Reports
Internal controls and governance 2020
The Auditor-General for New South Wales, Margaret Crawford today released her report on the findings and recommendations from the 2019–20 financial audits that relate to internal controls and governance at 40 of the largest agencies in the NSW public sector.
The bushfire and flood emergencies and the COVID‑19 pandemic continue to have a significant impact on the people and public sector of New South Wales. The scale of the government response to these events has been significant. The report focuses on the effectiveness of internal controls and governance processes, including relevant agencies’ response to the emergencies. In particular, the report focuses on:
- financial and information technology controls
- business continuity and disaster recovery planning arrangements
- procurement, including emergency procurement
- delegations that support timely and effective decision-making.
Due to the ongoing impact of COVID‑19 agencies have not yet returned to a business‑as‑usual environment. ‘Agencies will need to assess their response to the recent emergencies and update their business continuity, disaster recovery and other business resilience frameworks to reflect the lessons learnt from these events’ the Auditor-General said.
The report noted that special procurement provisions were put in place to allow agencies to better respond to the COVID-19 pandemic. The Auditor-General recommended agencies update their procurement policies to reflect the current requirements of the NSW Procurement Framework and the emergency procurement requirements.
This report analyses the internal controls and governance of 40 of the largest agencies in the NSW public sector for the year ended 30 June 2020. These 40 agencies constitute an estimated 85 per cent of total expenditure for all NSW public sector agencies.
1. Internal control trends
| New, repeat and high risk findings |
Internal control deficiencies increased by 13 per cent compared to last year. This is predominately due to a seven per cent increase in new internal control deficiencies and 24 per cent increase in repeat internal control deficiencies. There were ten high risk findings compared to four last year. The recent emergencies have consumed agency time and resources and may have contributed to the increase in internal control deficiencies, particularly repeat deficiencies. Agencies should:
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| Common findings |
A number of findings remain common across multiple agencies over the last four years, including:
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2. Information technology controls
| IT general controls |
We found deficiencies in information security controls over key financial systems including:
The deficiencies above increase the risk of non-compliance with the NSW Cyber Security Policy, which requires agencies to have processes in place to manage user access, including privileged user access to sensitive information or systems and remove that access once it is not required or employment is terminated. |
3. Business continuity and disaster recovery planning
| Assessing risks to business continuity and Scenario testing |
The response to the recent emergencies and the COVID-19 pandemic has encompassed a wide range of activities, including policy setting, on-going service delivery, safety and availability of staff, availability of IT and other systems and financial management. Agencies were required to activate their business continuity plans in response, and with the continued impact of COVID-19 have not yet returned to a business-as-usual environment. Our audits focused on the preparedness of agency business continuity and disaster recovery planning arrangements prior to the onset of the COVID-19 pandemic. We identified deficiencies in agency business continuity and disaster recovery planning arrangements. Twenty-three per cent of agencies had not conducted a business impact analysis (BIA) to identify critical business functions and determine business continuity priorities. Agencies can also improve the content of their BIA. For example, ten per cent of agencies' BIAs did not include recovery time objectives and six per cent of agencies did not identify key IT systems that support critical business functions. Scenario testing improves the effectiveness with which a live crisis is handled, but 40 per cent of agencies had not conducted a business continuity scenario testing exercise in the period from 1 January 2019 to 31 December 2019. There were also opportunities to improve the effectiveness of scenario testing exercises by:
Agencies have responded to the recent emergencies but addressing deficiencies will ensure agencies have adequate safeguards in their processes to again respond in the future, if required. During 2020–21 we plan to conduct a performance audit on 'Business continuity and disaster recovery planning'. This audit will consider the effectiveness of agency business continuity planning arrangements to maintain business continuity through the recent emergencies and/or COVID-19 pandemic and return to a business-as-usual environment. We also plan to conduct a performance audit on whole-of-government 'Coordination of emergency responses'. |
| Responding to disruptions |
We found agencies' governance functions could have been better informed about responses to disruptive incidents that had activated a business continuity or disaster recovery response between 1 January 2019 to 31 December 2019. For instance: in 89 per cent of instances where a business continuity response was activated, a post-incident review had been performed. In 82 per cent of these instances, the outcomes were reported to a relevant governance or executive management committee in 95 per cent of instances where a disaster recovery response was activated, a post incident review had been performed. In 86 per cent of these instances, the outcomes were reported to a relevant governance committee or executive management committee. Examples of recorded incidents included extensive air quality issues and power outages due to bushfires, system and network outages, and infected and hijacked servers. Agencies should assess their response to the recent emergencies and the COVID-19 pandemic and update business continuity, disaster recovery and other business resilience frameworks to incorporate lessons learned. Agencies should report to those charged with governance on the results and planned actions. |
| Management review and oversight | Eighty-two per cent and 86 per cent of agencies report to their audit and risk committees (ARC) on their business continuity and disaster recovery planning arrangements, respectively. Only 18 per cent and five per cent of ARCs are briefed on the results of respective scenario testing. Briefing ARCs on the results of scenario testing exercises helps inform their decisions about whether sound and effective business continuity and disaster recovery arrangements have been established. |
4. Procurement, including emergency procurement
| Policy framework |
Agency procurement policies did not capture the requirements of several key NSW Procurement Board Directions (the Directions), increasing the risk of non-compliance with the Directions. We noted:
Recommendation: Agencies should review their procurement policies and guidelines to ensure they capture the key requirements of the NSW Government Procurement Policy Framework, including NSW Procurement Board Directions. |
| Managing contracts |
Eighty-eight per cent of agencies maintain a central contract register to record all details of contracts above $150,000, which is a requirement of GIPA legislation. Of the agencies that maintained registers, 13 per cent did not capture all contracts and eight per cent did not include all relevant contract details. Sixteen per cent of agencies did not periodically review their contract register. Timely review increases compliance with GIPA legislation, and enhances the effectiveness with which procurement business units monitor contract end dates, contract extensions and commence new procurement. |
| Training and support |
Ninety-three per cent of agencies provide training to staff involved in procurement processes, and a further 77 per cent of agencies provide this training on an on-going basis. Of the seven per cent of agencies that had not provided training to staff, we noted gaps in aspects of their procurement activity, including:
Training on procurement activities ensures there is effective management of procurement processes to support operational requirements, and compliance with procurement directions. |
| Procurement activities | While agencies had implemented controls for tender activities above $650,000, 43 per cent of unaccredited agencies did not comply with the NSW Procurement Policy Framework because they had not had their procurement endorsed by an accredited agency within the cluster or by NSW Procurement. This endorsement aims to ensure the procurement is properly planned to deliver a value for money outcome before it commences. |
| Emergency procurement |
As at 30 June 2020, agencies within the scope of this report reported conducting 32,239 emergency procurements with a total contract value of $316,908,485. Emergency procurement activities included the purchase of COVID-19 cleaning and hygiene supplies. The government, through NSW Procurement released the 'COVID-19 Emergency procurement procedure', which relaxed procurement requirements to allow agencies to make COVID-19 emergency procurements. Our review against the emergency procurement measures found most agencies complied with requirements. For example:
Complying with the procedure helps to ensure government resources are being efficiently, effectively, economically and in accordance with the law. Recommendation: Agency procurement frameworks should be reviewed and updated so they can respond effectively to emergency situations that may arise in the future. This includes:
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5. Delegations
| Instruments of delegation |
We found that agencies have established financial and human resources delegations, but some had not revisited their delegation manuals following the legislative and machinery of government changes. For those agencies impacted by machinery of government changes we noted:
Delegations manuals are not always complete; 16 per cent of agencies had no delegation for writing off bad debts and 26 per cent of agencies had no delegation for writing off capital assets. Recommendation: Agencies should ensure their financial and human resources delegation manuals contain regular set review dates and are updated to reflect the Government Sector Finance Act 2018, machinery of government changes and their current organisational structure and roles and responsibilities. |
| Compliance with delegations |
Agencies did not understand or correctly apply the requirements of the Government Sector Finance Act 2018 (GSF Act), resulting in non-compliance with the Act. We found that 18 per cent of agencies spent deemed appropriations without obtaining an authorised delegation from the relevant Minister(s), as required by sections 4.6(1) and 5.5(3) of the GSF Act. Further detail on this issue will be included in our Auditor-General's Reports to Parliament on Central Agencies, Education, Health and Stronger Communities, which will be tabled throughout December 2020. Recommendation: Agencies should review financial and human resources delegations to ensure they capture all key functions of laws and regulations, and clearly specify the relevant power or function being conferred on the officer. |
6. Status of 2019 recommendations
| Progress implementing last year's recommendations |
Recommendations were made last year to improve transparency over reporting on gifts and benefits and improve the visibility management and those charged with governance had over actions taken to address conflicts of interest that may arise. This year, we continue to note:
While we acknowledge the significance of the recent emergencies, which have consumed agency time and resources, we note limited progress has been made implementing these recommendations. Further detail on the status of implementing all recommendations is in Appendix 2. Recommendation: Agencies should re-visit the recommendations made in last year's report on internal controls and governance and action these recommendations. |
Internal controls are processes, policies and procedures that help agencies to:
- operate effectively and efficiently
- produce reliable financial reports
- comply with laws and regulations
- support ethical government.
This chapter outlines the overall trends for agency controls and governance issues, including the number of audit findings, the degree of risk those deficiencies pose to the agency, and a summary of the most common deficiencies we found across agencies. The rest of this report presents this year’s controls and governance findings in more detail.
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Section highlights We identified ten high risk findings, compared to four last year with two findings repeated from the previous year. There was an overall increase of 13 per cent in the number of internal control deficiencies compared to last year due to a seven per cent increase in new internal control deficiencies, and a 24 per cent increase in repeat internal control deficiencies. The recent emergencies have consumed agency time and resources and may have contributed to the increase in internal control deficiencies, particularly repeat deficiencies. We identified a number of findings that remain common across multiple agencies over the last four years. Some of these findings related to areas that are fundamental to good internal control environments and effective organisational governance. Examples include:
Policies, procedures and internal controls should be properly designed, be appropriate for the current organisational structure and its business activities, and work effectively. |
This chapter outlines our audit observations, conclusions and recommendations, arising from our review of agency controls to manage key financial systems.
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Section highlights Government agencies’ financial reporting is heavily reliant on information technology (IT). We continue to see a high number of deficiencies related to IT general controls, particularly those related to user access administration. These controls are key in adequately protecting IT systems from inappropriate access and misuse. IT is also important to the delivery of agency services. These systems often provide the data to help monitor the efficiency and effectiveness of agency processes and services they deliver. Our financial audits do not review all agency IT systems. For example, IT systems used to support agency service delivery are generally outside the scope of our financial audit. However, agencies should also consider the relevance of our findings to these systems. Agencies need to continue to focus on assessing the risks of inappropriate access and misuse and the implementation of controls to adequately protect their systems, focussing on the processes in place to grant, remove and monitor user access, particularly privileged user access. |
This chapter outlines our audit observations, conclusions and recommendations, arising from our review of agency business continuity and disaster recovery planning arrangements.
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Section highlights We identified deficiencies in agency business continuity and disaster recovery planning arrangements and opportunities for agencies to enhance their business continuity management and disaster recovery planning arrangements. This will better prepare them to respond to a disruption to their critical functions, resulting from an emergency or other serious event. Twenty-three per cent of agencies had not conducted a business impact analysis (BIA) to identify critical business functions and determine business continuity priorities and 40 per cent of agencies had not conducted a business continuity scenario testing exercise in the period from 1 January 2019 to 31 December 2019. Scenario testing improves the effectiveness with which a live crisis is handled. This section focusses on the preparedness of agency business continuity and disaster recovery planning arrangements prior to the onset of the COVID-19 pandemic. While agencies have responded to the recent emergencies, proactively addressing deficiencies will ensure agencies have adequate safeguards in their processes to again respond in the future, if required. During 2020–21 we plan to conduct a performance audit on 'Business continuity and disaster recovery planning'. This audit will consider the effectiveness of agency business continuity planning arrangements to maintain business continuity through the recent emergencies and/or COVID-19 pandemic and return to a business-as-usual environment. We also plan to conduct a performance audit on whole-of-government 'Coordination of emergency responses'. |
This chapter outlines our audit observations, conclusions and recommendations, arising from our review of procurement agency procurement policies and procurement activity.
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Section highlights We found agencies have procurement policies in place to manage procurement activity, but the content of these policies was not sufficiently detailed to ensure compliance with NSW Procurement Board Directions (the Directions). The Directions aim to ensure procurement activity achieves value for money and meets the principles of probity and fairness. Agencies have generally implemented controls over their procurement process. In relation to emergency procurement activity, agencies reported conducting 32,239 emergency procurements with a total contract value of $316,908,485 up to 30 June 2020. Our review of emergency procurement activity conducted during 2019–20 identified areas where some agencies did not fully comply with the 'COVID-19 Emergency procurement procedure'. We also found not all agencies are maintaining complete and accurate contract registers. This not only increases the risk of non-compliance with GIPA legislation, but also limits the effectiveness of procurement business units to monitor contract end dates, contract extensions and commence new procurement in a timely manner. We noted instances where agencies renewed or extended contracts without going through a competitive tender process during the year. |
This chapter outlines our audit observations, conclusions and recommendations, arising from our review of agency compliance with financial and human resources delegations.
Appendix one – List of 2020 recommendations
Appendix two – Status of 2019 recommendations
Appendix three – Cluster agencies
Copyright notice
© Copyright reserved by the Audit Office of New South Wales. All rights reserved. No part of this publication may be reproduced without prior consent of the Audit Office of New South Wales. The Audit Office does not accept responsibility for loss or damage suffered by any person acting on or refraining from action as a result of any of this material.
Report on Local Government 2019
I am pleased to present my third report to the Parliament on the 2019 audits of local government councils in New South Wales.
This report notes that unqualified audit opinions were issued on the 2018–19 financial statements of 134 councils and 11 joint organisations. The opinion for one council was disclaimed and three audits are yet to complete.
The report also highlights improvements I have seen in financial reporting and governance arrangements across councils. Fewer errors were identified. More councils have audit, risk and improvement committees and internal audit functions. Risk management practices, including fraud control systems, have also improved.
These are very pleasing indicators of the gradual strengthening of governance and financial oversight of the sector. I want to acknowledge the investment councils have made in working with the Audit Office to improve consistency of practice and accountability generally.
Of course there is more work to do, particularly to prepare for new accounting standards and to strengthen controls over information technology and cyber security management. Asset management practices can also be improved. This report provides some guidance to council on these matters and we will continue to partner with the Office of Local Government in the Department of Planning, Industry and Environment to support good practice.
Auditor-General
5 March 2020
This report focuses on key observations and findings from the 2018–19 financial audits of councils and joint organisations.
Unqualified audit opinions were issued on the financial statements for 134 councils and 11 joint organisations. The audit opinion for Bayside’s 2017–18 and 2018–19 financial statements were disclaimed. Three audits are still in progress and will be included in next year’s report.
The report highlights a number of areas where there has been improvement. There was a reduction in errors identified in council financial statements and high risk issues reported in audit management letters. More councils have audit, risk and improvement committees and internal audit functions. Risk management practices and fraud control systems have also improved.
The report also found that councils could do more to be better prepared for the new accounting standards, asset management practices could be strengthened, and information technology controls and cyber security management could be improved.
The Auditor-General recommended that the Office of Local Government within the Department of Planning, Industry and Environment develop a cyber security policy by 30 June 2021 to ensure a consistent response to cyber security risks across councils.
Financial reporting is an important element of good governance. Confidence in and transparency of public sector decision making is enhanced when financial reporting is accurate and timely. Strong financial performance provides the platform for councils to deliver services and respond to community needs.
This chapter outlines our audit observations on the financial reporting and performance of councils and joint organisations.
Section highlights
- There was a reduction in the number and dollar value of errors identified in councils' financial statements.
- We continue to identify prior period errors, which are predominantly asset-related.
- Unqualified audit opinions were issued for 99 per cent of completed audits for councils and joint organisations.
- Three audits remain outstanding, with the outcomes to be reported in next year's Report to Parliament.
- Seventy-nine per cent of councils and joint organisations lodged their financial reports by 31 October 2019.
- Councils that performed some early reporting procedures achieved better outcomes in terms of the quality and timeliness of financial reporting.
- Councils are at various levels of preparedness to implement the new accounting standards for the 2019–20 financial year. Some have made the necessary modifications to systems and processes, but others are still assessing impacts.
- Most councils met the prescribed benchmarks for the liquidity and working capital performance measures over the past three years.
- More councils reported negative operating performance compared with the prior year, meaning their operating expenditure exceeded their operating revenue.
Strong governance systems and internal controls help councils to operate effectively and efficiently, produce reliable financial reports, comply with laws and regulations and support ethical government.
This chapter outlines the overall trends related to governance and internal control issues across councils and joint organisations for 2018–19.
Section highlights
- While the total number of issues reported in our management letters increased compared with the prior year, the total number of high risk issues have decreased. Of the high-risk issues, 41 per cent were deficiencies in information technology controls.
- More councils have established audit, risk and improvement committees and internal audit functions.
- Councils have improved risk management practices, with over 75 per cent of councils now having a risk management policy and register.
- While most councils have policies and processes to manage gifts and benefits, we identified some instances of non-compliance with the Model Code of Conduct.
- Most councils have policies and processes to manage the use of credit cards.
- Councils can strengthen policies and practices for managing fraud controls and legislative compliance.
- There are further opportunities for councils to improve internal controls over revenue, purchasing, payroll, cash, financial accounting and governance processes.
Councils rely on information technology (IT) to deliver services and manage information. While IT delivers considerable benefits, it also presents risks that council needs to address.
In prior years, we reported that councils need to improve IT governance and controls to manage key financial systems. This chapter outlines the progress made by councils in the management of key IT risks and controls, with an added focus on cyber security.
Section highlights
- We continue to report deficiencies in information technology controls, particularly around user access management. These controls are key to ensuring IT systems are protected from inappropriate access and misuse.
- Many councils do not have IT policies and procedures and others do not identify, monitor or report on IT risks.
- Cyber security management requires improvement, with some basic elements of governance not yet in place for many councils.
Councils are responsible for managing a significant range of assets to deliver services on behalf of the community.
This chapter outlines our asset management observations across councils and joint organisations.
Section highlights
- There was an increase in the total number of issues reported in our management letters for asset management processes.
- There were less high-risk issues reported compared to the previous year.
- We continue to identify discrepancies between the council's Crown land asset records and the Crown Land Information Database (CLID) managed by the former Department of Industry (DOI).
- Inconsistent practices remain across the Local Government sector in accounting for landfill sites.
Appendix one – Response from the Office of Local Government within the Department of Planning, Industry and Environment
Appendix two – Status of 2018 recommendations
Appendix three – Status of audits
Copyright notice
© Copyright reserved by the Audit Office of New South Wales. All rights reserved. No part of this publication may be reproduced without prior consent of the Audit Office of New South Wales. The Audit Office does not accept responsibility for loss or damage suffered by any person acting on or refraining from action as a result of any of this material.
Central Agencies 2019
The Auditor-General for New South Wales, Margaret Crawford, released her report today on the results of the financial audits of NSW Government central agencies, namely the Premier and Cabinet, Treasury and Customer Service clusters. There are 191 agencies in these clusters, including government financial, superannuation and insurance entities.
Unqualified audit opinions were issued on the financial statements for all agencies in the clusters. There were two high risk and 99 moderate risk audit findings on internal controls. Of these, 31 percent were repeat issues, and most related to weaknesses in information technology access controls.
The report notes a number of audit observations including:
- a qualified opinion on information technology internal controls at an outsourced service provider
- self-insurance losses of $1.4 billion partly due to unfavourable movements in the risk free discount rate, and increases in workers compensation claims, including psychological injury claims
- a shortfall (unfunded liability) of $637 million at 30 June 2019 in the Home Building Compensation Fund, due to premiums not being sufficient to meet costs of the scheme
- agencies self-assessed against the Australian Cyber Security Centre’s ‘Essential 8’ cyber risk mitigation strategies for the first time in 2018-19. Based on their own self assessments, more work needs to be done to improve cyber security resilience.
This report analyses the results of our financial statement audits of the Treasury, Premier and Cabinet and Customer Service clusters for the year ended 30 June 2019. Our key observations are summarised below.
This report provides parliament and other users of the NSW Government's central agencies and their cluster agencies financial statements with the results of our audits, observations, analysis, conclusions and recommendations in the following areas:
- financial reporting
- audit observations
- government financial services.
Central agency clusters were significantly impacted by Machinery of Government changes which took effect on 1 July 2019. This report is focussed on agencies now in the Treasury, Premier and Cabinet and Customer Service clusters. Some of these agencies may have been in another cluster during 2018–19. Please refer to the section on Machinery of Government changes for more details.
Central agencies and their key responsibilities are set out below.
Machinery of Government (MoG) refers to how the government organises the structures and functions of the public service. MoG changes are where the government reorganises these structures and functions and they are given effect by Administrative orders.
The MoG changes announced following the NSW State election on 23 March 2019 significantly impacted Central Agencies’ clusters through Administrative Changes Orders issued on 2 April 2019 and 1 May 2019. These orders took effect on 1 July 2019.
Section highlights
Significant impacts of the 2019 MoG changes included:
- abolishing the former Department of Finance, Services and Innovation, and creating the Department of Customer Service as the principal agency within the newly established Customer Service cluster
- transferring Jobs for NSW, Destination NSW and the Western City and Aerotropolis Authority into the Treasury cluster
- transferring Arts and Culture entities and Aboriginal Affairs NSW into the Premier and Cabinet cluster
- new responsibilities, risks and challenges for each cluster
Financial reporting is an important element of good governance. Confidence and transparency in public sector decision making are enhanced when financial reporting is accurate and timely.
This chapter outlines our audit observations on the 2019 financial reporting of agencies in the Treasury, Premier and Cabinet, and Customer Service clusters.
Section highlights
- Unqualified audit opinions were issued on the 30 June 2019 financial statements of all agencies within the three clusters, and the Legislature.
- The NSW Self Insurance Corporation (Corporation) 2018–19 financial statements did not include an estimate of the liability for unreported incidents of abuse that have occurred within NSW Government institutions. This is because the Corporation’s financial exposure could not be reliably measured at 30 June 2019. The exposure was instead disclosed as an unquantified contingent liability in the financial statement notes. This liability may be material to the Corporation and the Total State Sector financial statements.
- We recommend management and those charged with governance review instructions provided to management experts each year, along with other significant accounting judgements.
- Agencies will be implementing the requirements of new accounting standards shortly. These could significantly impact their financial positions and operating results. We noted instances where agencies need to do more work on their impact assessments to minimise the risk of errors in the 2019–20 financial statements.
Appropriate financial controls help ensure the efficient and effective use of resources and administration of agency policies. They are essential for quality and timely decision making.
This chapter outlines our observations and insights from our financial statement audits of agencies in the Treasury, Premier and Cabinet and Customer Service clusters.
Section highlights
- The 2018–19 audits found two high risk and 99 moderate risk issues across the agencies. Of these, 31 per cent were repeat issues. The most common repeat issue related to weaknesses in controls over information technology user access administration.
- NSW Government agency self-assessment results show that the NSW Public Sector's cyber security resilience needs urgent attention.
- GovConnect received a qualified opinion from the auditor of their service provider, Unisys, over weaknesses in information technology controls.
- Crown revenues from taxes, fines and fees continued to increase, but this was offset by decreases in stamp duty on property sales.
- The CTP reform resulted in green slip refunds of $198 million to vehicle owners. Unclaimed refunds are to be returned to motorists through a reduction in green slip premiums.
Background
This chapter outlines our audit observations, conclusions and recommendations specific to NSW Government agencies providing financial services.
Section highlights
- Last year's Auditor-General's Report to Parliament recommended Treasury consult with STC Pooled Fund and PCS Fund Trustees to prescribe prudential standards and requirements. Treasury has not taken specific action to address this recommendation.
We recommend Treasury formally assess the merits of implementing prudential standards and supervision arrangements, after considering the risks, benefits and costs to scheme members. - The NSW Self Insurance Corporation did not include an estimate of the liability for unreported incidents of abuse that have occurred within NSW Government institutions because it could not be reliably measured at 30 June 2019. The amounts involved could be material to the Corporation's and Total State Sector's financial statements.
- Insurance scheme liabilities were significantly impacted by unfavourable movements in economic assumptions, including a decrease in the risk free discount rate, and adverse changes in non-economic assumptions, such as higher medical costs.
Appendix one – Timeliness of financial reporting by agency
Appendix two – Management letter findings by agency
Appendix three – Status of 2018 recommendations
Appendix four – Cluster agencies
Appendix five – Financial data
Copyright notice
© Copyright reserved by the Audit Office of New South Wales. All rights reserved. No part of this publication may be reproduced without prior consent of the Audit Office of New South Wales. The Audit Office does not accept responsibility for loss or damage suffered by any person acting on or refraining from action as a result of any of this material.
Planning, Industry and Environment 2019
This report outlines the results of audits of the financial statements of agencies now grouped in the NSW Planning, Industry and Environment cluster.
Unqualified audit opinions were issued for 56 of the 66 cluster agencies’ 30 June 2019 financial statements. Ten audits remain incomplete. The cluster agencies need to improve the timeliness of financial reporting.
The Audit Office continued to identify issues regarding unprocessed Aboriginal land claims and the recognition of Crown land. ‘Auditor-General’s reports to parliament have recommended action to reduce the level of unprocessed land claims since 2007. However, the number of unprocessed claims continued to increase’, Margaret Crawford said.
One in five internal control findings were repeat issues. Key themes included information technology, asset management and improvements required to expense and payroll controls.
The report makes several recommendations including:
- Property NSW should urgently address the deficiencies in the lease data used to calculate the impact of the new leasing standard effective from 1 July 2019
- the Department of Planning, Industry and Environment should prioritise action to reduce unprocessed Aboriginal land claims
- the Department of Planning, Industry and Environment should ensure the Crown land database is complete and accurate so state agencies and local government councils are better informed about the Crown land they control.
This report analyses the results of our audits of financial statements of the Planning, Industry and Environment cluster agencies for the year ended 30 June 2019. The table below summarises our key observations.
1. Machinery of Government changes
| Creation of the Planning, Industry and Environment cluster |
The Machinery of Government (MoG) changes abolished the former Planning and Environment cluster and former Industry cluster, and created the Planning, Industry and Environment cluster on 1 July 2019. The Department of Planning and Environment (DPE), the Department of Industry (DOI), the Office of Environment and Heritage, and the Office of Local Government were abolished and the majority of their functions were transferred to the new Department of Planning, Industry and Environment (DPIE). |
| The Department of Planning, Industry and Environment is still in the process of implementing changes |
The MoG changes bring risks and challenges to the cluster. A MoG Steering Committee, with the support of various project control groups and working groups, identified and developed responses to key risks arising from the changes. However, the DPIE will take some time to fully integrate the policies, systems and processes of the abolished Departments and agencies. |
2. Financial reporting
| Audit opinions | Unqualified audit opinions were issued for 56 of the 66 cluster agencies' 30 June 2019 financial statements audits. Ten financial statements audits are still ongoing. |
| Timeliness of financial reporting |
Fifty-five of the 57 agencies subject to statutory deadlines submitted their financial statements on time. Due to issues identified during the audit, 13 financial statements audits were not completed and audit opinions issued by the statutory deadline. Agencies prepared and submitted their early close procedures in accordance with the mandatory timeframe set by NSW Treasury. However, 17 of the 49 agencies where we reviewed early close procedures were assessed as either partially addressing or not addressing one or more of the mandatory requirements. The cluster agencies could benefit from an increased focus on early close procedures. |
| Introduction of AASB 16 'Leases' |
We noted errors in the lease data used in Property NSW's AASB 16 impact calculations, which affect both Property NSW and other government agencies. These errors were significant enough to present a risk of material misstatements to the financial statements of Property NSW and other government agencies in future reporting periods. We had similar findings in our recent performance audit on 'Property Asset Utilisation', which highlighted issues with the quality of Property NSW's records. Recommendation: Property NSW should urgently address the deficiencies in the lease data used to calculate the impact of the new leasing standard effective from 1 July 2019. |
| Unprocessed Aboriginal land claims have continued to increase |
Despite an increase in the number of claims resolved, the number of unprocessed Aboriginal land claims increased by 7.2 per cent from the prior year to 35,855 at 30 June 2019. Claims can be made over Crown land assets of the DPIE or other government agencies. Until claims are resolved, there is an uncertainty over who is entitled to the land and the uses and activities that can be carried out on the land. We first recommended action to address unprocessed claims in 2007. Recommendation (repeat issue): The DPIE should prioritise action to reduce unprocessed Aboriginal land claims. |
3. Audit observations
| Internal controls |
One in five internal control issues identified and reported to management in 2018–19 were repeat issues. The lack of user access review was the most common IT general control issue in the cluster. |
| Drought relief |
The NSW Government announced an emergency drought relief package of $500 million in 2018, in addition to other financial assistance measures already in place. Limited documentation and written agreements between relevant delivery agencies resulted in a $31.0 million misstatement relating to grant revenue. |
| Recognition of Crown land |
Crown land is an important asset of the state. Management and recognition of Crown land assets is weakened when there is confusion over who is responsible for a particular Crown land parcel. Last year we recommended the DOI should ensure the database of Crown land is complete and accurate. While the DOI has commenced actions to improve the database, this continued to be an issue in 2018–19. Recommendation (repeat issue): The DPIE should ensure the Crown land database is complete and accurate so state agencies and local government councils are better informed about the Crown land they control. |
| Developer contributions | The former DPE continued to accumulate more developer contributions revenues than it spent on infrastructure projects. Total unspent funds increased to $274 million at 30 June 2019. |
This report provides parliament and other users of the Planning, Industry and Environment cluster agencies financial statements with the results of our audits, our observations, analysis, conclusions and recommendations in the following areas:
- financial reporting
- audit observations.
This cluster was created by the Machinery of Government changes on 1 July 2019. This report is focused on agencies in the Planning, Industry and Environment cluster from 1 July 2019. However, these agencies were all in other clusters during 2018–19. Please refer to the section on Machinery of Government changes for more details.
Machinery of Government (MoG) refers to how the government organises the structures and functions of the public service. MoG changes are where the government reorganises these structures and functions that are given effect by Administrative orders.
The MoG changes, announced following the NSW State election on 23 March 2019, created the Planning, Industry and Environment (PIE) cluster. The Administrative Changes Orders issued on 2 April 2019, 1 May 2019 and 28 June 2019 gave effect to these changes. These orders became effective on 1 July 2019.
Section highlights
The 2019 MoG changes significantly impacted the former Planning and Environment, and Industry clusters and agencies.
- The PIE cluster combines most of the functions and agencies of the former Planning and Environment and Industry clusters from 1 July 2019.
- The Department of Planning, Industry and Environment is the principal agency in the PIE cluster.
- The MoG changes bring risks and challenges to the PIE cluster.
- A MoG Steering Committee was established to oversee the transitional processes.
- The full integration of the systems and processes will not be completed in the near future.
Financial reporting is an important element of good governance. Confidence and transparency in public sector decision making are enhanced when financial reporting is accurate and timely.
This chapter outlines our audit observations related to the financial reporting of agencies in the Planning, Industry and Environment (PIE) cluster for 2019. In this chapter, the Department of Planning, Industry and Environment is referred to as DPIE, the former Department of Planning and Environment as DPE, and the former Department of Industry as DOI.
Section highlights
- Unqualified audit opinions were issued for all completed 30 June 2019 financial statements audits. However, some cluster agencies can further enhance the quality of financial reporting.
- Timeliness of financial reporting remains an issue for 13 agencies.
- Deficiencies were identified in the data used to calculate the impact of AASB 16 ‘Leases’ effective from 1 July 2019. Property NSW should urgently address these deficiencies.
- Unprocessed Aboriginal land claims continue to increase. DPIE should prioritise action to reduce unprocessed Aboriginal land claims.
Appropriate financial controls help ensure the efficient and effective use of resources and administration of agency policies. They are essential for quality and timely decision making.
This chapter outlines our audit observations and insights from our financial statement audits of agencies in the Planning, Industry and Environment (PIE) cluster for 2019. In this chapter, the Department of Planning, Industry and Environment is referred to as DPIE, the former Department of Planning and Environment as DPE, and the former Department of Industry as DOI.
Section highlights
- One in five issues identified and reported to management in 2018–19 were repeat issues.
- The lack of user access review was the most common IT general control issue in the PIE cluster.
- The PIE cluster provided significant financial assistance for drought relief.
- There continues to be significant deficiencies in Crown land records. The DPIE should ensure the Crown land database is complete and accurate.
- Unspent developer contributions funds continued to build up in 2018–19.
Appendix one – List of 2019 recommendations
Appendix two – Status of 2018 recommendations
Appendix three – Cluster agencies
Appendix four – Financial data
Appendix five – Management letter findings
Appendix six – Timeliness of financial reporting
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© Copyright reserved by the Audit Office of New South Wales. All rights reserved. No part of this publication may be reproduced without prior consent of the Audit Office of New South Wales. The Audit Office does not accept responsibility for loss or damage suffered by any person acting on or refraining from action as a result of any of this material.
Internal Controls and Governance 2019
This report covers the findings and recommendations from the 2018–19 financial audits that relate to internal controls and governance at 40 of the largest agencies in the NSW public sector. The 40 agencies selected for this report constitute around 84 per cent of total expenditure for all NSW public sector agencies.
The report provides insights into the effectiveness of controls and governance processes across the NSW public sector. It evaluates how agencies identify, mitigate and manage risks related to:
- financial controls
- information technology controls
- gifts and benefits
- internal audit
- contingent labour
- sensitive data.
The Auditor-General recommended that agencies do more to prioritise and address vulnerabilities in their internal controls and governance. The Auditor-General also recommended agencies increase the transparency of their management of gifts and benefits by publishing their registers on their websites.
This report analyses the internal controls and governance of 40 of the largest agencies in the NSW public sector for the year ended 30 June 2019.
1. Internal control trends
| New, repeat and high risk findings |
There was an increase in internal control deficiencies of 12 per cent compared to last year. The increase is predominately due to a 100 per cent increase in repeat financial and IT control deficiencies. Some agencies attributed the delay in actioning repeat findings to the diversion of staff from their regular activities to implement and operationalise the recent Machinery of Government changes. As a result, actions to address audit recommendations have been deferred or re prioritised, as the changes are implemented. Agencies need to ensure they are actively managing the risks associated with having these vulnerabilities in internal control systems unaddressed for extended periods of time. |
| Common findings |
A number of findings were common to multiple agencies. These findings often related to areas that are fundamental to good internal control environments and effective organisational governance, such as:
|
2. Information technology controls
| IT general controls |
We examined information security controls over key financial systems that support the preparation of agency financial statements. We found:
We also found 20 per cent of agencies had deficient IT program change controls, mainly related to segregation of duties in approval and authorisation processes, and user acceptance testing of program changes prior to deployment into production environments. User acceptance testing helps identify potential issues with software incompatibility, operational workflows, absent controls and software issues, as well as areas where training or user support may be required. |
3. Gifts and benefits
| Gifts and benefits registers |
All agencies had a gifts and benefits policy and 90 per cent of agencies maintain a gifts and benefits register. However, 51 per cent of the gifts and benefits registers we examined contained incomplete declarations, such as missing details for the approving officer, value of the gift and/or benefit offered and reasons supporting the decision. In some cases, gaps in recorded information meant the basis for decisions around gifts and benefits was not always clear, making it difficult to determine whether decisions in those instances were appropriate, compliant with policy and were not direct or indirect inducements to the recipients to favour suppliers or service providers. Agencies should ensure their gifts and benefits register includes all key fields specified in the Public Service Commission's minimum standards for gifts and benefits. Agencies should also perform regular reviews of the register to ensure completeness and ensure any gift or benefit accepted by a staff member meets the public's expectations for ethical behaviour. |
| Managing gifts and benefits |
We found opportunities to improve gifts and benefits processes and enhance transparency. For example, only three per cent of agencies publish their gifts and benefits registers on their websites. Agencies can improve management of gifts and benefits by:
|
| Reporting and monitoring |
Only 35 per cent of agencies reported trends in the number and nature of gifts and benefits recorded in their registers to the agency's senior executive management and/or a governance committee. Agencies should regularly report to the agency executive or other governance committee on trends in the offer and acceptance of gifts and benefits. |
4. Internal audit
| Obtaining value from the internal audit function |
Agencies have established and maintained internal audit functions to provide assurance on the effectiveness of agency controls and governance systems. However, we identified areas where agencies' internal audit functions could improve their processes to add greater value. For example, only 73 per cent of CAEs regularly attend meetings of the agency board or executive management committee. Internal audit functions can add greater value by involving the CAE more extensively in executive forums as an observer. Internal audit functions should also consider producing an annual report on internal audit. An annual report allows the internal audit function to report on their performance and add value by drawing to the attention of audit and risk committees and senior management strategic issues, thematic trends and emerging risks. |
| Role of the Chief Audit Executive |
Forty-five per cent of agencies assigned responsibilities to the Chief Audit Executive (CAE) that were broader than internal audit, but 17 per cent of these had not documented safeguards to protect the independence of the CAE. The reporting lines and status of the CAE at some agencies also needs review. At two agencies, the CAE reported to the CFO. Agencies should ensure:
|
| Quality assurance and improvement program |
Thirty-five per cent of agencies did not have a documented quality assurance and improvement program for its internal audit function. The policy and the International Standards for the Professional Practice of Internal Auditing require agencies to have a documented quality assurance and improvement program. The results of this program should be reported annually. Agencies should ensure there is a documented and operational Quality Assurance and Improvement Program for the internal audit function that covers both internal and external assessments. |
5. Managing contingent labour
| Obtaining value for money from contingent labour |
According to NSW Procurement data, spend on contingent labour has increased by 75 per cent over the last five years, to $1.5 billion in 2018–19. Improvements in internal processes and a renewed focus on agency monitoring and oversight of contingent labour can help ensure agencies get the best value for money from their contingent workforces. Agencies can improve their management of contingent labour by:
We also found 57 per cent of the 23 agencies we examined with contingent labour spend of more than $5 million in 2018–19 have implemented the government's vendor management system and service provider 'Contractor Central'. |
6. Managing sensitive data
| Identifying and assessing sensitive data |
Sixty-eight per cent of agencies maintain an inventory of their sensitive data and where it resides. However, these inventories are not always complete and risks may be overlooked. Agencies can improve processes to manage sensitive data by:
|
| Managing data breaches |
Eighty-eight per cent of agencies have established policies to respond to potential data breaches when they are identified and 70 per cent of agencies maintain a register to record key information in relation to identified data breach incidents. Agencies should maintain a data breach register to effectively manage the actions undertaken to contain, evaluate and remediate each data breach. |
This report covers the findings and recommendations from our 2018–19 financial audits that relate to internal controls and governance at 40 of the largest agencies (refer to Appendix three) in the NSW public sector. The 40 agencies selected for this volume constitute around 84 per cent of total expenditure for all NSW public sector agencies.
Although the report includes several agencies that have changed as a result of the Machinery of Government changes that were effective from 1 July 2019, its focus on sector wide issues and insights means that its findings remain relevant to NSW public sector agencies, including newly formed agencies that have assumed the functions of abolished agencies.
This report offers insights into internal controls and governance in the NSW public sector
This is the third report dedicated to internal controls and governance at NSW State Government agencies. The report provides insights into the effectiveness of controls and governance processes in the NSW public sector by:
- highlighting the potential risks posed by weaknesses in controls and governance processes
- helping agencies benchmark the adequacy of their processes against their peers
- focusing on new and emerging risks, and the internal controls and governance processes that might address those risks.
Without strong governance systems and internal controls, agencies increase the risks associated with effectively managing their finances and delivering services to citizens. For example, if they do not have strong information technology controls, sensitive information may be at risk of unauthorised access and misuse.
Areas of specific focus of the report have changed since last year
Last year's report topics included transparency and performance reporting, management of purchasing cards and taxi use, and fraud and corruption control. We are reporting on new topics this year and re-visiting agency management of gifts and benefits, which we first covered in our 2017 report. Re-visiting topics from prior years provides a baseline to show the NSW public sectors’ progress implementing appropriate internal controls and governance processes to mitigate existing, new and emerging risks in the public sector.
Our audits do not review all aspects of internal controls and governance every year. We select a range of measures and report on those that present heightened risks for agencies to mitigate. This year the report focusses on:
- internal control trends
- information technology controls, including access to agency systems
- protecting sensitive information held within agencies
- managing large and diverse workforces (controls around employing and managing contingent workers)
- maintaining an ethical culture (management of gifts and benefits)
- effectiveness of internal audit function and its oversight by Audit and Risk Committees.
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, internal controls and audit observations are included in the individual 2019 cluster financial audit reports, which will be tabled in parliament from November to December 2019.
Internal controls are processes, policies and procedures that help agencies to:
- operate effectively and efficiently
- produce reliable financial reports
- comply with laws and regulations
- support ethical government.
This chapter outlines the overall trends for agency controls and governance issues, including the number of audit findings, the degree of risk those deficiencies pose to the agency, and a summary of the most common deficiencies we found across agencies. The rest of this report presents this year’s controls and governance findings in more detail.
Key conclusions and sector wide learnings
- out of date policies or an absence of policies to guide appropriate decisions
- poor record keeping and document retention
- incomplete or inaccurate centralised registers or gaps in these registers.
Policies, procedures and internal controls should be properly designed, be appropriate for the current organisational structure and its business activities, and work effectively.
This chapter outlines our audit observations, conclusions and recommendations, arising from our review of agency controls to manage key financial systems.
This chapter outlines our audit observations, conclusions and recommendations, arising from our review of agency controls to manage gifts and benefits.
Key conclusions and sector wide learnings
We found most agencies have implemented the Public Service Commission's minimum standards for gifts and benefits. All agencies had a gifts and benefits policy and 90 per cent of agencies maintained a gifts and benefits register and provided some form of training to employees on the treatment of gifts and benefits.
Based on our analysis of agency registers, we found some areas where opportunities existed to make processes more effective. In some cases, gaps in recorded information meant the basis for decisions around gifts and benefits was not always clear, making it difficult to determine whether decisions in those instances were appropriate and compliant with policy. Fifty-one per cent of the gifts and benefits registers reviewed contained declarations where not all fields of information had been completed. Seventy-seven per cent of agencies that maintained a gifts and benefits register did not include all key fields suggested by the minimum standards.
Areas where agencies can improve their management of gifts and benefits include:
- ensuring agency policies comprehensively cover the elements necessary to make it effective in an operational environment, such as identifying risks specific to the agency and actions that will be taken in the event of a policy breach
- establishing and publishing a statement of business ethics on the agency's website to clearly communicate expected behaviours to clients, customers,suppliers and contractors
- updating gifts and benefits registers to include all key fields suggested by the minimum standards, as well as performing regular reviews of the register to ensure completeness
- providing on-going training, awareness activities and support to employees, not just at induction
- regularly reporting gifts and benefits to executive management and/or a governance committee such as the audit and risk committee, focussing on trends in the number and types of gifts and benefits offered to and accepted by agency staff
- publishing their gifts and benefits registers on their websites to demonstrate a commitment to a transparently ethical environment.
This chapter outlines our audit observations, conclusions and recommendations, arising from our review of agency internal audit functions.
Key conclusions and sector wide learnings
We found agencies have established and maintained internal audit functions to provide assurance on the effectiveness of agency controls and governance systems as required by TPP15-03 'Internal Audit and Risk Management Policy for the NSW Public Sector'. However, we identified areas where agencies' internal audit functions could improve their processes to add greater value, including:
- documenting and implementing safeguards to address conflicting roles performed by the Chief Audit Executive (CAE)
- ensuring the reporting lines for the CAE comply with the NSW Treasury policy, and the CAE reports neither functionally or administratively to the finance function or other significant recipients of internal audit services
- involving the CAE more extensively in executive forums as an observer
- documenting a Quality Assurance and Improvement Program for the internal audit function and performing both internal and external performance assessments to identify opportunities for continuous improvement
- reporting against key performance indicators or a balanced scorecard and producing an annual report on internal audit to bring to the attention of the audit and risk committee and senior management strategic issues, thematic trends and emerging risks that may require further attention or resources.
This chapter outlines our audit observations, conclusions and recommendations, arising from our review of agency controls to on-board, manage and off-board contingent labour.
Key conclusions and sector wide learnings
Agencies have implemented controls to manage contingent labour and most agencies have some level of reporting and oversight of contingent labour at an executive level. However, the increasing trend in spend on contingent labour warrants a renewed focus on agency monitoring and oversight of their use of contingent labour. Over the last five years spend on contingent labour has increased by 75 per cent, to $1.5 billion in 2018–19.
There are also some key gaps that limit the ability of agencies to effectively manage contingent labour. Key areas where agencies can improve their management of contingent labour include:
- preparing workforce plans to inform their resourcing strategy, and confirm prior to engaging contingent labour, that this solution aligns with the strategy and best meets business needs
- involving agency human resources units in decisions about engaging contingent labour
- regularly reporting on contingent labour use to agency executive teams, particularly in terms of trends in agency spend, tenure and compliance with policies and procedures
- strengthening on-boarding and off-boarding processes, including establishing checklists to on-board and off-board contingent labour, making provisions for knowledge transfer, and assessing, documenting and capturing performance information.
This chapter outlines our audit observations, conclusions and recommendations, arising from our review of governance and processes in relation to the management of sensitive data.
Key conclusions and sector wide learnings
Information technology risks are rapidly increasing. More interfaces between agencies and greater connectivity means the amounts of data agencies generate, access, store and share continue to increase. Some of this information is sensitive information, which is protected by the Privacy Act 1988.
It is important that agencies understand what sensitive data they hold, the risks associated with the inadvertent release of this information and how they are mitigating those risks. We found that agencies need to continue to identify and record their sensitive data, as well as expand the methods they use to identify sensitive data. This includes data held in unstructured repositories, such as network shared drives and by agency service providers.
Eighty-eight per cent of agencies have established policies to respond to potential data breaches when they are identified and 70 per cent of agencies maintain a register to record key information in relation to identified data breach incidents.
Key areas where agencies can improve their management of sensitive data include:
- identifying sensitive data, based on a comprehensive and structured process and maintaining an inventory of the data
- assessing the criticality and sensitivity of the data so that the protection of high risk data can be prioritised
- developing comprehensive data breach management policies to ensure data breaches are appropriately managed
- maintaining a data breach incident register to record key information in relation to identified data breaches incidents, including the estimated cost of the breach
- providing on-going training and awareness activities to employees in relation to sensitive data and managing data breaches.
Appendix one – List of 2019 recommendations
Appendix two – Status of 2018 recommendations
Appendix three – In-scope agencies
© Copyright reserved by the Audit Office of New South Wales. All rights reserved. No part of this publication may be reproduced without prior consent of the Audit Office of New South Wales. The Audit Office does not accept responsibility for loss or damage suffered by any person acting on or refraining from action as a result of any of this material.
Planning and Environment 2018
The Auditor-General for New South Wales, Margaret Crawford, released her report today on the NSW Planning and Environment cluster. The report focuses on key observations and findings from the most recent financial audits of these agencies. Unqualified audit opinions were issued for all agencies' financial statements. However, some cultural institutions had challenges valuing collection assets in 2017–18. These issues were resolved before the financial statements were finalised.
This report analyses the results of our audits of financial statements of the Planning and Environment cluster for the year ended 30 June 2018. The table below summarises our key observations.
This report provides parliament and other users of the Planning and Environment cluster agencies' financial statements with the results of our audits, our observations, analysis, conclusions and recommendations in the following areas:
- financial reporting
- audit observations
- service delivery.
Financial reporting is an important element of good governance. Confidence and transparency in public sector decision making is enhanced when financial reporting is accurate and timely.
This chapter outlines our audit observations related to the financial reporting of agencies in the Planning and Environment cluster for 2018.
| Observation | Conclusions and recommendations |
| 2.1 Quality of financial reporting | |
| Unqualified audit opinions were issued for all agencies' financial statements. | The quality of financial reporting remains high across the cluster. |
| 2.2 Key accounting issues | |
| There were errors in some cultural institutions' collection asset valuations. | Recommendation: Collection asset valuations could be improved by:
|
| 2.3 Timeliness of financial reporting | |
| Except for two agencies, the audits of cluster agencies’ financial statements were completed within the statutory timeframe. | Issues with asset revaluations delayed the finalisation of two environment and heritage agencies' financial statement audits. |
Appropriate financial controls help ensure the efficient and effective use of resources and administration of agency policies. They are essential for quality and timely decision making.
This chapter outlines our observations and insights from:
- our financial statement audits of agencies in the Planning and Environment cluster for 2018
- the areas of focus identified in the Audit Office work program.
The Audit Office annual work program provides a summary of all audits to be conducted within the proposed time period as well as detailed information on the areas of focus for each of the NSW Government clusters.
| Observation | Conclusions and recommendations |
| 3.1 Internal controls | |
| One in five internal control weaknesses reported in 2017–18 were repeat issues. | Delays in implementing audit recommendations can prolong the risk of fraud and error. Recommendation (repeat issue): Management letter recommendations to address internal control weaknesses should be actioned promptly, with a focus on addressing repeat issues. |
| One extreme risk was identified relating to the National Art School. The School does not have an occupancy agreement for the Darlinghurst campus. | Lack of formal agreement creates uncertainty over the School's continued occupancy of the Darlinghurst site. The School should continue to liaise with stakeholders to formalise the occupancy arrangement. |
| 3.2 Information technology controls | |
| The controls and governance arrangements when migrating payroll data from the Aurion system to SAP HR system were effective. | Data migration from the Aurion system to SAP HR system had no significant issues. |
| The Department can improve controls over user access to SAP system. | The Department needs to ensure the SAP user access controls are appropriate, including investigation of excess access rights and resolving segregation of duties issues. |
| 3.3 Annual work program | |
| Agencies used different benchmarks to monitor their maintenance expenditure. | The cluster agencies under review operate in different industries. As a result, they do not use the same benchmarks to assess the adequacy of their maintenance spend. |
This chapter outlines certain service delivery outcomes for 2017–18. The data on activity levels and performance is provided by cluster agencies. The Audit Office does not have a specific mandate to audit performance information. Accordingly, the information in this chapter is unaudited.
We report this information on service delivery to provide additional context to understand the operations of the Planning and Environment cluster, and to collate and present service information for different segments of the cluster in one report.
In our recent performance audit, ‘Progress and measurement of Premier's Priorities’, we identified 12 limitations of performance measurement and performance data. We recommended the Department of Premier and Cabinet ensure that processes to check and verify data are in place for all relevant agency data sources.
Central Agencies 2018
The Auditor-General for New South Wales, Margaret Crawford, released her report today on the results of the financial audits of NSW Government central agencies. The report focuses on key observations and findings from the most recent financial statement audits of agencies in the Treasury, Premier and Cabinet, and Finance, Services and Innovation clusters. While clear audit opinions were issued on all agency financial statements, the report notes that some complex accounting requirements caused significant errors in agency financial statements submitted for audit, which were corrected before the financial statements were approved.
This report analyses the results of our audits of the Treasury, Premier and Cabinet and Finance, Services and Innovation cluster agencies for the year ended 30 June 2018. The table below summarises our key observations.
This report provides parliament and other users of the NSW Government's central agencies and their cluster agencies financial statements with the results of our audits, our observations, analysis, conclusions and recommendations in the following areas:
- financial reporting
- audit observations
- liquidity risk management
- government financial services.
The central agencies and their key responsibilities are set out below.
| Central agencies | Key central agency responsibilities | Cluster responsibilities |
| The Treasury |
|
The cluster:
|
| Department of Premier and Cabinet |
|
The cluster:
|
| Department of Finance, Services and Innovation |
|
The cluster:
|
| Public Service Commission |
|
|
A full list of agencies that this report covers by relevant cluster is included in Appendix three.
Financial reporting is an important element of good governance. Confidence and transparency in public sector decision making are enhanced when financial reporting is accurate and timely.
This chapter outlines our audit observations related to the financial reporting of agencies in the Treasury, Premier and Cabinet and Finance, Services and Innovation clusters for 2018.
| Observation | Conclusions and recommendations |
| 2.1 Quality of financial reporting | |
| Unqualified opinions were issued for all agencies' financial statements submitted to the Audit Office. Complex accounting requirements caused significant errors in some agency financial statements, which were corrected before the financial statements were approved. |
Sufficient audit evidence was obtained to conclude the financial statements were free of material misstatement. Recommendation: Agencies should respond to key accounting issues when they are identified by preparing accounting papers and engaging with Treasury, the Audit Office and their Audit and Risk Committee when these matters are identified. |
| 2.2 Timeliness of financial reporting | |
| Most agencies complied with the statutory timeframe for completion of early close procedures, 48 agencies in the Treasury cluster did not comply with the statutory requirement to prepare financial statements, and the audits of nine agencies in the Treasury cluster were not completed within the statutory timeframe. All financial statement information of the 48 agencies that did not prepare financial statements has been captured in the consolidated financial statements of their parent entity, which was subject to audit. |
Early close procedures allow financial reporting issues and risks to be addressed early in the audit process. The timeliness of financial reporting can be improved by performing more robust early close procedures. |
Appropriate financial controls help ensure the efficient and effective use of resources and administration of agency policies. They are essential for quality and timely decision making.
This chapter outlines our observations and insights from:
- our financial statement audits of agencies in the Treasury, Premier and Cabinet and Finance, Services and Innovation cluster for 2018
- the areas of focus identified in the Audit Office work program.
The Audit Office work program provides a summary of all audits to be conducted within the proposed time period as well as detailed information on the areas of focus for each of the NSW Government clusters.
| Observation | Conclusions and recommendations |
| 3.1 Internal controls | |
| The 2017–18 audits found one high risk issue and 83 moderate risk issues across the agencies. Nineteen per cent of all issues were repeat issues. | Agencies should focus on rectifying repeat issues. |
| The high risk issue at Service NSW related to several deficiencies in procurement and contract management processes. | Service NSW may not be achieving value-for-money from their procurement and contract management activities. The high risk issue should be rectified as a matter of priority. This includes updating and implementing its procurement, vendor and contract management frameworks and delivering training to key staff involved in procurement and contract management activities. |
| Property NSW has implemented several controls during the year to rectify the high risk issue identified last year related to its transition to a new property and facility management service provider. However, the service providers performance remains below expectations and there are further opportunities to improve oversight and lift performance. | Property NSW can better define roles and accountabilities with the service provider and formalise policies and processes associated with its monitoring and oversight of the service provider. Implementing relevant KPIs, receiving timely reports and providing timely review and feedback to the service provider may help to lift performance. |
| GovConnect received unqualified opinions from their service auditor on all business process controls, except for information technology controls provided by Unisys, where a qualified opinion was received from the service auditor. A qualified opinion was received because of several deficiencies in user access controls. | These internal control deficiencies increase the risk of unauthorised access to key business systems, and increase audit effort and costs associated with addressing the risks arising from the deficiencies. |
| 3.2 Audit Office annual work program | |
|
Remediation of the Barangaroo site is now estimated to cost the Barangaroo Delivery Authority in excess of net $400 million. |
Measuring the remaining costs to remediate requires the use of estimation techniques and judgements, making the actual outcome inherently uncertain. We reviewed evidence to support the provision for remediation, including future costs estimates and this evidence supported management’s estimate. |
| The State Insurance Regulatory Authority have administered the refund of $138 million in Green slip refunds to policy holders through Service NSW during 2017–18. At 30 June 2018, $112 million in refunds are yet to be claimed. We reviewed the systems and processes supporting the refund process. While we found that this supports the disbursement of refunds to policyholders there were some deficiencies in Service NSW’s project controls when the program was being developed. |
Service NSW should apply the lessons learnt from this program to other programs it is delivering or will be delivering for agencies. |
| Revenue NSW recorded $30.4 billion from taxes, fines and fees in 2017–18 ($30.0 billion in 2016–17) to support the State’s finances. |
Crown revenue has steadily increased over the last five years predominately driven by rises in payroll tax and land tax and responsibility for collection of the Emergency Services Levy transferring to Revenue NSW under the Emergency Services Levy Act 2017 effective from July 2017. |
| 3.3 Managing maintenance | |
| Place Management NSW manages significant commercial and retail leases and maintains public domain spaces and other assets around the harbour foreshore. It has consistently underspent its asset maintenance budget. In 2017–18, asset maintenance expenses were only 34 per cent of budgeted maintenance expense. Currently, Place Management NSW does not use any ratios or benchmarks to determine the adequacy of its maintenance spend or to monitor whether it is achieving its budgeted maintenance program. |
This may be contributing to a high proportion of unplanned maintenance, which Place Management NSW reports was 38 per cent of total maintenance expense in 2017–18. Place Management NSW is outsourcing its property and facilities management function from 1 December 2018 to an external service provider. |
This chapter outlines our audit observations, conclusions and recommendations specific to NSW Government agencies providing financial services.
| Observation | Conclusions and recommendation |
| 5.1 Superannuation funds | |
| The SAS Trustee Corporation (STC) Pooled Fund and the Parliamentary Contributory Superannuation (PCS) Fund are not required to comply with the prudential and reporting standards issued by the Australian Prudential Regulation Authority (APRA). However, legislation allows the responsible Minister to prescribe prudential standards, reporting and audit requirements. |
Structured and comprehensive prudential oversight of these Funds is important as they operate in a volatile financial sector, have 103,000 members and manage investments of $43.3 billion. Recommendation: Treasury should consult with the Trustees of the STC Pooled Fund and PCS Fund to prescribe appropriate prudential standards and requirements, including oversight arrangements. |
| 5.2 Insurance and compensation | |
| Nominal Insurer and NSW Self Insurance Corporation investment performance marginally exceeded benchmark over the past five years. | Investment returns can impact on the premiums required to maintain an adequate funding ratio in addition to other factors such as claims experience and discount rates. |
| The Workers Compensation Nominal Insurer (Nominal Insurer) and NSW Self Insurance Corporation's net collected premiums and contributions decreased over the past five years. | The insurance schemes' investment performance and stable claim payments have enabled less reliance on net collected premiums and contributions as a source of funding, over the past five years. |
| Reforms were introduced to manage the Home Warranty Scheme's financial sustainability risks. | The Home Warranty Scheme has not collected sufficient premiums to fund expected claims costs, since commencing operations in 2011. In 2017–18, the Crown contributed $181 million for historical shortfalls. New reforms started on 1 January 2018 enabling the Scheme to price premiums based on risk. |
Internal Controls and Governance 2018
The Auditor-General for New South Wales Margaret Crawford found that as NSW state government agencies’ digital footprint increases they need to do more to address new and emerging information technology (IT) risks. This is one of the key findings to emerge from the second stand-alone report on internal controls and governance of the 40 largest NSW state government agencies.
This report analyses the internal controls and governance of the 40 largest agencies in the NSW public sector for the year ended 30 June 2018.
This report covers the findings and recommendations from our 2017–18 financial audits that relate to internal controls and governance at the 40 largest agencies (refer to Appendix three) in the NSW public sector.
This report offers insights into internal controls and governance in the NSW public sector
This is our second report dedicated to internal controls and governance at NSW State Government agencies. The report provides insights into the effectiveness of controls and governance processes in the NSW public sector by:
- highlighting the potential risks posed by weaknesses in controls and governance processes
- helping agencies benchmark the adequacy of their processes against their peers
- focusing on new and emerging risks, and the internal controls and governance processes that might address those risks.
Without strong governance systems and internal controls, agencies increase the risks associated with effectively managing their finances and delivering services to citizens. The way agencies deliver services increasingly relies on contracts and partnerships with the private sector. Many of these arrangements deliver front line services, but others provide less visible back office support. For example, an agency may rely on an IT service provider to manage a key system used to provide services to the community. The contract and service level agreements are only truly effective where they are actively managed to reduce risks to continuous quality service delivery, such as interruptions caused by system outages, cyber security attacks and data security breaches.
Our audits do not review all aspects of internal controls and governance every year. We select a range of measures, and report on those that present heightened risks for agencies to mitigate. This report divides these into the following five areas:
- Internal control trends
- Information technology (IT), including IT vendor management
- Transparency and performance reporting
- Management of purchasing cards and taxis
- Fraud and corruption control.
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 2018 cluster financial audit reports, which will be tabled in Parliament from November to December 2018.
The focus of the report has changed since last year
Last year's report topics included asset management, ethics and conduct, and risk management. We are reporting on new topics this year. We plan to introduce new topics and re-visit our previous topics in subsequent reports on a cyclical basis. This will provide a baseline against which to measure the NSW public sectors’ progress in implementing appropriate internal controls and governance processes to mitigate existing, new and emerging risks in the public sector.
Agencies selected for the volume account for 95 per cent of the state's expenditure
While we have covered only 40 agencies in this report, those selected are a large enough group to identify common issues and insights. They represent about 95 per cent of total expenditure for all NSW public sector agencies.
Internal controls are processes, policies and procedures that help agencies to:
- operate effectively and efficiently
- produce reliable financial reports
- comply with laws and regulations
- support ethical government.
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 presents this year’s controls and governance findings in more detail.
| Observation | Conclusions and recommendations |
|---|---|
| 2.1 High risk findings | |
| We found six high risk findings (seven in 2016–17), one of which was repeated from both last year and 2015–16. | Recommendation: Agencies should reduce risk by addressing high risk internal control deficiencies as a priority. |
| 2.2 Common findings | |
| We found several internal controls and governance findings common to multiple agencies. | Conclusion: Central agencies or the lead agency in a cluster can play a lead role in helping ensure agency responses to common findings are consistent, timely, efficient and effective. |
| 2.3 New and repeat findings | |
| Although internal control deficiencies decreased over the last four years, this year has seen a 42 per cent increase in internal control deficiencies. | The increase in new IT control deficiencies and repeat IT control deficiencies signifies an emerging risk for agencies. |
| IT control deficiencies feature in this increase, having risen by 63 per cent since last year. The number of repeat IT control deficiencies has doubled and is driven by the increasing digital footprint left by agencies as government prioritises on-line interfaces with citizens, and the number of transactions conducted through digital channels increases |
Recommendation: Agencies should reduce IT risks by:
|
Government agencies’ financial reporting is now heavily reliant on information technology (IT). IT is also increasingly important to the delivery of agency services. These systems often provide the data to help monitor the efficiency and effectiveness of agency processes and services they deliver. Our audits reviewed whether agencies have effective controls in place to manage both key financial systems and IT service contracts.
| Observation | Conclusions and recommendations |
|---|---|
| 3.1 Management of IT vendors | |
| Contract management framework Although 87 per cent of agencies have a contract management policy to manage IT vendors, one fifth require review. |
Conclusion: Agencies can more effectively manage IT vendor contracts by developing policies and procedures to ensure vendor management frameworks are kept up to date, plans are in place to manage vendor performance and risk, and compliance with the framework is monitored by:
|
| Contract risk management Forty-one per cent of agencies are not using contract management plans and do not assess contract risks. Half of the agencies that did assess contract risks, had not updated the risk assessments since the commencement of the contract. |
Conclusion: Instead of applying a 'set and forget' approach in relation to management of contract risks, agencies should assess risk regularly and develop a plan to actively manage identified risks throughout the contract lifecycle - from negotiation and commencement, to termination. |
|
Performance management Only 24 per cent of agencies sought assurance about the accuracy of vendor reporting against KPIs, yet sixty-seven per cent of the IT contracts allow agencies to determine performance based payments and/or penalise underperformance. |
Conclusion: Agencies are monitoring IT vendor performance, but could improve outcomes and more effectively manage under-performance by:
|
|
Transitioning services Where IT vendor contracts do make provision for transitioning-out, only 28 per cent of agencies have developed a transitioning-out plan with their IT vendor. |
Conclusion: Contract transition/phase out clauses and plans can mitigate risks to service disruption, ensure internal controls remain in place, avoid unnecessary costs and reduce the risk of 'vendor lock-in'. |
| Contract Registers Eleven out of forty agencies did not have a contract register, or have registers that are not accurate and/or complete. |
Conclusion: A contract register helps to manage an agency’s compliance obligations under the Government Information (Public Access) Act 2009 (the GIPA Act). However, it also helps agencies more effectively manage IT vendors by:
Recommendation: Agencies should ensure their contract registers are complete and accurate so they can more effectively govern contracts and manage compliance obligations. |
| 3.2 IT general controls | |
| Governance Ninety-five per cent of agencies have established policies to manage key IT processes and functions within the agency, with ten per cent of those due for review. |
Conclusion: Regular review of IT policies ensures risks are considered and appropriate strategies and procedures are implemented to manage these risks on a consistent basis. An absence of policies can lead to ad-hoc responses to risks, and failure to consider emerging IT risks and changes to agency IT environments. |
|
User access administration
|
Recommendation: Agencies should strengthen the administration of user access to prevent inappropriate access to key systems. |
| Privileged access Forty per cent of agencies do not periodically review logs of the activities of privileged users to identify suspicious or unauthorised activities. |
Recommendation: Agencies should:
|
| Password controls Twenty-three per cent of agencies did not comply with their own policy on password parameters. |
Recommendation: Agencies should ensure IT password settings comply with their password policies. |
| Program changes Fifteen per cent of agencies had deficient IT program change controls mainly related to segregation of duties and authorisation and testing of IT program changes prior to deployment. |
Recommendation: Agencies should maintain appropriate segregation of duties in their IT functions and test system changes before they are deployed. |
This chapter outlines our audit observations, conclusions and recommendations from our review of how agencies reported their performance in their 2016–17 annual reports. The Annual Reports (Statutory Bodies) Regulation 2015 and Annual Reports (Departments) Regulation 2015 (annual reports regulation) currently prescribes the minimum requirements for agency annual reports.
| Observation | Conclusion or recommendation |
| 4.1 Reporting on performance | |
|
Only 57 per cent of agencies linked reporting on performance to their strategic objectives. The use of targets and reporting performance over time was limited and applied inconsistently. |
Conclusion: There is significant disparity in the quality and consistency of how agencies report on their performance in their annual reports. This limits the reliability and transparency of reported performance information. Agencies could improve performance reporting by clearly linking strategic objectives to reported outcomes, and reporting on performance against targets over time. NSW Treasury may need to provide more guidance to agencies to support consistent and high-quality performance reporting in annual reports. |
|
There is no independent assurance that the performance metrics agencies report in their annual reports are accurate. Prior performance audits have noted issues related to the collection of performance information. For example, our 2016 Report on Red Tape Reduction highlighted inaccuracies in how the dollar-value of red tape reduction had been reported. |
Conclusion: The ability of Parliament and the public to rely on reported information as a relevant and accurate reflection of an agency's performance is limited. The relevance and accuracy of performance information is enhanced when:
|
| 4.2 Reporting on reports | |
|
Agency reporting on major projects does not meet the requirements of the annual reports regulation. Forty-seven per cent of agencies did not report on costs to date and estimated completion dates for major works in progress. Of the 47 per cent of agencies that reported on major works, only one agency reported detail about significant cost overruns, delays, amendments, deferments or cancellations. |
NSW Treasury produce an annual report checklist to help agencies comply with their annual report obligations. Recommendation: Agencies should comply with the annual reports regulation and report on all mandatory fields, including significant cost overruns and delays, for their major works in progress. |
|
The information the annual reports regulation requires agencies to report deals only with major works in progress. There is no requirement to report on completed works. Sixteen of 30 agencies reported some information on completed major works. |
Conclusion: Agencies could improve their transparency if they reported, or were required to report:
|
This chapter outlines our audit observations, conclusions and recommendations, arising from our review of agency preventative and detective controls over purchasing card and taxi use for 2017–18.
| Observation | Conclusion or recommendation |
| 5.1 Management of purchasing cards | |
| Volume of credit card spend Purchasing card expenditure has increased by 76 per cent over the last four years in response to a government review into the cost savings possible from using purchasing cards for low value, high volume procurement. |
Conclusion: The increasing use of purchasing cards highlights the importance of an effective framework for the use and management of purchasing cards. |
| Policy framework We found all agencies that held purchasing cards had a policy in place, but 26 per cent of agencies have not reviewed their purchasing card policy by the scheduled date, or do not have a scheduled revision date stated within their policy. |
Recommendation: Agencies should mitigate the risks associated with increased purchasing card use by ensuring policies and purchasing card frameworks remain current and compliant with the core requirements of TPP 17–09 'Use and Management of NSW Government Purchasing Cards'. |
| Preventative controls We found that:
|
Agencies have designed and implemented preventative controls aimed at deterring the potential misuse of purchasing cards. Conclusion: Further opportunities exist for agencies to better control the use of purchasing cards, such as:
|
|
Detective controls Major reviews, such as data analytics (29 per cent of agencies) and independent spot checks (49 per cent of agencies) are not widely used. |
Agencies have designed and implemented detective controls aimed at identifying potential misuse of purchasing cards. Conclusion: More effective monitoring using purchasing card data can provide better visibility over spending activity and can be used to:
|
| 5.2 Management of taxis | |
| Policy framework Thirteen per cent of agencies have not developed and implemented a policy to manage taxi use. In addition:
|
Conclusion: Agencies can promote savings and provide more options to staff where their taxi use policies:
|
| Detective controls All agencies approve taxi expenditure by expense reimbursement, purchasing card and Cabcharge, and have implemented controls around this approval process. However, beyond this there is minimal monitoring and review activity, such as data monitoring, independent spot checks or internal audit reviews. |
Conclusion: Taxi spend at agencies is not significant in terms of its dollar value, but it is significant from a probity perspective. Agencies can better address the probity risk by incorporating taxi use into a broader purchasing card or fraud monitoring program. |
Fraud and corruption control is one of the 17 key elements of our governance lighthouse. Recent reports from ICAC into state agencies and local government councils highlight the need for effective fraud control and ethical frameworks. Effective frameworks can help protect an agency from events that risk serious reputational damage and financial loss.
Our 2016 Fraud Survey found the NSW Government agencies we surveyed reported 1,077 frauds over the three year period to 30 June 2015. For those frauds where an estimate of losses was made, the reported value exceeded $10.0 million. The report also highlighted that the full extent of fraud in the NSW public sector could be higher than reported because:
- unreported frauds in organisations can be almost three times the number of reported frauds
- our 2015 survey did not include all NSW public sector agencies, nor did it include any NSW universities or local councils
- fraud committed by citizens such as fare evasion and fraudulent state tax self-assessments was not within the scope of our 2015 survey
- agencies did not estimate a value for 599 of the 1,077 (56 per cent) reported frauds.
Commissioning and outsourcing of services to the private sector and the advancement of digital technology are changing the fraud and corruption risks agencies face. Fraud risk assessments should be updated regularly and in particular where there are changes in agency business models. NSW Treasury Circular TC18-02 NSW Fraud and Corruption Control Policy now requires agencies develop, implement and maintain a fraud and corruption control framework, effective from 1 July 2018.
Our Fraud Control Improvement Kit provides guidance and practical advice to help organisations implement an effective fraud control framework. The kit is divided into ten attributes. Three key attributes have been assessed below; prevention, detection and notification systems.
This chapter outlines our audit observations, conclusions and recommendations, arising from our review of agency fraud and corruption controls for 2017–18.
| Observation | Conclusion or recommendation |
| 6.1 Prevention systems | |
|
Prevention systems Only 54 per cent of agencies have an employment screening policy and all agencies have IT security policies, but gaps in IT security controls could undermine their policies. |
Conclusion: Most agencies have implemented fraud prevention systems to reduce the risk of fraud. However poor IT security along with other gaps in agency prevention systems, such as employment screening practices heightens the risk of fraud and inappropriate use of data. Agencies can improve their fraud prevention systems by:
|
| Twenty-three per cent of agencies were not performing fraud risk assessments and some agency fraud risk assessments may not be as robust as they could be. | Conclusion: Agencies' systems of internal controls may be less effective where new and emerging fraud risks have been overlooked, or known weaknesses have not been rectified. |
| 6.2 Detection systems | |
| Detection systems Several agencies reported they were developing a data monitoring program, but only 38 per cent of agencies had already implemented a program. |
Studies have shown data monitoring, whereby entire populations of transactional data are analysed for indicators of fraudulent activity, is one of the most effective methods of early detection. Early detection decreases the duration a fraud remains undetected thereby limiting the extent of losses. Conclusion: Data monitoring is an effective tool for early detection of fraud and is more effective when informed by a comprehensive fraud risk assessment. |
| 6.3 Notification systems | |
| Notification system All agencies have notification systems for reporting actual or suspected fraud and corruption. Most agencies provide multiple reporting lines, provide training and publicise options for staff to report actual or suspected fraud and corruption. |
Conclusion: Training staff about their obligations and the use of fraud notification systems promotes a fraud-aware culture |
Report on Local Government 2017
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.
| 1. Introduction | |
| Local government sector | NSW has 140 councils: 128 local councils serving a geographic area and 12 county councils formed for a specific purpose. We completed audits of 139 councils' 2016–17 financial statements and eight councils' 2015–16 financial statements. Bayside Council received a lodgement extension from the Office of Local Government (OLG) and has not yet presented their 2016–17 financial statements for audit. |
| Service delivery | Each council provides a range of services, influenced by population density, demographics, the local economy, geographic and climatic characteristics. These differences influence the financial profile of councils. |
| 2. Financial reporting | |
| Quality of financial reporting |
The overall quality of financial reporting needs to improve:
OLG guidance for council year-end financial reporting needs to align with Australian Accounting Standards and be issued earlier. |
| Timeliness of financial reporting | Timeliness of financial reporting needs to improve. Forty councils required lodgement extensions past the 31 October 2017 statutory reporting deadline. |
| 3. Financial performance and sustainability | |
| Operating revenue | Eighteen councils operating expenses exceed current operating revenue. Fifty-nine councils do not meet OLG’s target of 60 per cent for own source operating revenue. |
| Liquidity and working capital | Most councils have sufficient liquidity and working capital. However, there are indicators that:
|
| Asset management measures | Reporting against OLG’s asset management performance measures highlights that councils need to consider whether spending on existing infrastructure assets is sufficient to ensure they continue to meet service delivery standards:
|
| 4. Asset management | |
| High risk issues | We reported ten high risk issues relating to councils’ asset management and accounting practices. |
| Asset reporting | The accuracy of asset registers requires improvement and all assets need to be reported in the financial statements. At 30 June 2017, 62 councils did not record all rural fire-fighting equipment in their financial statements. A large proportion of rural fire-fighting equipment is not reported in either State government or local government financial statements. |
| Asset valuation | We reported seven high risk matters related to asset valuations, including two that resulted in qualified audit opinions. |
| Asset useful life estimates | We identified that accounting for the useful lives of similar assets varied across councils, resulting in variable depreciation expense for these assets. In addition, the useful lives of assets need to be reviewed annually. This review should be supported by current condition assessments. |
| Asset policy and planning | Thirteen councils do not have an asset management strategy, policy and plan, as required by the Office of Local Government’s Integrated Planning and Reporting Framework. |
| 5. Governance and internal controls | |
| High risk issues | We reported 17 high risk issues relating to governance, financial accounting, purchasing and payables and payroll matters. |
| Governance | There is currently no requirement for councils to have an audit, risk and improvement committee and internal audit function. Consequently, 53 councils do not have an audit committee and 52 councils do not have an internal audit function. The Office of Local Government has incomplete information on the number of entities established by councils. There is no financial reporting framework for the variety of entities established by councils. Councils can strengthen policies and procedures to support critical business processes, practices for risk management and compliance with key laws and regulations. |
| Internal controls | Councils can improve internal controls over manual journals, reconciliations, purchasing and payables and payroll. |
| 6. Information technology | |
| High risk issues | We reported nine high risk issues relating to information technology. |
| Access to IT systems | Controls over user access to IT systems need to be strengthened. |
| Information Technology governance | IT governance benefits from appropriate policies, standards and guidelines across all critical IT processes. We identified that:
|
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.
| Observation | Conclusion or recommendation |
| 2.1 Quality of financial reporting | |
|
Qualified audit opinions
|
The councils that received unmodified audit opinions prepared financial statements that fairly present their financial position and results. |
|
We issued modified (qualified) opinions on the:
|
Councils with modified opinions should address the issues that give rise to the audit qualification. |
| Significant audit matters We reported 39 significant matters in 29 councils. They included material accounting issues and significant deficiencies in internal controls. Seventy-seven per cent of the matters related to assets. |
Significant issues with the quality of financial reporting delayed the completion of a number of audits. Improving the reporting on assets should be a priority. |
| Prior period errors We found 33 material errors worth $9.1 billion in the previous audited financial statements of 22 councils. These all required prior-year audited balances to be corrected. Eighty eight per cent of these were asset related. |
The high number of asset-related prior-period errors reinforces the need for councils to improve the way they value and account for assets. |
| Financial statements We reported 43 moderate risk findings where councils can improve the way they complete their financial statements. |
Recommendation Councils can improve the quality of financial reporting by reviewing their financial statements close processes to identify areas for improvements. |
| Of the councils that had an audit, risk and improvement committee, 55 per cent of these did not review the financial statements before audit. | Recommendation Councils can improve the quality of financial reporting by involving an audit, risk and improvement committee in the review of financial statements. |
| OLG guidance To support councils in preparing 30 June 2017 financial statements, OLG issued guidance documents in June 2017 and September 2017. This limited the time councils had to prepare financial statements in the prescribed form and resolve financial reporting and audit issues. |
Recommendation The Office of Local Government should release the Local Government Code of Accounting Practice and Financial Reporting and the End of Year Financial Reporting Circular earlier in the audit cycle, ideally by 30 April each year. |
| The Code applicable for the 2016–17 financial reporting period provided options and guidance that in some instances did not fully align with Australian Accounting Standards. | Recommendation The Local Government Code of Accounting Practice and Financial Reporting should align with Australian Accounting Standards. |
| 2.2 Timeliness of financial reporting | |
| Statutory deadlines One hundred councils submitted audited financial statements to OLG by the statutory deadline of 31 October 2017. Thirty-nine councils received reporting extensions up to 28 February, including 16 of the 20 newly amalgamated councils. Bayside Council received a reporting extension to 31 May 2018 and has not yet presented their financial statements for audit. |
Councils need to improve their financial reporting processes in order to lodge their financial statements by the statutory reporting deadline. |
| Early close procedures Councils currently do not use early close procedures to resolve accounting issues before the end of the financial year. |
Recommendation The Office of Local Government should introduce early close procedures with an emphasis on asset valuations. |
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.
| Observations | Conclusions |
| 3.1 Operating revenue performance measures | |
|
Operating performance Another 20 councils would not have met OLG’s operating performance benchmark without the receipt of 2017–18 financial assistance grants which was recorded as revenue during 2016–17. Eleven councils have not met OLG’s operating performance benchmark for the last three years. |
It is important that councils have financial management strategies that support their financial sustainability and ability to meet OLG’s operating performance benchmark over the long term. |
| Operating performance measures how well councils contain operating expenses within operating revenue. OLG has prescribed a benchmark of greater than zero. | |
|
Own source operating revenue |
Rural councils have high-value infrastructure assets that cover large areas with smaller populations and less capacity to raise revenue from alternative sources compared with metropolitan councils. |
| Own source operating revenue measures a council’s fiscal flexibility and the degree to which it can generate revenue from own sources compared with total revenue from all sources. OLG has prescribed a benchmark of more than 60 per cent of total revenue. | |
| 3.2 Liquidity and working capital performance measures | |
|
Unrestricted current ratio |
Most councils can meet short-term obligations as they fall due. |
| The unrestricted current ratio represents a council’s ability to meet its short-term obligations as they fall due. OLG has prescribed a benchmark of greater than 1.5 times. | |
|
Debt service cover ratio Regional councils have 56 per cent of the value of all borrowings in the sector. |
Most councils have sufficient operating cash available to service their borrowings. Regional councils borrow more heavily than metropolitan councils to deliver water and sewerage infrastructure. Metropolitan councils do not have the responsibility to provide water and sewerage infrastructure. |
| The debt service cover ratio measures the operating cash available to service debt including interest, principal and lease payments. OLG has prescribed a benchmark of greater than two times. | |
|
Rates and annual charges outstanding These councils also did not meet the infrastructure backlog ratio. |
Most councils are collecting rates and annual charges levied. Councils with higher levels of uncollected rates and charges can experience increased pressure on the working capital available to fund operations. |
| The rates and annual charges outstanding measure assesses the impact of uncollected rates and annual charges on a council’s liquidity and the adequacy of debt recovery efforts. OLG has prescribed a benchmark of less than five per cent for metropolitan and less than ten per cent for other councils. | |
|
Cash expense cover ratio |
Most councils have the capacity to cover more than three months of operating expenses. |
| The cash expense cover ratio indicates the number of months a council can continue paying its expenses without additional cash inflows. OLG has prescribed a benchmark of greater than three months. | |
|
This measure does not exclude externally and internally restricted funds. If externally restricted funds are excluded, all councils would still meet OLG’s benchmark. If both externally and internally restricted funds are excluded:
|
Councils with a higher proportion of restricted funds may have less flexibility to pay operational expenses than the cash expense cover ratio suggests. However, councils can resolve to lift internal restriction if required. |
|
3.3. Asset management performance measures (not audited) |
|
|
Building and infrastructure renewals ratio Most councils included expenditure related to work-in-progress in calculating this ratio. OLG are of the view that work-in-progress should be excluded and as a result identified that a further 23 councils do not meet the benchmark. |
These councils appear to not be renewing assets in line with the rate they are depreciating them. This raises questions as to whether council asset management plans are adequate to determine whether assets are being kept up to agreed standards. Uncertainty on the inclusion of work-in-progress assets does need to be is clarified in order to ensure consistency in determining whether councils are adequately renewing their assets. |
| The building and infrastructure renewals ratio represents the rate at which assets are being renewed relative to the rate at which they are depreciating. OLG has prescribed a benchmark of greater than 100 per cent. | |
|
Infrastructure backlog ratio |
These councils may not be maintaining their infrastructure backlog at a manageable level. |
| The infrastructure backlog ratio represents the proportion of infrastructure backlog relative to the total net book value of a council's infrastructure assets. OLG has prescribed a benchmark of less than two per cent. | |
|
Asset maintenance ratio |
These councils’ maintenance expenditure may be insufficient to sustain their assets in a functional state so they reach their predicted useful life. |
| The asset maintenance ratio represents the rate at which assets are being maintained relative to the rate at which they are required to be maintained. OLG has prescribed a benchmark of greater than 100 per cent. | |
|
Costs to bring assets to agreed service level |
There is variability between councils in the amount of outstanding renewal works to be completed. |
| This ratio represents the estimated cost to renew or rehabilitate existing infrastructure assets that have reached the condition-based interval level adopted by a council, relative to the gross replacement cost of all infrastructure assets. OLG has not prescribed a benchmark for this performance measure. | |
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.
| Number of OLG benchmarks met by councils | Number of councils | |||
| Metropolitan | Regional | Rural | County | |
| 6 | 12 | 12 | 29 | 5 |
| 5 | 17 | 21 | 17 | 5 |
| 4 | 4 | 4 | 8 | 2 |
| 3 | -- | -- | 3 | -- |
| Not available* | 1 | -- | -- | -- |
| Total | 34 | 37 | 57 | 12 |
Source: Audited Financial Statements for 2016–17.
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.
| Observations | Conclusion or recommendation |
| 4.1 High risk issues | |
|
Significant matters reported to those charged with council governance |
High risk issues affect council’s ability to maintain their assets in the condition required to deliver essential services. |
| 4.2 Asset reporting | |
|
Accuracy of asset registers |
Maintaining accurate asset records is important as it enables councils to manage their assets effectively and report on finances appropriately. |
|
Unrecorded land and infrastructure assets |
Assets not captured in council records is at risk of not being subject to their care and control, nor recorded in the financial statements. |
|
Rural fire-fighting equipment |
Recommendation In doing so, the Office of Local Government should work with NSW Treasury to ensure there is a whole‑of‑government approach. |
|
4.3 Asset valuation |
|
|
Restricted assets Nine councils corrected the land values in their 2016–17 financial statements, reducing the reported value of community land and land under roads by $12.1 billion. |
The valuation of community land and land under roads should reflect the physical and legislative restrictions on these assets as required by Australian Accounting Standards. The impact of restrictions can be significant. Councils should consider engaging experts to assist with the determination of asset fair values, as necessary. |
| Asset revaluations Our audits found many cases where councils did not review valuation results, comply with applicable codes, or work effectively with valuers to obtain accurate asset valuations. |
Valuing large infrastructure assets is a complex process. Councils would benefit if the process is started earlier and there is a clear plan to ensure valuations are appropriately managed and documented. |
|
4.4 Asset useful life estimates |
|
|
Asset useful life estimates In some cases, the useful lives of assets are not reviewed annually or supported by regular condition assessment. |
Depreciation is a significant expense for councils and therefore impacts on reported financial results and key performance indicators. To comply with Australian Accounting Standards, councils need to reassess the useful lives of all assets annually. Regular condition assessments are essential to identify maintenance requirements and maintain service delivery. |
|
4.5 Asset policy and planning |
|
| Asset management strategy Thirteen councils do not have an asset management policy, strategy and plan, as required by OLG's Integrated Planning and Reporting Framework. Newly amalgamated councils have until 30 June 2018 to implement this. |
An effective asset management strategy, policy and plan helps councils to manage their assets appropriately over their life cycle and to make informed decisions on the allocation of resources. |
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.
| Observation | Conclusion or recommendation |
| 5.1 High risk issues | |
| Significant matters reported to those charged with council governance | |
| Our 2016–17 audits identified 36 high risk governance and internal control deficiencies across 17 councils. | Asset practices accounted for the highest number of high risk issues and information technology accounted for the largest overall number of control deficiencies. These matters are covered in chapters four and six respectively. |
We reported:
|
High risk issues affect council’s ability to achieve their objectives and increase the risk of fraud and error. |
| 5.2 Governance | |
| Audit committees | |
| Councils are currently not required to have an audit, risk and improvement committee. Consequently, 53 councils do not have an audit committee. |
Proposed legislative changes will require councils to establish an audit, risk and improvement committee by March 2021. Recommendation |
|
Internal audit |
Recommendation |
|
Council entities |
Recommendation |
| The Local Government Act 1993 does not stipulate a financial reporting framework for council entities. |
Recommendation |
|
Policies and procedures |
It is important there are current policies, standards and guidelines available to staff and contractors across all critical business processes. |
|
Legislative compliance frameworks |
Councils can improve practices in monitoring compliance with key laws and regulations. This includes implementing a legislative compliance framework, register and policy. |
|
Risk management |
Council risk management practices are enhanced when there is a fit-for-purpose risk management framework, register and policy to outline how risks are identified, managed and monitored. |
| 5.3 Internal controls | |
|
Financial accounting We identified 51 high and moderate risk issues across 39 councils where reconciliation processes need to improve to support the preparation of accurate financial statements |
Sound financial accounting processes include controls to ensure:
|
| Purchasing and payables We found 102 high and moderate risk deficiencies in purchasing and payable controls across 64 councils. Sound purchasing controls are important to minimise error, unauthorised purchases, fraud and waste. |
As councils spend a substantial amount each year to procure goods and services, strong controls over purchasing and payment practices are critical. These include:
|
|
Payroll Managing excess annual leave balances was a challenge for 32 councils. |
Effective payroll controls are important because employee expenses represent a large portion of council expenditure. These controls include segregation of duties in the review of payroll master file data, timesheets, leave forms, payroll exception reports and termination payments. Excessive annual leave balances can have implications on employee costs, disrupts service delivery and affect work, health and safety. Excess annual leave balances should be continuously monitored and managed. |
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.
| Issues | Conclusion |
| 6.1 High risk issues | |
| Significant matters reported to those charged with council governance | |
| Our 2016–17 audits identified nine high risk IT control deficiencies across seven councils. The issues related to user access controls, privileged access controls and user developed applications. | High risk issues affect council’s ability to achieve their objectives and increase the risk of fraud and error. |
| 6.2 Access to IT systems | |
| User access controls We identified 107 issues across 56 councils where user access controls could be strengthened. |
Inadequate IT policies and controls around user access, including privileged access, increases the risk of individuals having excessive or unauthorised access to critical financial systems and data. |
|
Privileged access |
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User developed applications Our audits found 22 councils using spreadsheets for business operations, decision making and financial reporting that were not adequately secured, with changes that were not tracked, tested or reviewed. We also identified five councils where finance staff and senior management use database query tools to directly modify financial data, circumventing system-based business process controls. |
It is important councils are aware of all circumstances they are relying on UDAs to limit the risk of errors and potential misuse. This allows councils to:
|
| 6.3 IT Governance | |
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Strategy, policies and procedures Sixty-six councils do not have an adequate information security policy. |
IT governance is enhanced where there is:
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Disaster recovery and business continuity The ability to restore data from backups is critical to ensure business continuity in the face of a system disaster. We also found that 15 councils do not periodically test their ability to restore backups of data relevant to financial reporting. |
Sound management of disaster recovery and business continuity includes:
We expect to focus on these areas in our future audits. |
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 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
Internal Controls and Governance 2017
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
|
New and repeat findings |
The number of reported financial and IT control deficiencies has fallen, but many previously reported findings remain unresolved. |
|
High risk findings |
Poor systems implementations contributed to the seven high risk internal control deficiencies that could affect agencies. |
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Common findings |
Poor IT controls are the most commonly reported deficiency across agencies, followed by governance issues relating to cyber security, capital projects, continuous disclosure, shared services, ethics and risk management maturity. |
2. Information Technology
|
IT security |
Only two-thirds of agencies are complying with their own policies on IT security. Agencies need to tighten user access and password controls. |
|
Cyber security |
Agencies do not have a common view on what constitutes a cyber attack, which limits understanding the extent of the cyber security threat. |
|
Other IT systems |
Agencies can improve their disaster recovery plans and the change control processes they use when updating IT systems. |
3. Asset Management
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Capital investment |
Agencies report delays delivering against the significant increase in their budgets for capital projects. |
|
Capital projects |
Agencies are underspending their capital budgets and some can improve capital project governance. |
|
Asset disposals |
Eleven per cent of agencies were required to sell their real property through Property NSW but didn’t. And eight per cent of agencies can improve their asset disposal processes. |
4. Governance
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Governance arrangements |
Sixty-four per cent of agencies’ disclosure policies support communication of key performance information and prompt public reporting of significant issues. |
|
Shared services |
Fifty-nine per cent of agencies use shared services, yet 14 per cent do not have service level agreements in place and 20 per cent can strengthen the performance standards they set. |
5. Ethics and Conduct
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Ethical framework |
Agencies can reinforce their ethical frameworks by updating code‑of‑conduct policies and publishing a Statement of Business Ethics. |
|
Conflicts of interest |
All agencies we reviewed have a code of conduct, but they can still improve the way they update and manage their codes to reduce the risk of fraud and unethical behaviour. |
6. Risk Management
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Risk management maturity |
All agencies have implemented risk management frameworks, but with varying levels of maturity. |
|
Risk management elements |
Many agencies can improve risk registers and strengthen their risk culture, particularly in the way that they report risks to their lead agency. |
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:
- Overall trends
- Information technology
- Asset management
- Governance
- Ethics and conduct
- 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.
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Issues |
Recommendations |
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1.1 New and repeat findings |
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The number of internal control deficiencies reduced over the past three years, but new higher-risk information technology (IT) control deficiencies were reported in 2016–17. Deficiencies repeated from previous years still make up a sizeable proportion of all internal control deficiencies. |
Recommendation Agencies should focus on emerging IT risks, but also manage new IT risks, reduce existing IT control deficiencies, and address repeat internal control deficiencies on a more timely basis. |
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1.2 High risk findings |
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We found seven high risk internal control deficiencies, which might significantly affect agencies. |
Recommendation Agencies should rectify high risk internal control deficiencies as a priority |
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1.3 Common findings |
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The most common internal control deficiencies related to poor or absent IT controls. We found some common governance deficiencies across multiple agencies. |
Recommendation Agencies should coordinate actions and resources to help rectify common IT control and governance deficiencies. |
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.
| Issues | Recommendations |
2.1 IT security |
|
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User access administration While 95 per cent of agencies have policies about user access, about two-thirds were compliant with these policies. Agencies can improve how they grant, change and end user access to their systems. |
Recommendation Agencies should strengthen user access administration to prevent inappropriate access to sensitive systems. Agencies should:
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Privileged access Sixty-eight per cent of agencies do not adequately manage who can access their information systems, and many do not sufficiently monitor or restrict privileged access. |
Recommendation Agencies should tighten privileged user access to protect their information systems and reduce the risks of data misuse and fraud. Agencies should ensure they:
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Password controls Forty-one per cent of agencies did not meet either their own standards or minimum standards for password controls. |
Recommendation Agencies should review and enforce password controls to strengthen security over sensitive systems. As a minimum, password parameters should include:
|
2.2 Cyber Security |
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Cyber security framework Agencies do not have a common view on what constitutes a cyber attack, which limits understanding the extent of the cyber security threat. |
Recommendation The Department of Finance, Services and Innovation should revisit its existing framework to develop a shared cyber security terminology and strengthen the current reporting requirements for cyber incidents. |
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Cyber security strategies While 82 per cent of agencies have dedicated resources to address cyber security, they can strengthen their strategies, expertise and staff awareness. |
Recommendations The Department of Finance, Services and Innovation should:
Agencies should ensure they adequately resource staff dedicated to cyber security. |
2.3 Other IT systems |
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Change control processes Some agencies need to improve change control processes to avoid unauthorised or inaccurate system changes. |
Recommendation Agencies should consistently perform user acceptance testing before system upgrades and changes. They should also properly approve and document changes to IT systems. |
|
Disaster recovery planning Agencies can do more to adequately assess critical business systems to enforce effective disaster recovery plans. This includes reviewing and testing their plans on a timely basis. |
Recommendation Agencies should complete business impact analyses to strengthen disaster recovery plans, then regularly test and update their plans. |
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.
| Issues | Recommendations or conclusions |
3.1 Capital investment |
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Capital asset investment ratios Most agencies report high capital investment ratios, but one-third of agencies’ capital investment ratios are less than one. |
Recommendation Agencies with high capital asset investment ratios should ensure their project management and delivery functions have the capacity to deliver their current and forward work programs. |
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Volume of capital spending Most agencies have significant forward spending commitments for capital projects. However, agencies’ actual capital expenditure has been below budget for the last three years. |
Conclusion The significant increase in capital budget underspends warrant investigation, particularly where this has resulted from slower than expected delivery of projects from previous years. |
3.2 Capital projects |
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Major capital projects Agencies’ major capital projects were underspent by 13 percent against their budgets. |
Conclusion The causes of agency budget underspends warrant investigation to ensure the NSW Government’s infrastructure commitment is delivered on time. |
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Capital project governance Agencies do not consistently prepare business cases or use project steering committees to oversee major capital projects. |
Conclusion Agencies that have project management processes that include robust business cases and regular updates to their steering committees (or equivalent) are better able to provide those projects with strategic direction and oversight. |
3.3. Asset disposals |
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Asset disposal procedures Agencies need to strengthen their asset disposal procedures. |
Recommendations Agencies should have formal processes for disposing of surplus properties. Agencies should use Property NSW to manage real property sales unless, as in the case for State owned corporations, they have been granted an exemption. |
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.
| Issues | Recommendations or conclusions |
4.1 Governance arrangements |
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Continuous disclosure Continuous disclosure promotes improved performance and public trust and aides better decision-making. Continuous disclosure is only mandatory for NSW Government Businesses such as State owned corporations. |
Conclusion Some agencies promote transparency and accountability by publishing on their websites a continuous disclosure policy that provides for, and encourages:
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4.2 Shared services |
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Service level agreements Some agencies do not have service level agreements for their shared service arrangements. Many of the agreements that do exist do not adequately specify controls, performance or reporting requirements. This reduces the effectiveness of shared services arrangements. |
Conclusion Agencies are better able to manage the quality and timeliness of shared service arrangements where they have a service level agreement in place. Ideally, the terms of service should be agreed before services are transferred to the service provider and:
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Shared service performance Some agencies do not set performance standards for their shared service providers or regularly review performance results. |
Conclusion Agencies can achieve better results from shared service arrangements when they regularly monitor the performance of shared service providers using key measures for the benefits realised, costs saved and quality of services received. Before agencies extend or renegotiate a contract, they should comprehensively assess the services received and test the market to maximise value for money. |
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.
| Issues | Recommendations or conclusions |
5.1 Ethical framework |
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Code of conduct All agencies we reviewed have a code of conduct, but they can still improve the way they update and manage their codes to reduce the risk of fraud and unethical behaviour. |
Recommendation Agencies should regularly review their code-of-conduct policies and ensure they keep their codes of conduct up-to-date. |
|
Statement of business ethics Most agencies maintain an ethical framework, but some can enhance their related processes, particularly when dealing with external clients, customers, suppliers and contractors. |
Conclusion Agencies can enhance their ethical frameworks by publishing a Statement of Business Ethics, which communicates their values and culture. |
5.2 Potential conflicts of interest |
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Conflicts of interest All agencies have a conflicts-of-interest policy, but most can improve how they identify, manage and avoid conflicts of interest. |
Recommendation Agencies should improve the way they manage conflicts of interest, particularly by:
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Gifts and benefits While all agencies already have a formal gifts-and-benefits policy, we found gaps in the management of gifts and benefits by some that increase the risk of unethical conduct. |
Recommendation Agencies should improve the way they manage gifts and benefits by promptly updating registers and providing annual training to staff. |
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.
| Issues | Recommendations or conclusions |
6.1 Risk management maturity |
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|
All agencies have implemented risk management frameworks, but with varying levels of maturity in their application. Agencies’ averaged a score of 3.1 out of five across five critical assessment criteria for risk management. While strategy and governance fared best, the areas that most need to improve are risk culture, and systems and intelligence. |
Conclusion Agencies have introduced risk management frameworks and practices as required by the Treasury’s:
However, more can be done to progress risk management maturity and embed risk management in agency culture. |
6.2 Risk management elements |
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Risk culture Most agencies have started to embed risk management into the culture of their organisation. But only some have successfully done so, and most agencies can improve their risk culture.
|
Conclusion Agencies can improve their risk culture by:
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Risk registers and reporting Some agencies do not report their significant risks to their lead agency, which may impair the way resources are allocated in their cluster. Some agencies do not integrate risk registers at a divisional and whole-of-enterprise level. |
Conclusion Agencies not reporting significant risks at the cluster level increases the likelihood that significant risks are not being mitigated appropriately. |
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.
