendix one – Performance audits 2014 to 2018

Appendix two – Performance auditing

Appendix three – About this report

Many local councils need to improve their fraud control systems, according to a report released today by the Auditor-General for New South Wales, Margaret Crawford. The report highlights that councils often have fraud control procedures and systems in place, but are not ensuring people understand them and how they work. There is also significant variation between councils in the quality of their fraud controls.

Fraud can directly influence councils’ ability to deliver services, and undermine community confidence and trust. ICAC investigations, such as the recent Operation Ricco into the former City of Botany Bay Council, show the financial and reputational damage that major fraud can cause. Good fraud control practices are critical for councils and the community. 

The Audit Office of New South Wales 2015 Fraud Control Improvement Kit (the Kit) aligns with the Fraud and Corruption Control Standard AS8001-2008 and identifies ten attributes of an effective fraud control system. This audit used the Kit to assess how councils manage the risk of fraud. It identifies areas where fraud control can improve. 

Fraud can disrupt the delivery and quality of services and threaten the financial stability of councils.

Recent reviews of local government in Queensland and Victoria identify that councils are at risk of fraud because they purchase large quantities of goods and services using devolved decision making arrangements. The Queensland Audit Office in its 2014–15 report 'Fraud Management in Local Government' found that ‘Councils are exposed to high-risks of fraud and corruption because of the high volume of goods and services they procure, often from local suppliers; and because of the high degree of decision making vested in councils'. They also highlight some common problems faced by councils including the absence of fraud control plans and failure to conduct regular reviews of their internal controls. Also, in 2008 and 2012 the Victorian Auditor-General identified the importance of up-to-date fraud control planning, clearly documented related policies, training staff to identify fraud risks and the importance of controls such as third party management. 

Investigations into councils by the NSW Independent Commission Against Corruption (ICAC), such as the recent Operation Ricco, show the impact that fraud can have on councils. These impacts include significant financial loss, and negative public perceptions about how well councils manage fraud. The findings of these investigations also show the importance of good fraud controls for councils.

Appendix one – Response from agency 

Appendix two – Survey results

Appendix three – About the audit   

Appendix four – Performance auditing

Parliamentary reference - Report number #303 - released 22 June 2018 

Infrastructure NSW effectively manages how grant applications for regional assistance programs are assessed and recommended for funding. Its contract management processes are also effective. However, we are unable to conclude whether the objectives of these programs have been achieved as the relevant agencies have not yet measured their benefits, according to a report released today by the Auditor-General for New South Wales, Margaret Crawford. 

In 2011, the NSW Government established Restart NSW to fund new infrastructure with the proceeds from the sale and lease of government assets. From 2011 to 2017, the NSW Government allocated $1.7 billion from the fund for infrastructure in regional areas, with an additional commitment of $1.3 billion to be allocated by 2021. The NSW Government allocates these funds through regional assistance programs such as Resources for Regions and Fixing Country Roads. NSW councils are the primary recipients of funding provided under these programs.

The NSW Government announced the Resources for Regions program in 2012 with the aim of addressing infrastructure constraints in mining affected communities. Infrastructure NSW administers the program, with support from the Department of Premier and Cabinet.

The NSW Government announced the Fixing Country Roads program in 2014 with the aim of building more efficient road freight networks. Transport for NSW and Infrastructure NSW jointly administer this program, which funds local councils to deliver projects that help connect local and regional roads to state highways and freight hubs.

This audit assessed whether these two programs (Resources for Regions and Fixing Country Roads) were being effectively managed and achieved their objectives. In making this assessment, we answered the following questions:

• How well are the relevant agencies managing the assessment and recommendation process?
• How do the relevant agencies ensure that funded projects are being delivered?
• Do the funded projects meet program and project objectives?

The audit focussed on four rounds of Resources for Regions funding between 2013–14 to 2015–16, as well as the first two rounds of Fixing Country Roads funding in 2014–15 and 2015–16.

Appendix one - Response from agencies

Appendix two - Maps of funded projects

Appendix three - About the audit

Appendix four - Performance auditing

Parliamentary reference - Report number #300 - released 17 May 2018

Under section 421C of the Local Government Act 1993, I am pleased to present our first report on the statutory financial audits of councils, to NSW Parliament.

My appointment as the auditor of local government in New South Wales is the most significant change to the Auditor-General's mandate in nearly three decades.

Moving to the new audit arrangements over the past 18 months has been challenging but rewarding. It has confirmed my appreciation of local government – a sector passionate about the community and focused on delivering local services. 

The unique relationship each council has with its community differentiates it from other tiers of government.

Our audits
I am pleased to report that we completed 139 out of 140 financial statement audits for the 2016–17 audit cycle. The remaining council received an extension to lodge its financial statements.

We have also released a performance audit report on council reporting on service delivery. We will soon release another report on fraud controls in local councils and a report on council shared services later this year. 

• While the new audit mandate brings immense responsibility, my office has embraced the challenges involved and the objectives that NSW Parliament gave us: 
• strengthening governance and financial oversight in local government
• providing greater consistency in external audit
• ensuring reliable financial information is available to assess council performance
• improving financial management, fiscal responsibility and public accountability in how councils use citizens’ funds.

This report
This report is rich in data extracted from the results of the 2016–17 financial audits. For the first time, it presents a consistent view of financial performance across the New South Wales local government landscape. The report also provides guidance and includes recommendations to councils and the Office of Local Government aimed at strengthening financial reporting, asset management, governance and internal controls.

The report will help NSW Parliament understand the common challenges that councils face. It provides points of comparison for councils and signposts matters that will be the focus of future audits. Importantly, this report and the data visualisation that accompanies it, provides comprehensive and accessible information to citizens regarding the management and performance of their councils.

I would like to acknowledge the cooperation of councils throughout the audit process and our partnerships with the contract audit firms that helped us to deliver the audits. Together we can learn from each other and work towards improving outcomes for the community.  

Accurate and timely financial statements are an important element of sound financial management. They bring accountability and transparency to the way councils use public resources. Our financial audits assessed the following aspects of councils’ financial reporting:

• quality of financial reporting
• timeliness of financial reporting.

³ The Auditor‑General was appointed statutory auditor of eight councils for the 2015–16 reporting period at the specific request of councils, due to the failure by councils to appoint an auditor, or the inability of the previous auditor to complete the audit due to external investigation or auditor retirement.

Strong and sustainable financial performance provides the platform for councils to deliver services and respond to the needs of their community. This chapter outlines our audit observations on the performance of councils against the Office of Local Government's (OLG) performance indicators, grouped in three areas:

• operating revenue performance measures
• liquidity and working capital performance measures
• asset management performance measures.

Our analysis indicates that some councils face challenges in meeting these performance and sustainability measures.

OLG’s benchmarks for financial performance and sustainability

Each local council has unique characteristics such as its size, location and services provided to their communities. These differences affect the nature of each council's assets and liabilities, revenue and expenses, and in turn the financial performance measures against which it reports.

The Office of Local Government prescribes performance indicators for council reporting

The analysis in this chapter is based on performance measures prescribed in OLG’s Code of Accounting Practice and Financial Reporting (the Code). Councils report against these measures in their annual report, which includes the audited financial statements and other unaudited information. In the audited financial statements, councils report performance against six financial sustainability measures:

• operating performance
• own source operating revenue
• unrestricted current ratio
• debt service cover ratio
• rates and annual charges outstanding percentage
• cash expense cover ratio.

Councils also include the unaudited Special Schedule 7 'Report on Infrastructure Assets' in their annual reports. In this schedule, councils report to OLG on performance against four further measures:

• building and infrastructure renewals ratio
• infrastructure backlog ratio
• asset maintenance ratio
• cost to bring assets to agreed service level.

Each audited measure and three of the four unaudited measures has a prescribed benchmark. OLG’s benchmarks are the same for metropolitan, regional, rural and county councils, with the exception of the rates and annual charges outstanding percentage. Regional, rural and county councils have a different benchmark to metropolitan councils for this measure.

Three rural councils did not meet three of the audited OLG benchmarks

Most councils met OLG’s benchmarks for at least five or all of the six audited performance measures. Eight rural, four regional, four metropolitan and two county councils did not meet OLG’s benchmarks for two out of the six audited performance measures. Three rural councils did not meet OLG’s benchmarks for three out of the six audited performance measures.

The following table summarises how the councils performed across the six audited performance measures.

Appendix ten lists the performance of each council against all performance measures.

NSW councils own and manage a significant range of assets, including infrastructure, property, plant and equipment with a total value of $136 billion.

Many of the issues that our local government audits identified related to asset management. This chapter discusses some of the asset accounting issues we found, focusing on five areas:

• overall asset management issues
• asset registers
• asset valuation
• recognition and asset useful life estimates
• asset policy and planning.

Asset overview

NSW councils own and manage a significant range of assets, including infrastructure, property, plant and equipment.

At 30 June 2017, the combined carrying value of NSW council assets was as follows.

Good governance systems help councils to operate effectively and comply with relevant laws and standards. Internal controls assist councils to operate reliably and produce effective financial statements.

This chapter highlights the high risk issues we found and reports on a range of governance and control areas. Governance and control issues relating to asset management and information technology are covered in separate chapters.

Like most public sector agencies, councils increasingly rely on information technology (IT) to deliver services and manage sensitive information. While IT delivers considerable benefits, it also presents risks that councils need to address.

Our review of council IT systems focused on understanding the processes and controls that support the integrity, availability and security of the data used to prepare financial statements. This chapter outlines issues in three broad areas:

• high risk issues
• access to IT systems
• IT governance.

Appendix one - Response from the Office of Local Government

Appendix two - List of recommendations

Appendix three - Sources of information and council classifications

Appendix four - Councils amalgamated in 2016

Appendix five - Status of audits

Appendix six - Council spending by function - Definitions from the local government code of accounting practice and financial reporting

Appendix seven - OLG’s performance indicators from the audited financial statement - Descriptions

Appendix eight - OLG’s performance indicators from the unaudited special schedule 7 - Descriptions

Appendix nine - Financial information

Appendix ten - OLG’s performance indicators

Appendix 11 - NSW Crown Solicitor’s advice

Click here to access the Report on Local Government 2017 Data Visualisation

New South Wales local government councils’ could do more to demonstrate how well they are delivering services in their reports to the public, according to a report released today by the Auditor-General for New South Wales, Margaret Crawford. Many councils report activity, but do not report on outcomes in a way that would help their communities assess how well they are performing. Most councils also did not report on the cost of services, making it difficult for communities to see how efficiently they are being delivered. And councils are not consistently publishing targets to demonstrate what they are striving for.

I am pleased to present my first local government performance audit pursuant to section 421D of the Local Government Act 1993.

My new mandate supports the Parliament’s objectives to:

• strengthen governance and financial oversight in the local government sector
• improve financial management, fiscal responsibility and public accountability for how councils use citizens’ funds.

Performance audits aim to help councils improve their efficiency and effectiveness. They will also provide communities with independent information on the performance of their councils.

For this inaugural audit in the local government sector, I have chosen to examine how well councils report to their constituents about the services they provide.

In this way, the report will enable benchmarking and provide improvement guidance to all councils across New South Wales.

Specific recommendations to drive improved reporting are directed to the Office of Local Government, which is the regulator of councils in New South Wales.

Councils provide a range of services which have a direct impact on the amenity, safety and health of their communities. These services need to meet the needs and expectations of their communities, as well as relevant regulatory requirements set by state and federal governments. Councils have a high level of autonomy in decisions about how and to whom they provide services, so it is important that local communities have access to information about how well they are being delivered and meeting community needs. Ultimately councils should aim to ensure that reporting performance is subject to quality controls designed to provide independent assurance.

The Framework is silent on inclusion of efficiency or cost effectiveness indicators in reports

The guidelines produced by OLG in 2013 to assist councils to implement their Framework requirements advise that performance measures should be included in all plans. However, the Framework does not specifically state that efficiency or cost effectiveness indicators should be included as part of this process. This has been identified as a weakness in the 2012 performance audit report and the Local Government Reform Panel review of reporting by councils on service delivery.

The Framework and supporting documents provide limited guidance on reporting

Councils' annual reports provide a consolidated summary of their efforts and achievements in service delivery and financial management. However, OLG provides limited guidance on:

• good practice in reporting to the community
• how the annual report links with other plans and reports required by the Framework.

Further, the Framework includes both Annual and End of Term Reports. However, End of Term reports are published prior to council elections and are mainly a consolidation of annual reports produced during a council’s term. The relationship between Annual reports and End of Term reports is not clear.

OLG is reviewing the Framework and guidance

OLG commenced work on reviewing of the Framework in 2013 but this was deferred with work re‑starting in 2017. The revised guidelines and manual were expected to be released late in 2017.

OLG should build on the Framework to improve guidance on reporting on service delivery, including in annual reports

The Framework provides limited guidance on how best to report on service delivery, including in annual reports. It is silent on inclusion of efficiency or cost effectiveness indicators in reporting, which are fundamental aspects of performance reporting. Councils we consulted would welcome more guidance from OLG on these aspects of reporting.

Our consultation with councils highlighted that many council staff would welcome a set of reporting principles that provide guidance to councils, without being prescriptive. This would allow councils to tailor their approach to the individual characteristics, needs and priorities of their local communities.

Streamlining the reporting burden would help councils improve reporting

The NSW Government does not have a central view of all local government reporting, planning and compliance obligations. A 2016 draft IPART ‘Review of reporting and compliance burdens on Local Government’ noted that councils provide a wide range of services under 67 different Acts, administered by 27 different NSW Government agencies. Consolidating and coordinating reporting requirements would assist with better reporting over time and comparative reporting. It would also provide an opportunity for NSW Government agencies to reduce the reporting burden on councils by identifying and removing duplication.

Enabling rural councils to perform tailored surveys of their communities may be more beneficial than a state-wide survey in defining outcome indicators

Some councils use community satisfaction survey data to develop outcome indicators for reporting. The results from these are used by councils to set service delivery targets and report on outcomes. This helps to drive service delivery in line with community expectations. While some regional councils do conduct satisfaction surveys, surveys are mainly used by metropolitan councils which generally have the resources needed to run them.

OLG and the Department of Premier and Cabinet have explored the potential to conduct state-wide resident satisfaction surveys with a view to establishing measures to improve service delivery. This work has drawn from a similar approach adopted in Victoria. Our consultation with stakeholders in Victoria indicated that the state level survey is not sufficiently detailed or specific enough to be used as a tool in setting targets that respond to local circumstances, expectations and priorities. Our analysis of reports and consultation with stakeholders suggest that better use of resident survey data in rural and regional areas may support improvements in performance reporting in these areas. Rural councils may benefit more from tailored surveys of groups of councils with similar challenges, priorities and circumstances than from a standard state-wide survey. These could potentially be achieved through regional cooperation between groups of similar councils or regional groups.

Comparative reporting indicators are needed to enable councils to respond to service delivery priorities of their communities

The Local Government Reform Panel in 2012 identified the need for ‘more consistent data collection and benchmarking to enable councils and the public to gain a clear understanding of how a council is performing relative to their peers’.

OLG commenced work in 2012 to build a new performance measurement Framework for councils which aimed to move away from compliance reporting. This work was also strongly influenced by the approach used in Victoria that requires councils to report on a set of 79 indicators which are reported on the Victorian 'Know your council' website. OLG’s work did not fully progress at the time and several other local government representative bodies have since commenced work to establish performance measurement frameworks. OLG advised us it has recently recommenced its work on this project.

Our consultation identified some desire amongst councils to be able to compare their performance to support improvement in the delivery of services. We also identified a level of frustration that more progress has not been made toward establishment of a set of indicators that councils can use to measure performance and drive improvement in service delivery.

Several councils we spoke with were concerned that the current approaches to comparative reporting did not adequately acknowledge that councils need to tailor their service types, level and mix to the needs of their community. Comparative reporting approaches tend to focus on output measures such as number of applications processed, library loans annually and opening hours for sporting facilities, rather than outcome measures. These approaches risk unjustified and adverse interpretations of performance where councils have made a decision based on community consultation, local priorities and available resources. To mitigate this, it is important to

• adopt a partnership approach to the development of indicators
• ensure indicators measure performance, not just level of activity
• compare performance between councils that are similar in terms of size and location.

It may be more feasible, at least in the short term, for OLG to support small groups of like councils to develop indicators suited to their situation.

Based on our consultations, key lessons from implementing a sector-wide performance indicator framework in Victoria included the benefits of:

• consolidation of the various compliance data currently being reported by councils to provide an initial platform for comparative performance reporting
• adopting a partnership approach to development of common indicators with groups of like councils.

Appendix one - Response from agency

Appendix two - Service delivery categorisation

Appendix three - Reporting targets and performance over time

Appendix four - Performance auditing

Appendix five - About the audit

Parliamentary reference - Report number #296 - released 1 February 2018

Agencies need to do more to address risks posed by information technology (IT).

Effective internal controls and governance systems help agencies to operate efficiently and effectively and comply with relevant laws, standards and policies. We assessed how well agencies are implementing these systems, and highlighted opportunities for improvement.
 

1. Overall trends

2. Information Technology

3. Asset Management

4. Governance

5. Ethics and Conduct

6. Risk Management 

This report covers the findings and recommendations from our 2016–17 financial audits related to the internal controls and governance of the 39 largest agencies (refer to Appendix three) in the NSW public sector. These agencies represent about 95 per cent of total expenditure for all NSW agencies and were considered to be a large enough group to identify common issues and insights.

The findings in this report should not be used to draw conclusions on the effectiveness of individual agency control environments and governance arrangements. Specific financial reporting, controls and service delivery comments are included in the individual 2017 cluster financial audit reports tabled in Parliament from October to December 2017.

This new report offers strategic insight on the public sector as a whole

In previous years, we have commented on internal control and governance issues in the volumes we published on each ‘cluster’ or agency sector, generally between October and December. To add further value, we then commented more broadly about the issues identified for the public sector as a whole at the start of the following year.

This year, we have created this report dedicated to internal controls and governance. This will help Parliament to understand broad issues affecting the public sector, and help agencies to compare their own performance against that of their peers.

Without strong control measures and governance systems, agencies face increased risks in their financial management and service delivery. If they do not, for example, properly authorise payments or manage conflicts of interest, they are at greater risk of fraud. If they do not have strong information technology (IT) systems, sensitive and trusted information may be at risk of unauthorised access and misuse.

These problems can in turn reduce the efficiency of agency operations, increase their costs and reduce the quality of the services they deliver.

Our audits do not review every control or governance measure every year. We select a range of measures, and report on those that present the most significant risks that agencies should mitigate. This report divides these into the following six areas:

1. Overall trends
2. Information technology
3. Asset management
4. Governance
5. Ethics and conduct
6. Risk management.

Internal controls are processes, policies and procedures that help agencies to:

• operate effectively and efficiently
• produce reliable financial reports
• comply with laws and regulations.

This chapter outlines the overall trends for agency controls and governance issues, including the number of findings, level of risk and the most common deficiencies we found across agencies. The rest of this volume then illustrates this year’s controls and governance findings in more detail.

Information technology (IT) has become increasingly important for government agencies’ financial reporting and to deliver their services efficiently and effectively. Our audits reviewed whether agencies have effective controls in place over their IT systems. We found that IT security remains the source of many control weakness in agencies.

Agency service delivery relies on developing and renewing infrastructure assets such as schools, hospitals, roads, or public housing. Agencies are currently investing significantly in new assets. Agencies need to manage the scale and volume of current capital projects in order to deliver new infrastructure on time, on budget and realise the intended benefits. We found agencies can improve how they:

• manage their major capital projects
• dispose of existing assets.

Governance refers to the high-level frameworks, processes and behaviours that help an organisation to achieve its objectives, comply with legal and other requirements, and meet a high standard of probity, accountability and transparency.

This chapter sets out the governance lighthouse model the Audit Office developed to help agencies reach best practice. It then focuses on two key areas: continuous disclosure and shared services arrangements. The following two chapters look at findings related to ethics and risk management.

All government sector employees must demonstrate the highest levels of ethical conduct, in line with standards set by The Code of Ethics and Conduct for NSW government sector employees.

This chapter looks at how well agencies are managing these requirements, and where they can improve their policies and processes.

We found that agencies mostly have the appropriate codes, frameworks and policies in place. But we have highlighted opportunities to improve the way they manage those systems to reduce the risks of unethical conduct.

Risk management is an integral part of effective corporate governance. It helps agencies to identify, assess and prioritise the risks they face and in turn minimise, monitor and control the impact of unforeseen events. It also means agencies can respond to opportunities that may emerge and improve their services and activities.

This year we looked at the overall maturity of the risk management frameworks that agencies use, along with two important risk management elements: risk culture and risk registers.

Effective risk management can improve agency decision-making, protect reputations and lead to significant efficiencies and cost savings. By embedding risk management directly into their operations, agencies can also derive extra value for their activities and services.

The following report highlights results of financial audits of agencies in the Planning and Environment cluster. The report focuses on key observations and findings from the most recent audits of these agencies.

The audits were completed for most agencies in the cluster and unqualified audit opinions issued. Issues identified during the financial statement audits of seven small agencies delayed their finalisation beyond the statutory deadline, and six of these remain incomplete. Apart from these small agencies, the quality of financial reporting across the cluster remained at a high standard.

This report provides Parliament and others with the audit results, observations and recommendations for Planning and Environment cluster agencies. The report has been structured into two chapters focussing on financial reporting and controls and service delivery.

The Planning and Environment cluster plays a role in ensuring each community across New South Wales receives the services and infrastructure it needs.

This chapter outlines our audit observations and recommendations related to financial reporting and controls of Planning and Environment cluster agencies for 2016–17.

This chapter outlines our audit observations, conclusions and recommendations relating to service delivery for 2016–17.

Appendix one - List of 2017 recommendations

Appendix two - Status of 2016 recommendations

Appendix three - Agencies selected for this volume

Appendix four - Financial audit reporting

Appendix five - Timeliness of financial reporting

Appendix six - Financial indicators

The Auditor-General, Margaret Crawford released her report on the results of the financial audits of agencies in the Education cluster. The report focuses on key observations and findings from the most recent audits of these agencies.

'I am pleased to report that unqualified audit opinions were issued on the financial statements for all agencies in the Education cluster', the Auditor-General said. 'The quality and timeliness of financial reporting remains strong'.

Total State Sector Accounts received an unqualified audit opinion for the fifth consecutive year.

There was a $5.7 billion State budget surplus and continued investment in new infrastructure, in part funded by the long-term leases of Ausgrid and Endeavour Energy assets. This report also comments on key accounting matters, including the correction of some previously reported balances and the first time reporting of combined Cabinet members’ compensation in the Total State Sector Accounts.

Pursuant to the Public Finance and Audit Act 1983, I present my Report on State Finances 2017.

You will note that the format of this report has changed from previous years.

The intent of this change is to draw attention to the key matters that have been the focus of our audit and highlight significant factors that have contributed to the outcome.

First, it is pleasing to report once again that I issued a clear audit opinion on the State’s consolidated financial statements. This outcome demonstrates the Government’s continued focus on the quality of financial reporting across the NSW public sector.

High quality financial management and reporting are crucial to properly inform the public and build community confidence in our system of government.

The Treasury’s Financial Management Transformation program also aims to improve financial governance, budgeting and reporting arrangements across the sector. My Office is working collaboratively with The Treasury on reforms to reduce the burden of reporting, without weakening established safeguards.

The reforms should include measures to provide independent assurance of the budget process, of outcome reporting by agencies, and the power to “follow the dollar” given the increasing use of non-government organisations to deliver Government programs.

This Report also highlights another year of strong financial performance. The State’s budget result was a $5.7 billion surplus, and investment in new infrastructure has continued, in part funded by the long-term leases of Ausgrid and Endeavour Energy assets.

Finally, could I take this opportunity to thank the staff of The Treasury for the way they approached this audit. Our partnership is critical to ensuring NSW is an exemplar of quality financial management and reporting.

Margaret Crawford 
24 October 2017

A clear audit opinion on the State’s consolidated financial statements was issued.

Timely and accurate financial reporting is essential for informed decision making, effective management of public funds and enhancing public accountability.

This year’s clear audit opinion reflects the Government’s continued efforts to improve the quality of financial reporting across the NSW public sector.

Since the introduction of ‘early close procedures’ in 2011-12, the number of significant errors in financial statements of agencies has generally fallen largely due to identifying and resolving complex accounting issues early. Agencies’ 2016-17 financial statements submitted for audit contained nine errors exceeding $20 million. All errors were subsequently corrected in the individual agencies financial statements.

Agencies should continue to respond to key accounting issues as soon as they are identified. Where issues are identified, accounting position papers should be prepared for consideration by the Audit Office, their Audit and Risk Committee members, and when relevant, The Treasury.

The State addressed the following key accounting matters during 2016-17. 

The State recognised rail tunnels and earthworks valued at $8.5 billion.

Some rail tunnels and earthworks have never been valued by the State. These include the City Circle, the country rail network and other tunnels and earthworks built before the year 2000. Some of these tunnels and earthworks date back to the early 1900s.

For many years, the State did not account for these assets as they believed that their value could not be reliably measured. This year an independent valuer was engaged to perform a comprehensive valuation. The methodology used demonstrated
that the assets could have been reflected in the financial statements earlier.

The State recorded an additional $8.5 billion to correct the value of infrastructure assets at 1 July 2016.

Cabinet member’s compensation and related party transactions were reviewed.

Due to changes in Accounting Standards, the State had to consider 'related party information' in the financial statements. Previously this only applied to for-profit entities.

This year, requirements to report related party information extended to members of Cabinet, considered to be “key management personnel” of the State, as defined by Accounting Standards.

The Treasury implemented a process to assess and report Cabinet member’s compensation, and transactions between Cabinet members and/or their close family members, and government agencies.

Collectively, Cabinet members’ remuneration was $8.8 million, which was mainly salaries and allowances, and $3.5 million of non-monetary benefits such as security and drivers. The Treasury determined there were no other specific “related party” transactions or balances that required disclosure in the State’s financial statements.

Information system limitations continue at TAFE NSW.

TAFE NSW has experienced ongoing issues with its student administration system.

TAFE NSW has again implemented additional processes to verify the accuracy and completeness of revenue from sales of goods and services.

TAFE NSW expects to spend up to $89 million on a new information system to address these issues. Modules of the new student enrolment system are expected to be in place for the 2018 enrolment period.

Restatements relating to the General Government Sector's investment in the commercial sector.

The State corrected two previously reported balances relating to the General Government Sector’s investment in the commercial sector.

Accounting Standards require the General Government Sector to effectively store gains or losses related to its investment in the commercial sector in reserves until the investment is derecognised.

When these investments are disposed of, the cumulative gains and losses must be cleared and recognised in the operating result. However, the Government had previously cleared the cumulative gains and losses directly to Accumulated Funds within equity.

To comply with Accounting Standards, a total of $6 billion previously reported as a movement in equity  at 30 June 2016, has now been corrected to the operating result.

In addition, Accounting Standards only allow gains or losses on its investments to be stored in reserves. In past years, the State recognised all changes in the value of its investment in Available for Sale Reserves, including the capital contributed to establish the State’s investment. In 2016-17, a total of $23.4 billion of contributed capital was corrected to accumulated funds at 1 July 2015.

The State’s budget result was a $5.7 billion surplus, $2.0 billion higher than the budget estimate.

The Total State Sector comprises 310 entities controlled by the NSW Government.

Of the total, the General Government Sector comprises 215 entities that provide goods and services not directly paid for by consumers.

The non-General Government Sector comprises 95 Government businesses that provide goods and services such as water and electricity, or financial services.

A principal measure of a Government’s overall performance is its Net Operating Balance, or Budget Result. The Net Operating Balance reports the difference between the cost of General Government service delivery and the revenue earned to fund these sectors.

The State has recorded budget surpluses and exceeded the original budget result in nine of the last ten years.

The State maintained its AAA credit rating.

The object of the Act is to maintain the AAA credit rating.

NSW’s finances are managed in alignment with the Fiscal Responsibility Act 2012 (the Act).

The Act established the framework for fiscal responsibility and strategy needed to protect the State’s AAA credit rating and service delivery to the people of NSW.

The purpose of maintaining the AAA credit rating is to reduce the cost of, and ensure the broadest access to, borrowings.

A triple-A credit rating also helps maintain business and consumer confidence so economic activity and employment are sustained. The legislation sets out targets and principles for financial management to achieve this.

New South Wales has credit ratings of AAA/Negative from Standard & Poor’s and Aaa/Stable from Moody’s Investors Service.

The fiscal targets for achieving this objective are:

General Government expenditure growth is lower than long term revenue growth.

General Government expenditure growth was 4.2 per cent in 2016-17, below the long-term revenue growth of 5.6 per cent.

Eliminating unfunded superannuation liabilities by 2030.

The Act sets a target of eliminating unfunded defined benefit superannuation liabilities by 2030. The State’s net superannuation liability was $58.6 billion at 30 June 2017 ($71.2 billion at 30 June 2016).

The Government predicts the 2030 target will be achieved. The State’s funding plan is to contribute amounts escalated by five per cent each year so the schemes will be fully funded by 2030. In 2016-17, the State made employer contributions of $1.5 billion, which is largely consistent with contributions over the past five years.

The liability values in the graph below do not reflect the values recorded in the Total State Sector Accounts. For financial reporting purposes, Accounting Standards (AASB 119 Employee Benefits) require the State to discount its superannuation liability using the government bond rate (refer to page 10 of this report). 

The relevant government bond rate in the current economic climate is 2.62 per cent.

The State’s target for the unfunded superannuation liability is measured using AASB 1056 Superannuation Entities. This is because it adopts a measurement basis that reflects expected earnings on fund assets, which are currently between 5.9 and 7.4 per cent. Using these rates, the liability is $15.0 billion at 30 June 2017 ($16.1 billion at 30 June 2016). The unfunded liability is $2.4 billion less than when the Act was introduced.

The State’s assets grew by $31.6 billion during 2016-17 to $409 billion.

Valuing the State’s physical assets.

When we audit the financial statements, we focus on areas we consider as higher risk. These areas are often complex, and require the use of estimates and judgements.

The State has $307.2 billion of physical assets measured at fair value in accordance with Australian Accounting Standards. Fair value calculations are inherently complex and sensitive to assumptions and estimates, increasing the risk these assets are incorrectly valued.

In our audits, we assess the reasonableness and appropriateness of assumptions used in valuing physical assets. This includes obtaining an understanding of the valuation methodologies applied and judgements made. We also review the completeness of asset registers, and the mathematical accuracy of valuation models.

Net movements between years includes additions, disposals, depreciation and valuations. This year, valuations of physical assets added $16.2 billion to the State’s assets, comprising: 

• Transport for NSW and Railcorp $8.5 billion

• New South Wales Land and Housing Corporation $4.8 billion

• Roads and Maritime Services $930 million

• Crown Entity $400 million.    

The State’s financial assets increased $27.5 billion in 2016-17

The State’s financial assets have increased by 88 per cent over the past four years. In 2016-17, financial assets increased primarily due to proceeds from the sale of government assets and businesses.

The Government implemented reforms to better use the State’s financial assets. A key element was the creation of an Asset and Liability Committee (ALCO) to provide advice on ways to improve balance sheet management.

Since the creation of the ALCO, reforms include:

• Establishment of the New South Wales Infrastructure Future Fund (NIFF). The net proceeds from the State’s asset recycling program are invested into the NIFF, which is managed by TCorp, with a balance of $14.6 billion by 30 June 2017. Funds raised are invested through the NIFF until the Government requires them for critical infrastructure projects that are part of the Restart NSW and Rebuilding NSW program of works. ALCO and TCorp provide advice on the NIFF’s performance and management

• Establishment of the Social and Affordable Housing Fund ($1.1 billion at 30 June 2017). ALCO oversees the Fund to ensure an appropriate investment approach that will maintain funding certainty for new social and affordable housing stock

• Cash and liquidity management reforms to centralise cash previously held by agencies in the Treasury Banking System. This reform is designed to ensure agencies have adequate levels of liquidity but with surplus funds invested centrally for better returns.

The State’s liabilities decreased by $13.1 billion during 2016-17 to $182 billion.

Valuing the State’s liabilities relies on an actuarial assessment.

Nearly half of the State’s liabilities relate to its employees. This includes unfunded superannuation, and employee benefits, such as long service and recreation leave.

Valuation of these obligations is subject to complex estimation techniques and significant judgements. Small changes in assumptions can materially impact the financial statements.

We address the risk associated with auditing these balances:

• using actuarial specialists

• testing controls around underlying employee data used in data models, and testing the accuracy of the calculations

• evaluating assumptions applied in calculating employee entitlements such as the discount rate and the probability of long service leave vesting conditions being met.

The State’s superannuation obligations reduced by $12.6 billion in 2016-17.

The State’s $58.6 billion superannuation liability represents obligations for past and present employees, less the value of assets set aside to meet those obligations. The superannuation liability decreased from $71.2 billion to $58.6 billion, largely due to an increase in the discount rate from 1.99 per cent to 2.62 per cent. This alone reduced the liability by $9.2 billion

The State’s borrowings totalled $70.6 billion at 30 June 2017.

The State’s borrowings totalled $70.6 billion at 30 June 2017, $9.5 billion less than the previous year. This was largely due to the repayment of borrowings when the assets of Ausgrid and Endeavour Energy were leased to the private sector.

TCorp issues bonds to raise funds for NSW Government agencies. The bonds are actively traded in financial markets providing price transparency and liquidity to public sector borrowers and institutional investors. All TCorp bonds are guaranteed by the NSW Government.

The Government manages its debt liabilities through its balance sheet management strategy. The strategy extends to TCorp, which applies an active risk management strategy to the Government’s debt portfolio.

General Government Sector debt is being restructured by replacing shorter-term debt with longer-term debt. This lengthens the portfolio to better match liabilities with the funding requirements of infrastructure assets and reduces refinancing risks. It also allows the Government to take advantage of the low interest rate environment.

The State recorded revenue of $83.5 billion in  2016-17, an increase of $5.3 billion from 2015-16.

The State’s results are underpinned by revenue growth in taxation, fees and fines.

Taxation, fees, fines and other revenue comprises $30.5 billion of taxation ($28.7 billion in 2015-16) and $5.3 billion of fees, fines and other revenue ($4.6 billion).

Tax revenue for the Total State Sector increased by $1.8 billion, or 6.4 per cent compared to 2015-16, primarily due to:

• one-off business asset sales and lease transactions, including $718 million in transfer duty from the Ausgrid and Endeavour Energy lease transactions

• $385 million increase in payroll tax from growth in NSW employment and average employee compensation

• a $426 million increase in land taxes.

Growth in stamp duty is expected to slow over the next 4 years.

General Government Sector stamp duties have increased from $6.2 billion in 2012-13 to $11.5 billion in 2016-17, an annual average growth rate of 16.5 per cent. The Government’s budget forecasts the growth in stamp duties to decline, to an average annual growth rate of 2.6 per cent between 2016-17 and 2020-21.

The State received Commonwealth grants and subsidies of $30.8 billion in 2016-17.

The State received $30.8 billion from the Commonwealth Government in 2016-17, $1.6 billion more than in 2015-16. This was primarily due to transaction based asset recycling grants of $1.0 billion and a $720 million increase in national land transport grants. This increase was offset by a $435 million decrease in General Purpose Grants, which mainly comprises New South Wales’ share of the Goods and Services Tax (GST). 

The State spent $79.4 billion in 2016-17 to deliver services to the community, an increase of $3.9 billion from 2015-16.

Overall expenses increased 5.2 per cent from last year. Most of the increase was due to higher employee costs and operating costs.

Total salaries and wages increased by 4.2 per cent from 2015-16.

Total salaries and wages increased to $30 billion from $28.8 billion in 2015-16. The Government wages policy aims to limit the growth in remuneration and other employee costs to no more than 2.5 per cent per annum.

Operating expenses increased by 12.4 per cent from 2015-16.

Within operating expenses, payments for supplies, services and other expenses increased, in part, due to the State:

• reacquiring mining licenses worth $482 million and additional land remediation costs of $101 million

• spending more on health including additional drug supplies relating to Hepatitis C.

State spend on transport and communications increased by 68.1 per cent since 2012-13.

While spending on health and education remain the largest functional areas provided by Government, expenditure on transport and communication increased, on average, by 13.9 per cent annually between 2012-13 and 2016-17. This increase reflects the Government’s investment in transport infrastructure such as the Sydney Metro and Westconnex. Over the same period, spending on health increased by $3.9 billion.

Expenditure on fuel and energy has decreased by an average of 44.7 per cent since 2012-13, reflecting the State’s leases of electricity network assets.

In 2011, the Government established Restart NSW to fund high priority infrastructure projects.

Restart NSW projects are primarily funded from the proceeds from the asset recycling program enabling Government to deliver new infrastructure investment.

Restart NSW provides funding for the delivery of Rebuilding NSW, which is the Government’s 10-year plan to invest $20 billion in new infrastructure.

The State finalised long-term leases of Ausgrid and Endeavour Energy assets.

In June 2017, the Government finalised its long-term lease of 50.4 per cent of Endeavour Energy. This transaction follows on from the long-term leases of TransGrid in December 2015 and 50.4 per cent of Ausgrid in December 2016. Net proceeds of $15.0 billion were paid into Restart NSW relating to these transactions.

The Government also finalised an arrangement for the private sector to provide land titling and registry services to the public for 35 years. The State, through Restart NSW, received an upfront payment of $2.6 billion from the new operator.

Restart NSW is funding $29.8 billion of new infrastructure.

The Government has detailed its plan to invest $20 billion into the Rebuilding NSW plan from Restart NSW.

At 30 June 2017, around $2.9 billion has already been spent on Rebuilding NSW projects from Restart NSW, with a further $9 billion included in the budget aggregates. The Government has also earmarked a further $8.1 billion in Restart NSW for future projects.

The most significant project is the Sydney Metro. The Government has committed $7.0 billion from Restart NSW to build a 30-kilometre metro line, linking Sydney Metro Northwest at Chatswood, through new stations in the lower North Shore, the Sydney CBD and southwest to Bankstown. At 30 June 2017, $2.4 billion has been spent on this project from Restart NSW.

Other significant projects funded by Restart NSW include a $1.8 billion contribution to WestConnex and reserved funding of $1 billion towards the State’s Major Stadia Network program.

The Treasury initiated the Financial Management Transformation (FMT) program with the aim of changing and improving financial governance, budgeting and reporting arrangements of the New South Wales public sector.

FMT aims to deliver better outcomes for the people of New South Wales and focuses on transparency and accountability for expenditure, and better value for money.

New Financial Management System

PRIME is the Information Technology (IT) solution component of the FMT program, replacing several historical systems. PRIME will provide both financial and performance information within one IT platform for all agencies in the NSW public sector.

It is expected to give Government more timely information to plan and deliver its policy priorities and the budget.

Independent assurance over the budget process would improve confidence in the reliability of the State’s financial information.

Appendix one - Prescribed entities

Appendix two - Legal opinions

The Department of Planning and Environment provides more than $245 million in energy rebates to around 27 percent of NSW households. This report highlights that the department is not monitoring the rebate schemes to understand whether they are delivering the best outcomes.

Most rebates are ongoing payments applied directly to energy bills reducing the amount payable by the householder. The structure of these rebates is complex and can be inequitable. Some households are eligible for four different rebates, each with its own eligibility criteria.  Also, some households in very similar circumstances receive different levels of support depending on what type of energy is used in their home or which adult in the house is the energy account holder. For example, a household using both electricity and gas receives more assistance than a household with electricity alone even if total energy bills are the same. 

By September 2018, the Department of Planning and Environment should:

1. Ensure effective strategies are in place to make information about rebates available to all eligible, low-income households
    
2. Evaluate alternative models and develop advice for government to reduce complexity and improve equity of ongoing rebates
    
3. Establish measurable objectives for schemes that provide ongoing support, and monitor and measure performance of all schemes against objectives and outcome measures
    
4. Assess the impacts of the forecast increase in embedded networks and develop strategies to manage any increased administrative risk
    
5. Strengthen assurance that EAPA is being provided in accordance with its objectives and guidelines by implementing accreditation and compliance programs
    
6. Ensure those eligible for EAPA financial support are not disadvantaged by inflexible payments, inconsistent provider practices, or inability to access an EAPA provider in a timely manner. Options include:
   • moving from a fixed-value voucher to a flexible payment based on need irrespective of energy type
   • establishing a ‘Provider of Last Resort’ facility for households that cannot access an EAPA Provider.

Parliamentary reference - Report number #292 - released 19 September 2017