Reports
The effectiveness of the financial arrangements and management practices in four integrity agencies
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.
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.
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.
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.
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.
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.
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.
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.
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.
Appendix one – Response from agencies
Appendix two – About the audit
Appendix three – Opinion from the Crown Solicitor’s Office
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Performance audit insights: key findings from 2014-2018
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.
Fraud Survey
In a report released today, the NSW Auditor-General, Margaret Crawford provides a snapshot of reported fraud in the NSW public sector and an analysis of NSW Government agencies’ fraud controls based on a survey of 102 agencies.
Agency compliance with the GIPA Act
In a report released today, the NSW Auditor-General, Margaret Crawford found some NSW Government agencies were not publicly releasing all the required information on contracts with the private sector, nor were they publishing it in a timely manner.
This report assessed whether 13 agencies were complying with Part 3 Division 5 of the Government Information (Public Access) Act 2009 (GIPA Act), relating to Government contracts with the private sector.
