What this report is about

Results of the audit of the Consolidated State Financial Statements of the New South Wales General Government Sector (GGS) and Total State Sector (TSS) for the year ended 30 June 2023.

Findings

The audit opinion on the 2022–23 Consolidated State Financial Statements was qualified in relation to two issues and included an emphasis of matter.

The first qualification matter is a continuation of the prior year limitation of scope on the audit relating to the Catholic Metropolitan Cemeteries Trust (CMCT), a controlled state entity, who continued to deny access to its management, books and records for the purposes of a financial audit. As a result, the Audit Office was unable to obtain sufficient appropriate audit evidence to support the assets, liabilities, income and expenses relating to CMCT recorded in the TSS and the equity investment recognised in the GGS relating to the net assets of CMCT.

The second qualification matter relates to the limitations on the accuracy and reliability of financial information relating to Statutory Land Managers (SLMs) and Common Trust entities (CTs) controlled by the State and were either exempted from requirements to prepare financial reports, or who were required to submit financial reports and have not done so. The Audit Office was unable to obtain sufficient appropriate audit evidence to determine the impact on the value of non-land assets and liabilities, income and expenses that should be recognised in the 2022–23 Consolidated State Financial Statements and which have not been recorded in the Consolidated State Financial Statements.

The independent audit opinion also includes an emphasis of matter drawing attention to key decisions made by the NSW Government regarding the future of the Transport Asset Holding Entity of New South Wales (TAHE).

Recommendations

The report includes recommendations for NSW Treasury to address several high-risk findings, including:

• ensuring accurate and reliable financial information is available to recognise the non-land balances of SLMs and CTs
• ensuring the CMCT, SLMs and CTs meet their statutory reporting obligations
• conducting a broader review of the financial reporting exemption framework
• continued monitoring of TAHE's control over its assets
• providing timely guidance to the sector relating to legislative or policy changes that impact financial reporting
• developing an accounting policy for the reimbursement of unsuccessful tender bid cost contributions.

Read the PDF report

What this report is about

Result of the Treasury portfolio of agencies’ financial statement audits for the year ended 30 June 2023.

The results of the audit of the NSW Government’s consolidated Total State Sector Accounts (TSSA), which are prepared by NSW Treasury, will be reported separately in our report on ‘State Finances 2023’.

The audit found

Unqualified audit opinions were issued on all general purpose financial statement audits.

Qualified audit opinions were issued on two of the 24 other engagements prepared by portfolio agencies. These related to payments made from Special Deposit Accounts that did not comply with the relevant legislation.

The number of monetary misstatements identified in our audits increased from 29 in 2021–22 to 39 in 2022–23.

The new parental leave policy impacted agencies across all portfolios. NSW Treasury should perform annual assessments to identify changes in legislation and regulation and provide timely guidance to the sector.

Transport for NSW and Sydney Metro have capitalised over $300 million of tender bid costs paid to unsuccessful tender bidders relating to significant infrastructure projects. Whilst NSW Treasury policy provides clarity on the reimbursement of unsuccessful bidders’ costs, clearer guidance on how to account for these costs in agencies’ financial statements is required.

The key audit issues were

Five high-risk issues were reported in 2022–23. Three were new findings on contract management, accounting treatments for workers compensation renewal premium adjustments and the management and oversight of a Special Deposit Account. Two repeat issues referred to the need to improve quality review processes over financial reporting and the timely approval of administration costs.

Portfolio agencies should prioritise and action recommendations to address internal control deficiencies.

This report provides Parliament and other users of the Treasury portfolio of agencies’ financial statements with the results of our audits, analysis, conclusions and recommendations in the following areas:

• financial reporting
• audit observations.

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 portfolio of agencies (the portfolio) for 2023.

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 portfolio.

Appendix one – Misstatements in financial statements submitted for audit

Appendix two – Early close procedures

Appendix three – Timeliness of financial reporting

Appendix four – Financial data

Appendix five – Acquittals and other opinions

© 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.

What this report is about

Results of the Education portfolio of agencies’ financial statements audits for the year ended 30 June 2023.

What we found

Unqualified audit opinions were issued for all Education portfolio agencies.

An ‘other matter’ paragraph was included in the TAFE Commission’s independent auditor’s report as it did not have a delegation or sub-delegation from the Minister for Education and Early Learning to incur expenditure on grants from other portfolio agencies.

What the key issues were

Comprehensive valuations of buildings at the Department of Education (the department) and at the TAFE Commission found that certain assumptions applied in previous years needed to be updated, resulting in prior period restatements.

The department prepaid a building contractor for early works on a project and some of the prepayment is in legal dispute.

The department duplicated a claim for project funding from Restart NSW in 2021.

New parental leave legislation increased employee liabilities for portfolio agencies. The department and the NSW Education Standards Authority (the Authority) updated their financial statements to record parental leave liabilities.

A high risk matter was raised for the Authority to improve the quality and timeliness of information to support their financial statement close process.

What we recommended

Portfolio agencies should ensure any changes to employee entitlements are assessed for their potential financial statements impact under the relevant Australian Accounting Standards.

The department should:

• improve processes to ensure project claims are not duplicated
• assess the risks associated with providing prepayments to contractors.

This report provides Parliament and other users of the Education portfolio of agencies’ financial statements with the results of our audits, analysis, conclusions and recommendations in the following areas:

• financial reporting
• audit observations.

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 Education portfolio (the portfolio) for 2023.

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 Education portfolio.

Appendix one – Early close procedures

Appendix two – Financial data

© 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.

What this report is about

Students in rural and remote areas of NSW face greater challenges compared to their metropolitan peers.

This report examined how the NSW Department of Education (the department) is ensuring that rural and remote students have access to the same quality of early childhood, school education, and skills pathways as metropolitan students.

What we found

A decade since the previous (2013) strategy to address educational disadvantage, there remain considerable gaps in access and outcomes between rural and remote students and metropolitan students.

The Rural and Remote Education Strategy (2021–24) is unlikely to address these longstanding and known issues of educational disadvantage in rural and remote areas.

Key enabling factors such as resourcing a dedicated team, setting performance measures, and establishing suitable governance arrangements were not put in place to support effective implementation of the 2021 strategy.

The department has programs aimed at addressing remoteness challenges, but does not know if these initiatives improve access or outcomes.

The department does not monitor or report on student access or outcomes according to geographic location.

What we recommended

The Department of Education should:

• develop a new strategy that addresses disadvantage in regional, rural and remote education
• establish and report publicly on regional, rural and remote key performance indicators
• improve data collection by using a standard remoteness classification
• improve governance arrangements for regional, rural and remote education
• review the resources provided for regional, rural and remote areas that recognises the additional costs
• develop an approach that ensures all students can access best practice modes of delivery.

In February 2021, the department of Education (the department) released the ‘Rural and Remote Education Strategy (2021–2024)’. The strategy sets a vision that ‘every child in regional New South Wales has access to the same quality of education as their metropolitan peers’. It recognises that students in rural and remote areas of New South Wales face greater challenges compared to students in metropolitan locations. These challenges contribute to regional, rural and remote students underperforming on major educational indicators compared to their metropolitan peers.

In recent years, regional, rural and remote communities experienced a series of natural disasters as well as the COVID-19 pandemic. In response to the pandemic and subsequent school closures, the department introduced new initiatives aimed at minimising the disruption to children including online learning and small group tuition.

The department established a regional, rural and remote education policy unit in 2021 to support delivery of the strategy and its vision.

The objective of this audit was to assess the effectiveness of the department’s activities to ensure that regional, rural and remote students have access to the same quality of early childhood, school education, and skills pathways as their metropolitan peers.

In making this assessment, the audit examined whether:

• The department developed and implemented a strategy that enables regional, rural and remote students to access the same quality of early childhood education, school education, and skills pathways as students in metropolitan New South Wales.
• The department has been addressing the complexities and needs of regional, rural and remote early childhood education, school education, and skills pathways.

This chapter examines the process to develop the Rural and Remote Education Strategy (2021–2024). It considers whether there was a comprehensive program of stakeholder consultation, whether relevant research and evidence was incorporated and whether an effective performance monitoring system was established.

The department made genuine efforts to consult with stakeholders on the new strategy

The department had a clear process to engage and obtain feedback from key stakeholders during the development of the new strategy. It developed a range of documents to support the consultation process including a stakeholder engagement plan, communications plan, and presentation. The department used the International Association for Public Participation (IAP2) Spectrum of Public Participation principles to help ensure that relevant stakeholders were included in the planning and decision-making process.

In late 2019, the department began its first phase of consultations with internal and external stakeholders to get their views on rural and remote education. It consulted internally with department directors, advisory groups, and learning communities, and externally with government agencies, service providers, non-government schools, and universities.

In March 2020, the department developed a stakeholder engagement paper to test the key issues from stakeholder consultations. Four focus areas were identified and included in a consultation paper that went out to key stakeholders for the second round of consultations in May 2020.

In the third consultation phase, the department conducted a workshop with stakeholders to review the earlier feedback, prioritise issues, identify gaps, and provide further input.

This consultation process enabled the department to identify issues and challenges to inform the new strategy. However, it was already aware that the blueprint was having limited success, and had already identified potential focus areas, following the evaluation of the blueprint in 2019.

The department did not consider recent research when developing the new strategy

The department's guidance materials promote the importance of considering research during policymaking. The guidelines describe the need to understand a topic, consult with stakeholders, identify gaps in existing knowledge, and ensure future work is informed by current literature.

In 2013, the department published a literature review on rural and remote education to inform the blueprint. The literature review found that students in rural and remote schools were not performing as well as their metropolitan peers, and that this performance gap was widening. The review attributed this to the higher number of children from low socio-economic backgrounds attending rural and remote schools. The review also identified several other factors that could negatively impact performance outcomes for rural and remote students. The department used the findings of the literature review to develop the key focus areas in the 2013 blueprint.

When the department began developing the new rural and remote education strategy in 2019, it recognised the need to review the literature on recent international initiatives. However, it has not yet released this review. This means that the department could have missed important new developments since it last examined the literature in 2013. Incorporating up-to-date research is important where past strategies have not met all their intended outcomes.

A national review into rural and remote education in 2018 examined Australian and international literature to inform its findings. The review made 11 recommendations to the Australian and state governments. While the NSW Government was not required to formally respond to the review, it could have considered the work done by that review when developing the new strategy. Several review recommendations are addressed in the strategy, while several others are only partly addressed. Gaps between review recommendations and specific strategy actions include improving the availability of quality accommodation, substantially reducing the waiting times for specialist assessments of students with learning difficulties and disabilities and increasing access to high quality distance education.

In 2019, the department commissioned a rural and remote project to contribute a research and evidence base to the new strategy. The main aim of the project was to help the department understand how it could better support rural and remote schools to increase educational outcomes. There was not enough time for this review to be completed prior to the release of the strategy. As of June 2023, the research project had not yet been released.

The strategy did not address all findings and recommendations from a recent evaluation

In 2020, the department's Centre for Education Statistics and Evaluation (CESE) published an evaluation of the blueprint. The evaluation examined how the actions in the blueprint were implemented. It recommended that a new strategy be developed, and made recommendations for things that should be incorporated into the strategy.

The blueprint aimed to ensure students in rural and remote areas could access the same quality of education as their metropolitan peers. The blueprint identified four focus areas to meet that aim:

• quality early childhood education
• great teachers and school leaders
• curriculum access for all
• effective partnerships and connections.

The department developed several initiatives to help meet the objectives of each of the four focus areas. These initiatives are described in Exhibit 5 below.

The evaluation found that initiatives in two of the four focus areas – Quality early childhood education and Curriculum access for all – had performed well. However, the evaluation found that initiatives in the other two focus areas – Great teachers and school leaders and Effective partnerships and connections – did not achieve intended outcomes.

On the whole, the evaluation found that the 'remoteness gap' between rural and remote students and metropolitan students had not reduced since the blueprint was introduced. It recommended that the department continue its focus on rural and remote education by developing a new evidence-based strategy that focused on student outcomes and clear measures of success.

Objectives and actions in the new strategy were similar to those in the blueprint

The 2021 strategy sets an overall vision that 'every child in regional New South Wales has access to the same quality of education as their metropolitan peers'. It also states that the department 'is committed to ensuring all rural and remote students have equitable access to educational opportunities'.

Four areas in the blueprint remained a focus in the new strategy – early childhood education, teacher recruitment and retention, curriculum, and student wellbeing support services. Each focus area identifies a goal, as well as the aims and actions that contribute to those goals.

While this shows the department identified that these areas required continued attention, most actions were to 'increase', 'expand' or 'improve' existing programs and resources. The new strategy did not propose any new ideas or solutions, despite the blueprint achieving limited success in improving outcomes for rural and remote students.

There were no baseline or target measures set to monitor progress of the new strategy

The blueprint evaluation recommended that the department develop a new evidence-based strategy which focused on improving student outcomes. It also recommended the department use a program logic methodology to ensure there was a clear definition of success, adequate measures of success, and continual monitoring to ensure success.

Program logic models are a visual representation of the various components of a program. They can be used to illustrate program priorities, inputs, activities, outputs, outcomes, and assumptions. Logic models are used to explain how a proposed solution will address a specific problem. They are important because they can help test assumptions, build business cases, and identify potential enablers or barriers that could impact the project.

The department did not complete a program logic model during development of the new strategy, nor did it define measures to monitor whether the strategy's overall vision for quality education or the commitment to equitable access was on track to be achieved.

The department has not comprehensively monitored changes in educational outcomes in regional, rural and remote areas since the evaluation of the blueprint in 2020. This evaluation had seven indicators of educational outcomes by remoteness. The measures used in the evaluation could have provided a starting point given the similarity in focus areas between the blueprint and the new strategy. Not addressing past review recommendations increases risks that issues will be repeated.

The policy unit advised it has plans to set up a dashboard to monitor performance across the department's business plan measures by remoteness. This is intended to identify areas where system-wide improvements are required. This is not a comprehensive account of the strategy outcomes because the business plan measures don't capture all the goals of the strategy.

There were no timeframes or resources identified for implementing new strategy actions

The strategy has an overall timeframe of 2021–2024 but does not clarify when it expects the vision, goals, or aims to be achieved, or actions to be implemented.

The department's guidance on policymaking sets out how projects should be transitioned between the policy and implementation teams. This guidance is intended to help ensure the policy intent and scope of the project are not lost during the delivery of the project. The guidance highlights that the policy team should establish clear project implementation timeframes. It is important to have clear timeframes because it enables teams to measure progress, manage resources, and prioritise actions to ensure project outcomes are achieved.

The strategy states that there is a further $1 billion of investment planned over the next three years for rural and remote education but does not identify how this is allocated across its focus areas. It is important to identify the resources required to support the implementation of a program so that program objectives are met in a timely and cost-effective manner. The previous blueprint identified much lower funding of $80 million but more clearly showed how it would be allocated for identified actions across the four focus areas.

In response to our requests, the department separately identified $1.286 billion in expenditure for regional, rural and remote schools referenced in the strategy. Most of this expenditure related to existing department programs and activities rather than new initiatives. The total amount included:

• $576.9 million for new and upgraded schools
• $365.8 million for upgraded information technology equipment and resources
• $120 million for school facility upgrades to be co-funded by schools
• $60 million to replace school roofs
• $60 million for the COVID Intensive Learning Support Program
• $32 million for the Early Action for Success program
• $29.7 million for staffing incentives
• $21.7 million for literacy and numeracy interventions
• $18.8 million in school location allowances
• $1.45 million for the Rural Learning Exchange Pilot
• $0.4 million for Rural and Remote Network initiatives.

This chapter examines the arrangements in place to implement the strategy. It considers whether effective governance arrangements are in place and how progress is monitored and reported.

This chapter considers the effectiveness of arrangements to ensure regional, rural and remote students have access to quality early childhood education, school education, and post‑school transitions.

This chapter considers the department's arrangements to monitor educational and wellbeing outcomes of students by remoteness. It reports on differences in outcomes between students in metropolitan areas and those in regional, rural and remote areas.

Those living in regional, rural and remote areas can have greater difficulty in accessing government services, often needing to travel long distances, or facing lower service levels than provided in major cities. This context is important when considering educational and wellbeing outcomes, given the disruptive effects of waiting or missing out on important services.

The rest of this chapter details key measures in the department's outcome and business plan.

Appendix one – Response from agency

Appendix two – About the audit

Appendix three – Performance auditing

© 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.

Parliamentary reference - Report number #385 - released 10 August 2023

What the report is about

This audit assessed how effectively NSW government agencies procure and manage consultants. It examined the role of the NSW Procurement Board and NSW Procurement (a unit within NSW Treasury) in supporting and monitoring agency procurement and management of consultants.

The audit used four sources of data that contain information about spending on consultants by NSW government agencies, including annual report disclosures and the State's financial consolidation system (Prime). It also reviewed a sample of consulting engagements from ten NSW government agencies.

What we found

Our review of a selection of consulting engagements indicates that agencies do not procure and manage consultants effectively.

We found most agencies do not use consultants strategically and do not have systems for managing or evaluating consultant performance. We also found examples of non-compliance with procurement rules, including contract variations that exceeded procurement thresholds.

NSW Procurement has made improvements to the information available about spending on consultants, including additional analysis and reporting. However, there is no single data source that accurately captures spending on consultants.

Our analysis of data on whole-of-government spending on consultants, drawn from agency annual reports, indicates that four large professional services firms accounted for about a quarter of consultancy expenditure from 2017–18 to 2021–22. This concentration increases strategic risks, including over-reliance on a limited number of providers and potential reduction in the independence of advice.

It is also highly unlikely that NSW government agencies will meet the government's 2019 policy commitment to reduce consultancy expenses by 20% each year, over four years, from 2019–20. NSW Treasury advised that to implement this commitment, agency budgets were reduced in Prime in line with the savings targets. However, actual spending on consulting in NSW Treasury's Reports on State Finances 2020–21 and 2021–22 was almost $100 million higher than the savings targets over the first three years since 2019–20.

What we recommended

The report made seven recommendations which aim to improve:

• the quality and transparency of data on spending on consultants
• monitoring of strategic risks and agency compliance with procurement and recordkeeping rules
• agencies' strategic use of consultants, including evaluation and knowledge retention.

Between 2017–18 and 2021–22, NSW government agency annual reports disclosed total spending of around $1 billion on consultants across more than 10,000 engagements. More than 1,000 consulting firms provided services to NSW government agencies during this period. Consulting is a classification of professional services that is characterised by giving advice or recommendations on a specific issue. The NSW Procurement Board Direction PBD-2021-03 defines a consultant as a person or organisation that provides 'recommendations or professional advice to assist decision-making by management'. PBD-2021-03 notes that the advisory nature of the work of consultants is the main factor that distinguishes them from other providers of professional services.

The NSW Procurement Board is responsible for setting procurement policy, issuing directions to support policies, and monitoring and reporting on agency compliance with policies and directions. NSW Procurement, a division within NSW Treasury, supports agencies to comply with the NSW Procurement Board’s policies and directions. A 'devolved governance model' is used for procurement in New South Wales. This means the heads of government entities that are covered by the NSW Procurement Board’s directions are responsible for managing the entity's procurement, including managing risks, reporting and ensuring compliance, in line with procurement laws and policies.

This audit assessed how effectively NSW government agencies procure and manage consultants. It assessed the role of the NSW Procurement Board and NSW Procurement in supporting and monitoring agency procurement and management of consultants. It also reviewed a sample of consulting engagements from ten NSW government agencies to examine how agencies procured, managed and reported on their use of consultants. The ten NSW government agencies were:

• NSW Treasury
• Department of Communities and Justice
• Department of Customer Service
• Department of Education
• Department of Planning and Environment
• Department of Premier and Cabinet
• Department of Regional NSW
• Infrastructure NSW
• Sydney Metro
• Transport for NSW

There are four different sources of data that contain information about spending on consultants by NSW government agencies: the State's financial consolidation system (Prime), disclosures of spending on consultants in agency annual reports, and two systems operated by NSW Procurement (the Business Advisory Services (BAS) dashboard and Spend Cube). Each of these data sources serves a different purpose, and collects and categorises information differently. None of these provide a complete source of data on spending on consultants, either in their own right or collectively.

NSW Treasury considers Prime to be the 'source of truth' on consulting expenditure across the NSW public sector. An account within Prime records recurrent spending on consultants, but this account does not include capital expenditure (that is, spending on consultants that has from a financial reporting perspective been 'capitalised' to a project on the balance sheet). As the State's financial consolidation system, Prime captures all financial information. However, capitalised consulting expenditure is recorded within various capital accounts, and is not identifiable within these accounts. While this is appropriate for accounting purposes, it means that the Prime account that records recurrent consulting expenditure does not reflect total spending on consultants by NSW government agencies. We used the data in Prime to assess whether NSW government agencies met the NSW Government's policy commitment—stated before the 2019 election and costed by the Parliamentary Budget Office—to reduce recurrent expenditure on consulting by 20% each year, over four years, from 2019–20. We did this because, while the Prime account for recurrent consulting expenditure does not reflect all spending on consultants, it does capture the recurrent spending that was subject to the policy commitment.

Most NSW government agencies are required by legislation to disclose spending on consultants (as defined in PBD-2021-03) in their annual reports. These disclosures include both recurrent and capital expenditure. For consulting engagements that cost more than $50,000, the disclosures also provide itemised information, including the names of the individual projects and the consultants used. While this data is more complete than Prime because it includes capital expenditure, it also has some gaps. Some entities are excluded from public reporting requirements on consultant use. For example, NSW Local Health Districts (LHD) are not required to produce annual reports, and the Ministry of Health does not include LHD consulting expenditure in its annual report.¹ We used annual report disclosure data to report on total expenditure on consultants, and the concentration of suppliers of consulting services to NSW government agencies.

The BAS dashboard and Spend Cube are systems created by NSW Procurement to collect information about spending on suppliers of professional services. This includes consultants, but also includes other professional services providers. The systems were not designed for reporting on spending on consulting as defined in PBD-2021-03. However, we have used this data to assess specific aspects of NSW Procurement's monitoring of the use of consultants by NSW government agencies.

In 2018, we conducted an audit titled 'Procurement and reporting of consultancy services'. This assessed how 12 NSW government agencies complied with procurement requirements and how NSW Procurement supported the functions of the NSW Procurement Board. The 2018 audit found that none of the 12 agencies fully complied with NSW Procurement Board Directions on the use of consultants and that the NSW Procurement Board was not fully effective in overseeing and supporting agencies’ procurement of consultants. Specific findings from the 2018 audit included: 

• Agencies applied the definition of consultant inconsistently, which affected the accuracy of reporting on consultancy expenditure.
• There was inadequate guidance from NSW Procurement for agencies implementing the procurement framework, with a need for additional tools, automated processes, and other internal controls to improve compliance.
• NSW Procurement had insufficient data for effective oversight of procurement and did not publish any data on the procurement of consultancy services by NSW government agencies.

This chapter outlines our findings on the role of NSW Procurement in overseeing the use of consultants by NSW government agencies.

This chapter outlines our findings on the use of consultants by the ten NSW government agencies that were included in this audit.

Appendix one – Responses from auditees

Appendix two – About the audit

Appendix three – Performance auditing

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.

Parliamentary reference - Report number #378 - released 2 March 2023

What the report is about

Results of the Treasury cluster agencies' financial statement audits for the year ended 30 June 2022.

The results of the audit of the NSW Government's consolidated Total State Sector Accounts (TSSA), which is prepared by NSW Treasury, are reported separately in our report on 'State Finances 2022'.

What we found

Unmodified audit opinions were issued on all 30 June 2022 general purpose financial statement audits.

Qualified audit opinions were issued on three of the 25 other engagements prepared by cluster agencies. These related to payments made from Special Deposit Accounts (SDA) that did not comply with the relevant legislation.

What the key issues were

Commercial agreements were signed between TAHE, the operators and Transport for NSW in June 2022, which reflected an expected rate of return of 2.5% on contributed equity. However, it remains critical that the government continue to provide sufficient funding to the operators so they can pay for access and use TAHE assets. These findings are reported in our report on 'State Finances 2022'.

Eight high-risk issues were raised in 2021–22, of which five relate to NSW Treasury.

A number of previously reported audit findings and recommendations with respect to icare continue to be ongoing issues. This includes the Workers Compensation Nominal Insurer continuing to hold less assets than the estimated present value of its future payment obligations, when measured in accordance with the accounting framework.

What we recommended

Our report on 'State Finances 2022' made several recommendations to improve NSW Treasury's processes.

In this report, we recommended icare should ensure:

• it has sufficient controls in place over claim payments, including an effective quality assurance program, to minimise claim payment errors
• that documentation to support PIAWE calculations is appropriately maintained, and that the minimum documentation requirements are set out in a policy.

This report provides Parliament and other users of the Treasury cluster’s financial statements with the results of our audits, analysis, conclusions and recommendations in the following areas:

• financial reporting
• audit observations.

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 cluster (the cluster) for 2022.

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 cluster.

Appendix one – Misstatements in financial statements submitted for audit

Appendix two – Early close procedures

Appendix three – Timeliness of financial reporting

Appendix four – Financial data

Appendix five – Acquittals and other opinions

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.

What the report is about

Results of the 2021–22 consolidated General Government Sector (GGS) and Total State Sector (TSS) financial statements audits.

What we found

The Independent Auditor’s Report on the 2021–22 GGS and TSS financial statements was modified with a limitation of scope and also contained an emphasis of matter.

The opinion in the TSS Independent Auditor’s Report was modified with a limitation of scope on certain balances consolidated in the TSS financial statements because the Catholic Metropolitan Cemeteries Trust (CMCT) denied access to its management, books and records for the purpose of conducting a financial audit.

The Independent Auditor’s Report also includes an emphasis of matter drawing attention to the significant uncertainties associated with the GGS’s equity investment in Transport Asset Holding Entity (TAHE). The significant uncertainty relates to key assumptions and estimates used to forecast a 2.5% return from GGS investments into TAHE that supports the accounting treatment as an equity injection, including:

• funding to support the Rail Operators to pay TAHE’s contracted and forecast access and licence fees up until 2045–46. The Rail Operators are dependent on funding from the GGS to pay access and licence fees. Forecast modelling notes a requirement of a further $10.2 billion in budget funding to pay TAHE to the end of the ten-year contract period in 2030–31, in addition to the $5.5 billion allocated in the forward estimates and up to $50.8 billion for the period 2032 to 2046
• a significant portion of the projected returns are earnt outside of the ten-year contract period and there is a risk that TAHE may not be able to recontract fees at levels consistent with current projections.

What we recommended

The report includes a number of recommendations including:

• continued monitoring that TAHE controls the reported assets ensuring the CMCT, Category 2 Statutory Land Managers (SLM) and Commons Trusts meet their statutory reporting obligations
• ensuring accounting and audit position papers are sufficiently consulted with key stakeholders and are concluded on a timely basis
• ensuring agencies support the timely conclusion of audits by bringing to the auditors' attention key Cabinet records and identifying references relating to accounting issues impacting the financial statements
• for Special Deposit Accounts (SDA) responsible managers should ensure amounts appropriated under any Act or law for payment into the account are appropriately recorded, ensuring payments from SDAs are allowable and made in accordance with Treasurer's delegations and standing authorisation.

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Pursuant to section 52A of the Government Sector Audit Act 1983 I am pleased to present my Auditor-General’s Report on State Finances 2022.

Once again this year has presented considerable challenges for the state sector and my Office as we collectively grapple with uncertainties related to COVID-19 and the disruption of emergency events impacting New South Wales. In addition, there were many recommendations arising from last year’s audit to be addressed.

While there is more to do to ensure good financial stewardship of the State, resolution of matters was helped by constructive engagement with the NSW Treasury at the most senior levels. Personally I wish to thank the Treasurer and Secretary for their commitment to instilling integrity in financial management systems and processes. The support Treasury provided for recent amendments to the Government Sector Audit Act 1983 to provide ‘follow the dollar’ powers and other changes recommended by the Public Accounts Committee quadrennial review of my Office is also acknowledged.

Finally I want to thank the teams that contributed to this year’s audit of the Total State Accounts for their diligence, professionalism and commitment. I am very proud of your work.

Margaret Crawford

Auditor-General for New South Wales

The Independent Auditor's Report was qualified and also included an emphasis of matter

The audit opinion on the State's 2021–22 financial statements was modified. The delayed signing of the NSW Total State Sector Accounts (TSSA) by NSW Treasury was in order to resolve significant accounting issues that were material to the TSSA. The key areas requiring significant audit effort included reviewing the State's accounting for TCorp Investment Management (IM) Funds and responding to the risks related to the Catholic Metropolitan Cemeteries Trust (CMCT) denying access to its management and books and records, which is detailed in this Report.

NSW Treasury aimed to sign the TSSA by 19 October 2022. This was delayed by nearly six weeks and the TSSA audit opinion was subsequently signed on the statutory deadline imposed on the Treasurer for tabling of the TSSA in the Legislative Assembly of 30 November 2022.

The Independent Auditor’s Report was modified due to a limitation of scope on the balances consolidated in the TSSA relating to the CMCT

The opinion in the Independent Auditor’s Report was modified with a limitation of scope due to the inability to access management, books and records of a controlled entity, the CMCT.

This year, NSW Treasury, after reconsidering all facts and the perspectives of the CMCT, reconfirmed that the CMCT is a controlled entity of the State for financial reporting purposes. This means CMCT is a GSF agency under the provisions of the Government Sector Finance Act 2018 (GSF Act). As such NSW Treasury is required by Australian Accounting Standards to consolidate the CMCT into the Total State Sector Accounts (TSSA). The value of assets and liabilities of CMCT consolidated into the TSSA is $310.3 million and $15.1 million, respectively, and the loss of CMCT consolidated into the TSSA for the year is $2.4 million.

To date, CMCT has not met its statutory obligations to prepare financial statements under the GSF Act and give them to the Auditor-General. CMCT has not submitted its financial statements to the Auditor-General for audit as required despite repeated requests and has not provided access to its books and records for the purposes of a financial audit. The Secretary of the Department of Planning and Environment wrote to CMCT to request it work with, and offer full assistance to, the Auditor-General in the exercise of her duties.

NSW Treasury has met with and considered CMCT's perspectives. NSW Treasury’s position remains that CMCT is a controlled entity of the State for financial reporting purposes. Consequently, CMCT has not met its statutory obligations as a controlled entity to submit its financial statements for audit and provide access to its books and records. Therefore, the Audit Office was unable to obtain sufficient appropriate audit evidence about the carrying amount of assets and liabilities consolidated into the Total State Sector Accounts as at 30 June 2022 and of the amount of income and expenses for the year then ended. Accordingly a modified audit opinion was issued on the NSW Government's 2021–22 consolidated financial statements.

Section 3 of this report titled 'Limitation of Scope relating to CMCT' discusses this matter in further detail.

An emphasis of matter drawing attention to uncertainty relating to the General Government Sector's investment in the Transport Asset Holding Entity (TAHE) remains

The Independent Auditor’s Report also includes an emphasis of matter, drawing attention to the significant uncertainties associated with the General Government Sector's (GGS) equity investment in TAHE. The significant uncertainty relates to key assumptions used to forecast returns from investments into TAHE in order to support the recognition of the government's funding of TAHE as an equity injection.

At the time of signing the Independent Auditor's Report, there was significant uncertainty with regards to assumptions and estimates used to forecast a return from the GGS investment into TAHE, which supports the recognition of an equity injection. There is significant uncertainty relating to:

• the 2022–23 Budget committed $5.5 billion to fund TAHE's key customers, Sydney Trains and NSW Trains (the operators), to support their payment of access and licence fees agreed on 23 June 2022. However, this funding only extends out to the end of the forward estimates period in 2025–26, which falls short of the ten-year contractual periods to 2030–31 and the projected period to 2045–46 to achieve a 2.5% return from the government's equity investment. The government will need to fund the operators an additional $10.2 billion in Budget funding so that they can meet their contractual obligations to TAHE from 2026–27 to 2030–31, and a further projected funding of $50.8 billion from 2031 to 2046. This additional funding is not within the government's published Budget figures, leading to uncertainty on whether the government-funded operators can pay access and licence fees beyond the forward estimates period of 2025–26
• a significant portion of the projected returns are earnt outside the ten-year contract period (terminating 30 June 2031) and there is a risk that TAHE will not be able to recontract for access and licence fees at a level that is consistent with current projections. There is also a risk that funding for TAHE's key customers will not be sufficient to fund payment of access and licence fees at a level that is consistent with current projections.

The 'State Finances 2021' report made recommendations regarding the significant accounting issues relating to TAHE. The State's response to these recommendations are detailed in Section 4 of this report titled ‘Investment in the Transport Asset Holding Entity’. Other significant matters related to the TSSA audit are covered in Section 8 titled ‘Key audit findings’.

Other financial reporting matters

All government agencies were granted an extra week to submit financial statements for audit

A one-week extension provided agencies across the sector with additional time to resolve key accounting issues and submit financial statements for audit by 1 August 2022.

Further extensions were approved for the following seven agencies (ten in 2020–21):

• State Insurance Regulatory Authority (3 August 2022)
• Dams Safety NSW (8 August 2022)
• Jenolan Caves Reserve Trust (8 August 2022)
• Transport for NSW (8 August 2022)
• Department of Enterprise, Investment and Trade (22 August 2022)
• Transport Asset Holding Entity (22 August 2022)
• Department of Transport (26 August 2022).

Additional extensions provided agencies with more time to complete:

• asset valuations
• valuations of actuarially assessed liabilities.

An initial draft of the TSSA was provided to audit on 15 September 2022. This version was incomplete and excluded the impact of consolidating the State's TCorp IM funds under the correct Australian Accounting Standards. An additional three versions of the draft TSSA were provided to audit progressively to update the TCorp IM fund consolidated balances. The final complete version of the TSSA was submitted on 27 October 2022 which included all adjustments relating to the TCorp IM fund consolidation. Refer to section 8.1 for more details on the material restatements relating to the consolidation of the TCorp IM funds.

In 2021–22, agency financial statements presented for audit contained 20 errors exceeding $20 million (24 in 2020–21). The total value of these errors was $973 million, a decrease from the previous year ($6.6 billion in 2020–21).

The graph below shows the number of reported errors exceeding $20 million over the past five years in agencies’ financial statements presented for audit.

The errors resulted from:

• incorrect application of Australian Accounting Standards and NSW Treasury policies
• incorrect judgements and assumptions when valuing non-current physical assets and liabilities.

NSW Treasury concluded CMCT is a controlled entity of the State

In response to our recommendation in the ‘State Finances 2021’ report, NSW Treasury reconfirmed that the Catholic Metropolitan Cemeteries Trust (CMCT) is a controlled entity of the State. The Audit Office accepted the position of NSW Treasury.

The reaffirmation of this position means CMCT is a GSF agency under the provisions of the Government Sector Finance Act 2018 (GSF Act). Section 7.6 of the GSF Act places an obligation on CMCT to prepare financial statements and give them to the Auditor-General. Further, section 34 of the Government Sector Audit Act 1983 (the GSA Act) requires the Auditor-General to furnish an audit report on these financial statements.

To date, CMCT has not met its statutory obligations to prepare financial statements under the GSF Act and give them to the Auditor-General. CMCT has not submitted their financial statements to the Auditor-General for audit despite repeated requests and has not provided access to its books and records for the purposes of a financial audit. There was extensive correspondence between the Audit Office of NSW, CMCT, NSW Treasury and the Department of Planning and Environment in 2022 regarding this matter.

In addition, on 10 December 2021, the then Minister for Water, Property and Housing wrote to the Auditor-General requesting a financial and performance audit be performed pursuant to section 27B(3)(c) of the GSA Act. The audit would cover the financial affairs of CMCT, including whether funds have been used for the proper purpose. The Audit Office of New South Wales has written to CMCT on a number of occasions to request the provision of documentation and access to management in order to conduct the performance audit. CMCT has not provided the Audit Office of New South Wales access to its management, books and records for the purpose of the required performance audit.

NSW Treasury has met with and considered CMCT's perspectives. NSW Treasury’s position remains that CMCT is a controlled entity of the State for financial reporting purposes. Consequently, CMCT did not meet its statutory obligations as a controlled entity to submit its financial statements for audit and provide access to its books and records.

The TSSA audit opinion included a limitation of scope

The opinion in the TSSA Independent Auditor’s Report was modified with a limitation of scope due to an inability to access management and the books and records of CMCT. This limitation was appropriately disclosed in Note 1 'Statement of Significant Accounting Policies' of the TSSA. The Statement of Compliance signed by the Secretary of Treasury and the Treasurer on 29 November 2022 was also updated to acknowledge the disclosure in Note 1 regarding CMCT.

The Audit Office was unable to obtain sufficient appropriate audit evidence about the carrying amount of assets and liabilities consolidated into the Total State Sector Accounts as at 30 June 2022 and of the amount of income and expenses for the year then ended. Accordingly a modified audit opinion was issued on the NSW Government's 2021–22 consolidated financial statements.

The process of information sharing by NSW Treasury continues to require improvement

In last year’s ‘State Finances 2021’ report an extreme risk management letter finding was reported for NSW Treasury to ensure it significantly improve its processes so that all relevant information is identified and shared with the Audit Office to support material transactions and balances of the State.

A number of events reconfirmed that NSW Treasury needs to continue improving its process with respect to information sharing with the Audit Office. Notably, NSW Treasury’s finance team had not demonstrated that all available information (on their systems) was considered by them when assessing the State’s control over CMCT.

Critical information relating to CMCT was in the possession of NSW Treasury since late October 2021 but not considered when reconfirming their accounting position on the State's control of CMCT this year. A further reconfirmation of the State's control over CMCT was needed by NSW Treasury to ensure this information was considered in their accounting assessment.

The above demonstrates that more effective consultation is required by NSW Treasury with key stakeholders to ensure all information relevant to forming an accounting position relating to the TSSA is captured. This will ensure new information is not identified late in the audit process and NSW Treasury considers all information when concluding on the accounting position of the State.

Last year's report highlighted that NSW Government actions avoided a qualified opinion in 2020–21 relating to the General Government Sector's $2.4 billion cash contribution to Transport Asset Holding Entity (TAHE). These actions included the NSW Government agreeing to provide additional future funding to TAHE's key government customers Sydney Trains and NSW Trains (the operators) to support increases in access and licence fees to be paid to TAHE.

The additional funding by the government was necessary to demonstrate that a reasonable expectation of a sufficient rate of return would be earned on its equity invested in TAHE. Last year, there was no government policy on what the minimum return should be on investments in other public sector entities, so the long-term inflation rate was used as a benchmark. A recommendation was made in last year's State Finances report that NSW Treasury establish a policy on the minimum expected return from its investments.

On 6 September 2022, NSW Treasury finalised its policy relating to the government’s returns on equity investments. The application of this policy is limited to State Owned Corporations and similar to the Commonwealth framework for commercial businesses, which requires the expected return be at least equal to the long-term inflation rate.

The government's commitment to additional funding was conveyed last year through revised shareholder expectations being published in the 2021–22 'NSW Budget-Half yearly Review' on 16 December 2021, increasing the expected returns on equity from 1.5% to the expected long-term inflation rate of 2.5%. On 18 December 2021, Transport for NSW (TfNSW) and the operators entered into a Heads of Agreement (HoA). This formed the basis of negotiations to revise the pricing within the existing ten-year contracts and deliver upon the shareholders’ expected return of 2.5% on contributed equity to be earned over the estimated weighted average remaining useful lives of TAHE's assets.

Further information on last year's audit of the government’s investment in TAHE can be found in our 'State Finances 2021' report.

Ten-year commercial agreements were signed between TAHE, operators and TfNSW

Last year's State Finances report recommended that NSW Treasury facilitate revised commercial agreements to reflect the access and licence fees detailed in the HoA. As these agreements were not executed by 30 June 2021, last year's audit opinion of the Total State Sector Accounts (TSSA) included an Emphasis of Matter drawing attention to the uncertainty that existed at balance date as these agreements were not finalised.

On 23 June 2022, commercial agreements were signed between TAHE, the operators and Transport for NSW through a deed of variation. The revised access and licence fees for the ten-year period 2021–22 to 2030–31 was $16.6 billion, which is $520 million less than the HoA fees of $17.1 billion.

TAHE's main customers principally rely on government funding to pay access and licence fees

Whilst TAHE has agreed ten-year access and licence fees of $16.6 billion with its two main customers Sydney Trains and NSW Trains, these two operators significantly rely on government funding when making these payments to TAHE. At 30 June 2022, TAHE's expected return of 2.5% is contingent upon the GGS funding the operators to support their payment of access and licence fees that have been agreed with TAHE for the ten-year contracted period and for non-contracted periods from 2031–32 to 2045–46.

The 2022–23 NSW Budget has allocated $5.5 billion to fund the operators, to support their payment of access and licence fees. However, this funding extends to the end of the forward estimates period in 2025–26, which falls short of the ten-year contractual period to 2030–2031 and the projected period to 2045–46 to achieve the 2.5% return.

The government will need to fund the operators an additional $10.2 billion in budget funding to meet their contractual obligations to TAHE from 2026–27 to 2030–2031, and a further projected funding of $50.8 billion from 2032 to 2046. This is needed to ensure the government continues to demonstrate its expected return on investment of 2.5%. This additional funding is not within the government's published 2022–23 NSW Budget figures, leading to uncertainty on whether the government funded operators can pay access and licence fees beyond the forward estimate period of 2025–26.

Significant funding uncertainties remain

While the ten-year access and licence fee agreements were communicated to the NSW Government's Expenditure Review Committee, it is yet to be fully provided for in the government's budget figures. As TAHE's projections are highly dependent on the operators as its key customers, it remains critical that the government continue to provide sufficient funding to the operators so they can pay for access and use of TAHE assets. This means the significant funding uncertainties reported in last year's TSSA audit opinion remain for 2021–22.

The government has estimated $37.9 billion in returns (equivalent to 2.5% on contributed equity) is to be earned from its investment in TAHE over the period from 1 July 2022 to 30 June 2046. As previously reported, TAHE derives most of its revenue from access and licence fee agreements from the operators, who in turn are both funded by grants through TfNSW from the GGS. More than 95% of these returns are estimated to be earned outside of the ten-year contract period (terminating 30 June 2031).

There remains risk that:

• TAHE will not be able to recontract for access and licence fees at a level that is consistent with current projections
• future governments' funding to TAHE's key customers will not be sufficient to fund payment of access and licence fees at a level that is consistent with current projections
• TAHE will be unable to grow its non-government revenues.

This significant funding uncertainty was also reported in last year's TSSA audit opinion and will remain for 2021–22.

In 2021–22, TAHE and NSW Treasury prepared further modelling to support the Government's intent to earn a 2.5% return inclusive of recovering the holding (revaluation) loss of $20.3 billion on its investment in TAHE

Last year's State Finances report highlighted that NSW Treasury, with TAHE, should prepare robust projections and business plans to support the expected returns forecast beyond FY2031.

This year TAHE engaged an expert to help develop a model demonstrating the government's expected returns from its investment in TAHE. The model mathematically forecasts that returns of 2.5% will be achieved by 2046 and this will include recovery of the revaluation losses of $20.3 billion relating to 2020–21.

The current model includes some key assumptions:

• The main source of revenue is the access and licence fees expected from the two public rail operators (Sydney Trains and NSW Trains) contributing to more than 80% of TAHE's projected revenue. The rail operators are largely funded by the government when paying access and licence fees to TAHE.
• For the first ten years, the access and licence fees are based on the signed agreements between TAHE and the public rail operators.
• Beyond the ten-year contracted period, the model assumes existing contractual terms for access and licence fees will continue unchanged allowing for an annual rise for inflation (2.5% per annum), and increased fees to enable a 7.62% return for renewed assets.
• The capital expenditure included in the model is only the amounts approved by the Expenditure Review Committee (ERC) as part of the ten-year forecast. The model beyond ten years includes expected investment in renewed and replacement assets but excludes any forecasts relating to growth capex that is not approved by the ERC, and any related depreciation expenses for growth capex.

While management has developed a 35-year long term financial model to support the returns, we note this will need to be refined over the next few years. Furthermore, these are forecasted figures and we have not seen sufficient evidence of whether this reflects reality (that is, the achievement of dividends representing a return on equity) as it is still very early. Therefore, this will remain a high-risk matter until we have seen sufficient evidence of reality to the forecasted figures.

There is negative net impact on the budget after 2024–25 and this will grow in the future

There are some key points to highlight with this modelling and these are best conveyed with the graph below. This graph shows total cash injections made by the GGS since the government first announced the creation of TAHE as a for-profit entity in the 2015–16 NSW Budget. It also conveys the forecast returns from TAHE to the GGS and the level of funding operators will need from the GGS to pay TAHE's access and licence fees over the 30-year period. These cash flows are key inputs used in the modelling which calculates a 2.5% return from TAHE inclusive of recovering the holding (revaluation) loss of $20.3 billion.

The government continues to respond to the impact of the COVID-19 pandemic on New South Wales through its economic stimulus measures

The COVID-19 pandemic continued to significantly impact the State’s finances, reducing revenue and increasing expenses especially in sectors directly responsible for responding to the COVID-19 pandemic, such as Health. In October 2021, the government announced through the 'COVID-19 Economic Recovery Strategy' an additional $2.8 billion in economic stimulus and response measures following the conclusion of the three-month lockdown due to the Delta COVID-19 outbreak. Measures included:

• $739 million in household and social support, including housing support for Aboriginal communities and survivors of domestic violence, and vouchers to thank parents for their efforts to support learning from home
• $500 million to consumers and businesses including expansion of the 'Dine & Discover' and 'Stay & Rediscover' voucher programs
• $495 million in education support addressing learning gaps for children and helping schools prepare for future learning disruptions
• $487 million in combined funding for tourism, events, sports, and recreation throughout New South Wales
• $130 million to fund mental health services for individuals whose mental health was impacted by the pandemic.

The 2021–22 financial year included $21.9 billion for pandemic response and economic stimulus measures. Of this, $17.9 billion was spent in 2021–22 while a further $1 billion of the budgeted amount from 2021–22 was carried forward into 2022–23. The graph below shows the total allocation and spend by cluster for 2022 compared to target spend.

There were 14 natural disaster declarations including four severe weather events in 2021–22

Natural disasters such as bushfires, storms, floods, and other adverse weather events can have a significant impact on the State's finances. Costs associated with natural disasters include direct response costs such as clean-up and recovery, temporary accommodation, and as well as financial assistance provided to impacted communities such as recovery and business support grants.

The NSW Government can make a natural disaster declaration allowing eligible individuals and communities from impacted Local Government Areas access to a range of special financial assistance measures.

In 2021–22, there were 14 natural disaster declarations announced comparable to 14 in the previous year. These natural disaster declarations largely related to storms and floods throughout the State. In 2021–22, there was a larger number of 'severe weather' events declared, with four in 2021–22 (nil in 2020–21).

Natural disaster expenses increased 143% to $1.4 billion in 2021–22, up from $569 million last year

Over 2021–22, the budgeted cost for declared natural disasters was $1.9 billion ($725 million in 2020–21). Actual expenditure by the State on disaster response increased by $815 million to $1.4 billion. The graph below shows the total allocation and spend by cluster for 2022 compared to their budget spend.

Deficit of $15.3 billion compared with a budgeted deficit of $8.6 billion

The outcomes of the government’s overall activity and policies are reflected in its net operating balance (budget result). This is the difference between the cost of general government service delivery and the revenue earned to fund these sectors.

The General Government Sector, which comprises 196 entities, generally provides goods and services funded centrally by the State.

In addition to the 196 entities within the General Government Sector, a further 85 government controlled businesses are included within the consolidated Total State Sector financial statements. These businesses generally provide goods and services, such as water, electricity and financial services for which consumers pay for directly, and form part of the PNFC (31) and PFC (54) sectors.

The budget result for the 2021–22 financial year was a deficit of $15.3 billion compared to an original forecast of a budget deficit of $8.6 billion.

Revenues increased $16.1 billion to $106.7 billion

The State’s total revenues increased $16.1 billion to $106.7 billion, an increase of 17.8% compared to the previous year. Total revenue growth in 2020–21 was 5.1%. The State's increase in revenue was mostly from $9.2 billion in grants and subsidies and $4.6 billion in taxation.

Taxation revenue increased by 13.3%

Taxation revenue increased by $4.6 billion, mainly due to the net of:

• $4.9 billion higher stamp duties collected from property sales driven by growth in property transaction volumes and prices during 2021–22. This was growth was experienced across residential and commercial property markets
• $296 million lower gambling and betting taxes compared to 2020–21. Decrease was primarily attributed to the ongoing effects of COVID-19 restrictions and venue closures within the first half of 2021–22.

Stamp duties of $16.6 billion remains the largest source of taxation revenue, $7.7 billion higher than payroll tax of $8.9 billion, the second-largest source of taxation revenue.

Assets grew by $53 billion to $571 billion

The State’s assets include physical assets such as land, buildings and infrastructure, and financial assets such as cash, and other financial instruments and equity investments. The value of total assets increased by $53.2 billion or 10.3% to $571 billion. The increase was largely due to increases in the carrying value of land, buildings and infrastructure systems.

Valuing the State’s physical assets

State’s physical assets valued at $437 billion

The value of the State’s physical assets increased by $46.8 billion to $437 billion in 2021–22 ($724 million increase in 2020–21). The State’s physical assets include land and buildings ($198 billion), infrastructure systems ($221 billion), and plant and equipment ($18 billion).

The movement in physical asset values between years includes additions, disposals, depreciation and valuation adjustments. Other movements include assets reclassified to held for sale and other opening balance adjustments.

Appendix one – Prescribed entities

Appendix two – Legal opinions

Appendix three – TSS sectors and entities

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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.

What the report is about

Result of the Education cluster financial statement audits for the year ended 30 June 2022.

What we found

Unmodified audit opinions were issued for Education cluster agencies.

An 'other matter' paragraph was included in the TAFE Commission's independent auditor's report as it did not have a delegation or sub-delegation from the Minister for Education and Early Learning to incur expenditure from cluster grants.

What the key issues were

Annual fair value assessments of land and buildings showed material differences in their carrying values. As a result, the Department of Education and the TAFE Commission completed desktop revaluations of land and buildings, collectively increasing the value of these assets by $1.2 billion and $4.7 billion respectively.

The Department of Education and the NSW Education Standards Authority accepted changes to their office leasing arrangements managed by Property NSW. These changes resulted in the collective derecognition of $270.6 million of right-of-use assets and $382.9 million in lease liabilities.

What we recommended

A high-risk matter was reported in the management letter for the TAFE Commission highlighting non-compliance with policies and procedures guiding appropriate use of purchasing cards.

We recommended cluster agencies prioritise and address internal control deficiencies.

This report provides Parliament and other users of the Education cluster’s financial statements with the results of our audits, analysis, conclusions and recommendations in the following areas:

• financial reporting
• audit observations.

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 Education cluster (the cluster) for 2022.

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 Education cluster.

The number of findings reported to management has increased, and 31% were repeat issues

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

In 2021–22, there were 29 findings raised across the cluster (28 in 2020–21). Thirty-one per cent of all issues were repeat issues (50% in 2020–21).

The most common new and repeat issues related to internal control deficiencies in agencies’ information technology general controls, application controls, and procurement and payroll practices.

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

A high-risk matter was reported at the TAFE Commission highlighting instances of non-compliance with policies and procedures guiding appropriate purchasing card use

As part of our audit of the TAFE Commission, we integrated the use of data analytics into the audit approach. We performed data analytics over aspects of payroll, procurement and accounts payable activities. This helped us to highlight anomalies or risks in those data sets that are relevant to the audit of the TAFE Commission and plan testing procedures to address those risks. Data analytics also assisted us in providing an insight into the internal control environment of the TAFE Commission, highlighting areas where key controls are not in place or are not operating as management intended.

Our analysis over purchasing card data supplied by the TAFE Commission for the period July 2021 to March 2022 found deficiencies in the provisioning, use and cancellation of purchasing cards. This included identified instances of:

• controls effectively bypassed when a purchasing card surrendered by a former employee had been used by another employee
• split payments, circumventing delegation / cardholder limits
• delays in the submission and approval of purchasing card transactions.

The table below describes the common issues identified across the cluster by category and risk rating:

Appendix one – Early close procedures

What the report is about

In this report, we have analysed the key findings and recommendations from our audit reports over the past four years.

This analysis includes financial audits, performance audits, and compliance audits of state and local government entities that were tabled in NSW Parliament between July 2018 and February 2022.

The report is framed by recognition that the past four years have seen significant challenges and emergency events.

The scale of government responses to these events has been wide-ranging, involving emergency response coordination, service delivery, governance and policy.

The report is a resource to support public sector agencies and local government to improve future programs and activities.

What we found

Our analysis of findings and recommendations is structured around six key themes:

• Integrity and transparency
• Performance and monitoring
• Governance and oversight
• Cyber security and data
• System planning for disruption
• Resource management.

The report draws from this analysis to present recommendations for elements of good practice that government agencies should consider in relation to these themes. It also includes relevant examples from recent audit reports.

In this report we particularly call out threats to the integrity of government systems, processes and governance arrangements.

The report highlights the need for balanced advice to government on options and risks, for transparent documentation and reporting of directions and decisions, and for early and open sharing of information with integrity bodies and audit.

A number of the matters highlighted in this report are similar to those described in our previous Insights Report, (Performance Audit Insights: key findings from 2014–2018) specifically in relation to cyber and information security, to performance measurement, reporting and evaluation, and system and workforce planning and capability.

I am pleased to present the Audit Insights 2018–2022 report. This report describes key findings, trends and lessons learned from the last four years of audit. It seeks to inform the New South Wales Parliament of key risks identified and to provide insights and suggestions to the agencies we audit to improve performance across the public sector.

The report is framed by a very clear recognition that governments have been responding to significant events, in number, character and scale, over recent years. Further, it acknowledges that public servants at both state and council levels generally bring their best selves to work and diligently strive to deliver great outcomes for citizens and communities. The role of audit in this context is to provide necessary assurance over government spending, programs and services, and make suggestions for continuous improvement.

A number of the matters highlighted in this report are similar to those described in our previous Insights Report, (Performance Audit Insights: key findings from 2014–2018) specifically in relation to cyber and information security, to performance measurement, reporting and evaluation, and system and workforce planning and capability.

However, in this report we particularly call out threats to the integrity of government systems, processes and governance arrangements. We highlight the need for balanced advice to government on options and risks, for transparent documentation and reporting of directions and decisions, and for early and open sharing of information with integrity bodies and audit. Arguably, these considerations are never more important than in an increasingly complex environment and in the face of significant emergency events and they will be key areas of focus in our future audit program.

While we have acknowledged the challenges of the last few years have required rapid responses to address the short-term impacts of emergency events, there is much to be learned to improve future programs. I trust that the insights developed in this report provide a helpful resource to public sector agencies and local government across New South Wales. I would be pleased to receive any feedback you may wish to offer.

Margaret Crawford
Auditor-General for New South Wales

This report brings together a summary of key findings arising from NSW Audit Office reports tabled in the New South Wales Parliament between July 2018 and February 2022. This includes analysis of financial audits, performance audits, and compliance audits tabled over this period.

• Financial audits provide an independent opinion on the financial statements of NSW Government entities, universities and councils and identify whether they comply with accounting standards, relevant laws, regulations, and government directions.
• Performance audits determine whether government entities carry out their activities effectively, are doing so economically and efficiently, and in accordance with relevant laws. The activities examined by a performance audit may include a selected program or service, all or part of an entity, or more than one government entity. Performance audits can consider issues which affect the whole state and/or the local government sectors.
• Compliance audits and other assurance reviews are audits that assess whether specific legislation, directions, and regulations have been adhered to.

This report follows our earlier edition titled 'Performance Audit Insights: key findings from 2014–2018'. That report sought to highlight issues and themes emerging from performance audit findings, and to share lessons common across government. In this report, we have analysed the key findings and recommendations from our reports over the past four years. The full list of reports is included in Appendix 1. The analysis included findings and recommendations from 58 performance audits, as well as selected financial and compliance reports tabled between July 2018 and February 2022. The number of recommendations and key findings made across different areas of activity and the top issues are summarised at Exhibit 1.

The past four years have seen unprecedented challenges and several emergency events, and the scale of government responses to these events has been wide-ranging involving emergency response coordination, service delivery, governance and policy. While these emergencies are having a significant impact today, they are also likely to continue to have an impact into the future. There is much to learn from the response to those events that will help the government sector to prepare for and respond to future disruption. The following chapters bring together our recommendations for core elements of good practice across a number of areas of government activity, along with relevant examples from recent audit reports.

This 'Audit Insights 2018–2022' report does not make comparative analysis of trends in public sector performance since our 2018 Insights report, but instead highlights areas where government continues to face challenges, as well as new issues that our audits have identified since our 2018 report. We will continue to use the findings of our Insights analysis to shape our future audit priorities, in line with our purpose to help Parliament hold government accountable for its use of public resources in New South Wales.

Appendix one – Included reports, 2018–2022

Appendix two – About this report

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What the report is about

This report draws together the financial impact of COVID-19 on the agencies integral to responses across the state government sector of New South Wales.

What we found

Since the COVID-19 pandemic hit NSW in January 2020, and until 30 June 2021, $7.5 billion was spent by state government agencies for health and economic stimulus. The response was largely funded by borrowings.

The key areas of spending since the start of COVID-19 in NSW to 30 June 2021 were:

• direct health response measures – $2.2 billion
• personal protective equipment – $1.4 billion
• small business grants – $795 million
• quarantine costs – $613 million
• increases in employee expenses and cleaning costs across most agencies
• vaccine distribution, including vaccination hubs – $71 million.

The COVID-19 pandemic significantly impacted the financial performance and position of state government agencies.

Decreases in revenue from providing goods and services were offset by increases in appropriations, grants and contributions, for health and economic stimulus funding in response to the pandemic.

Most agencies had expense growth, due to additional operating requirements to manage and respond to the pandemic along with implementing new or expanded stimulus programs and initiatives.

Response measures for COVID-19 have meant the NSW Government is unlikely to meet targets in the Fiscal Responsibility Act 2012 being:

• annual expense growth kept below long-term average revenue growth
• elimination of State’s unfunded superannuation liability by 2030.