Reports
Education 2018
The Auditor-General for New South Wales, Margaret Crawford, released her report today on the results of the financial audits of agencies in the Education cluster. The report focuses on key observations and findings from the most recent financial audits of these agencies. 'I am pleased to report that unqualified audit opinions were issued on the financial statements of both agencies in the Education cluster', the Auditor-General said. Statements were submitted and audited within statutory deadlines.
This report analyses the results of our audits of financial statements of the Education cluster for the year ended 30 June 2018. The table below summarises our key observations.
This report provides parliament and other users of the Education cluster’s 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 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 for 2017–18.
| Observation | Conclusions and recommendations |
| 2.1 Quality of financial reporting | |
| Unqualified audit opinions were issued on the financial statements of both cluster agencies. | Sufficient audit evidence was obtained to conclude the financial statements were free of material misstatement. |
| 2.2 Timeliness of financial reporting | |
| Both cluster agencies met the statutory deadlines for completing early close procedures and submitting financial statements. | Early close procedures continue to facilitate the timely preparation of cluster agencies’ financial statements and completion of audits, but scope exists to improve outcomes by resolving issues and supplying supporting documentation earlier. |
| 2.3 Key issues from financial audits | |
| Inconsistencies in the Department’s annual leave and long service leave data, identified over the past three audits, remain unresolved. This issue impacts the Department’s liability estimates for annual leave and long service leave, including associated on-costs. It also on-flows to the Crown Entity, which assumes the Department's liability for long service leave. | Recommendation: The Department should confirm leave data and review assumptions following deployment of the new HR/Payroll system to better estimate the liability for employee benefits and the amount to be assumed by the Crown Entity. |
| 2.4 Key financial information | |
| Cluster agencies recorded net deficits in 2017–18. |
The Department recorded a net deficit of $30.7 million in 2017–18 against a budgeted surplus of $122 million. The NSW Education Standards Authority recorded a net deficit of $4.1 million against a budgeted deficit of $4.7 million. |
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 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 | |
| Twenty internal control deficiencies were identified during our audits of cluster agencies. We assessed one as a high risk finding. | |
| Eight internal control weaknesses were repeat issues from previous financial audits that had not been fully addressed by management. | Recommendation: Management should prioritise and action recommendations to address internal control weaknesses. |
| 3.2 Information technology | |
| Delivery of the Learning Management and Business Reform (LMBR) program is complete. |
The LMBR program has been a major project for the Department since it was established in 2006. A staged approach was adopted for implementing the Department’s new HR/Payroll system to manage the risks associated with this large-scale roll-out. |
| 3.3 Valuation of the Department’s land and buildings | |
| The Department completed a revaluation of land and building assets during 2017–18. |
A market approach was used to revalue the Department’s land, resulting in a revaluation increment of $2.3 billion. A current replacement cost approach was used to revalue the Department’s school buildings, resulting in an increment of $6.2 billion. |
| 3.4 Maintenance of school facilities | |
| The Department regularly assesses the condition of school buildings and uses Life Cycle Costing to predict maintenance and capital renewal, and to prioritise maintenance activities. | The Life Cycle Costing assessment conducted by the Department in 2017–18 rated 70 per cent of school buildings as being in either as new or good condition. No school buildings were rated as being in end-of-life condition. |
| 3.4 School asset delivery | |
| The Department’s School Assets Strategic Plan is designed to ensure that there are sufficient fit-for-purpose places for students up to 2031. | The Department created a new division, School Infrastructure NSW, to oversee the planning, supply and maintenance of schools and implement major school infrastructure projects. |
This chapter provides service delivery outcomes for the Education cluster for 2017–18. It provides important contextual information about the cluster's operation, but the data on achievement of these outcomes is not audited. The Audit Office does not have a specific mandate to audit performance information.
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.
Newcastle Urban Transformation and Transport Program
The urban renewal projects on former railway land in the Newcastle city centre are well targeted to support the objectives of the Newcastle Urban Transformation and Transport Program (the Program), according to a report released today by the Auditor-General for New South Wales, Margaret Crawford. The planned uses of the former railway land achieve a balance between the economic and social objectives of the Program at a reasonable cost to the government. However, the evidence that the cost of the light rail will be justified by its contribution to the Program is not convincing.
The Newcastle Urban Transformation and Transport Program (the Program) is an urban renewal and transport program in the Newcastle city centre. The Hunter and Central Coast Development Corporation (HCCDC) has led the Program since 2017. UrbanGrowth NSW led the Program from 2014 until 2017. Transport for NSW has been responsible for delivering the transport parts of the Program since the Program commenced. All references to HCCDC in this report relate to both HCCDC and its predecessor, the Hunter Development Corporation. All references to UrbanGrowth NSW in this report relate only to its Newcastle office from 2014 to 2017.
This audit had two objectives:
- To assess the economy of the approach chosen to achieve the objectives of the Program.
- To assess the effectiveness of the consultation and oversight of the Program.
We addressed the audit objectives by answering the following questions:
a) Was the decision to build light rail an economical option for achieving Program objectives?
b) Has the best value been obtained for the use of the former railway land?
c) Was good practice used in consultation on key Program decisions?
d) Did governance arrangements support delivery of the program?
1. The urban renewal projects on the former railway land are well targeted to support the objectives of the Program. However, there is insufficient evidence that the cost of the light rail will be justified by its contribution to Program objectives.
The planned uses of the former railway land achieve a balance between the economic and social objectives of the Program at a reasonable cost to the Government. HCCDC, and previously UrbanGrowth NSW, identified and considered options for land use that would best meet Program objectives. Required probity processes were followed for developments that involved financial transactions. Our audit did not assess the achievement of these objectives because none of the projects have been completed yet.
Analysis presented in the Program business case and other planning documents showed that the light rail would have small transport benefits and was expected to make a modest contribution to broader Program objectives. Analysis in the Program business case argued that despite this, the light rail was justified because it would attract investment and promote economic development around the route. The Program business case referred to several international examples to support this argument, but did not make a convincing case that these examples were comparable to the proposed light rail in Newcastle.
The audited agencies argue that the contribution of light rail cannot be assessed separately because it is a part of a broader Program. The cost of the light rail makes up around 53 per cent of the total Program funding. Given the cost of the light rail, agencies need to be able to demonstrate that this investment provides value for money by making a measurable contribution to the Program objectives.
2. Consultation and oversight were mostly effective during the implementation stages of the Program. There were weaknesses in both areas in the planning stages.
Consultations about the urban renewal activities from around 2015 onward followed good practice standards. These consultations were based on an internationally accepted framework and met their stated objectives. Community consultations on the decision to close the train line were held in 2006 and 2009. However, the final decision in 2012 was made without a specific community consultation. There was no community consultation on the decision to build a light rail.
The governance arrangements that were in place during the planning stages of the Program did not provide effective oversight. This meant there was not a single agreed set of Program objectives until 2016 and roles and responsibilities for the Program were not clear. Leadership and oversight improved during the implementation phase of the Program. Roles and responsibilities were clarified and a multi-agency steering committee was established to resolve issues that needed multi-agency coordination.
Recommendations
For future infrastructure programs, NSW Government agencies should support economical decision-making on infrastructure projects by:
- providing balanced advice to decision makers on the benefits and risks of large infrastructure investments at all stages of the decision-making process
- providing scope and cost estimates that are as accurate and complete as possible when initial funding decisions are being made
- making business cases available to the public.
The planned uses of the former railway land align with the objectives of encouraging people to visit and live in the city centre, creating attractive public spaces, and supporting growth in employment in the city. The transport benefits of the activities are less clear, because the light rail is the major transport project and this will not make significant improvements to transport in Newcastle.
The processes used for selling and leasing parts of the former railway land followed industry standards. Options for the former railway land were identified and assessed systematically. Competitive processes were used for most transactions and the required assessment and approval processes were followed. The sale of land to the University of Newcastle did not use a competitive process, but required processes for direct negotiations were followed.
Recommendation
By March 2019, the Hunter and Central Coast Development Corporation should:
- work with relevant stakeholders to explore options for increasing the focus on the heritage objective of the Program in projects on the former railway land. This could include projects that recognise the cultural and industrial heritage of Newcastle.
Consultations focusing on urban renewal options for the Program included a range of stakeholders and provided opportunities for input into decisions about the use of the former railway land. These consultations received mostly positive feedback from participants. Changes and additions were made to the objectives of the Program and specific projects in response to feedback received.
There had been several decades of debate about the potential closure of the train line, including community consultations in 2006 and 2009. However, the final decision to close the train line was made and announced in 2012 without a specific community consultation. HCCDC states that consultation with industry and business representatives constitutes community consultation because industry representatives are also members of the community. This does not meet good practice standards because it is not a representative sample of the community.
There was no community consultation on the decision to build a light rail. There were subsequent opportunities for members of the community to comment on the implementation options, but the decision to build it had already been made. A community and industry consultation was held on which route the light rail should use, but the results of this were not made public.
Recommendation
For future infrastructure programs, NSW Government agencies should consult with a wide range of stakeholders before major decisions are made and announced, and report publicly on the results and outcomes of consultations.
The governance arrangements that were in place during the planning stages of the Program did not provide effective oversight. Project leadership and oversight improved during the implementation phase of the Program.
Multi-agency coordination and oversight were ineffective during the planning stages of the Program. Examples include: multiple versions of Program objectives being in circulation; unclear reporting lines for project management groups; and poor role definition for the initial advisory board. Program ownership was clarified in mid-2016 with the appointment of a new Program Director with clear accountability for the delivery of the Program. This was supported by the creation of a multi-agency steering committee that was more effective than previous oversight bodies.
The limitations that existed in multi-agency coordination and oversight had some negative consequences in important aspects of project management for the Program. This included whole-of-government benefits management and the coordination of work to mitigate impacts of the Program on small businesses.
Recommendations
For future infrastructure programs, NSW Government agencies should:
- develop and implement a benefits management approach from the beginning of a program to ensure responsibility for defining benefits and measuring their achievement is clear
- establish whole-of-government oversight early in the program to guide major decisions. This should include:
- agreeing on objectives and ensuring all agencies understand these
- clearly defining roles and responsibilities for all agencies
- establishing whole-of-government coordination for the assessment and mitigation of the impact of major construction projects on businesses and the community.
By March 2019, the Hunter and Central Coast Development Corporation should update and implement the Program Benefits Realisation Plan. This should include:
- setting measurable targets for the desired benefits
- clearly allocating ownership for achieving the desired benefits
- monitoring progress toward achieving the desired benefits and reporting publicly on the results.
Appendix one - Response from agencies
Appendix two - About the audit
Appendix three - Performance auditing
Parliamentary reference - Report number #310 - released 12 December 2018
Industry 2018
The Auditor-General for New South Wales, Margaret Crawford, released her report today on the Industry cluster. The report focuses on key observations and findings from the most recent financial audits of agencies in the cluster. Cluster agencies received unqualified audit opinions for 41 out of the 47 financial statements presented for audit for 30 June 2018. Six audits remain incomplete. 'While it is pleasing to note that unqualified audit opinions have been issued, the timeliness of financial reporting needs to be improved through better oversight, prompt resolution of issues, and an increased focus on early close procedures', the Auditor-General said.
This report analyses the results of our audits of financial statements of the Industry cluster for the year ended 30 June 2018. The table below summarises our key observations.
This report provides parliament and other users of the Industry cluster agencies' financial statements with the results of our audits, including our observations, analysis, conclusions and recommendations in the following areas:
- financial reporting
- audit observations
- service delivery.
The Department of Industry (the Department) is the lead agency in a cluster of 50 agencies. Other significant agencies in the cluster include Local Land Services, New South Wales Rural Assistance Authority, Technical and Further Education Commission (TAFE NSW), various sporting agencies, Forestry Corporation NSW and Water NSW.
The 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 related to the financial reporting of agencies in the Industry cluster for 2018.
| Observation | Conclusions and recommendations |
| 2.1 Quality of financial reporting | |
| Unqualified audit opinions were issued for 41 out of 47 financial statement audits. Six audits are continuing. The number of misstatements identified in financial statements submitted for audit increased from 73 in 2016–17 to 92 in 2017–18. |
Conclusion: Agencies continue to address financial reporting issues and ensure significant matters that may impact the audit opinion are appropriately dealt with. The increase in the number of misstatements indicates a renewed focus on quality is required. |
| 2.2 Timeliness of financial reporting | |
| Nineteen out of 37 audit opinions were issued within the statutory deadline. Delays occurred due to the time required to resolve issues identified during the audit, or to obtain appropriate evidence to support balances or disclosures in the financial statements. There were also delays in receiving the signed certification from the agency, required before we can issue an audit opinion. We reviewed the conduct of early close procedures at 17 agencies. Fifteen of these agencies were assessed as not fully addressing mandatory early close procedures. |
Recommendation: Timeliness of financial reporting should be improved through better oversight of the preparation of financial statements, prompt resolution of issues, and an increased focus on early close procedures. |
| 2.3 Key financial reporting issues | |
| Information system limitations continue at TAFE NSW. TAFE NSW implemented additional processes to verify the accuracy and completeness of revenue from student fees. | Conclusion: Procedures to address system limitations are costly, causing delays in financial reporting and increased resource commitments for staff, contractors and audit. |
| Misstatements and internal control issues continue to be identified in accounting for Crown land. | The information system used to record Crown land was not designed to facilitate efficient financial reporting. These limitations and other control weaknesses impacted the completeness and accuracy of the Department's financial statements. Recommendation: The Department should address system limitations and control weaknesses to ensure complete and accurate reporting for Crown land. |
| Unprocessed Aboriginal land claims continue to increase. | Recommendation (repeat issue): The Department should reduce unprocessed Aboriginal land claims. |
| 2.4 Financial information and sustainability | |
| Cluster agencies recorded a combined surplus of $58.0 million compared to a combined deficit of $86.0 million in the previous year. |
|
| We identified five agencies with potential sustainability issues such as low liquidity or negative net assets. | Conclusion: Adequate arrangements are in place to mitigate potential sustainability issues. These arrangements include a commitment from the Department to provide financial support if required. |
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 Industry 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 control | |
| Almost one in three internal control issues identified in 2017–18 were repeat issues. | Recommendation (repeat issue): Recommendations to management to address internal control issues from prior years should be addressed promptly to reduce risks and improve processes. |
| 3.2 Information technology controls | |
| User access administration over financial systems remains an area of weakness. Two high risk and 18 moderate risk issues related to user access administration across nine agencies were identified. | Recommendation (repeat issue): Agencies' controls over administration of user access to critical systems should:
|
| 3.3 Annual work program | |
| Errors continue to be identified in the Crown land database. Instances were identified where Crown land was not recognised by the appropriate entity, or was recognised by more than one entity. |
Recommendation: The Department 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. |
| Approximately 700 managers of Crown land do not submit financial statements required by the Public Finance and Audit Act 1983. | NSW Treasury and the Department are continuing work to clarify reporting arrangements for these entities. |
| 3.4 Managing maintenance | |
| Some cluster agencies do not monitor their backlog maintenance. Consequently, the total backlog maintenance in the Industry cluster is unknown. This impacts the reliability and consistency of information about assets and their condition. | When backlog maintenance is unknown, it is difficult for agencies to develop an accurate and effective maintenance plan that focuses on areas of highest need. It also means agencies' maintenance plans are reactive rather than preventative. Effective maintenance planning helps agencies to:
|
| Maintenance budgets in some cluster agencies are not set based on actual maintenance needs. | Recommendation: Cluster agencies should set their maintenance budgets based on identified maintenance needs to more accurately budget and prioritise expenditure. |
Agencies in the Industry cluster provide services across a wide variety of areas. This chapter outlines certain service delivery outcomes for 2017–18 for the Industry cluster. It provides important contextual information about the cluster's operation, but 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.
In our recent performance audit, Progress and measurement of Premier's Priorities, we identified 12 limitations of performance measurement and performance data. We recommended that the Department of Premier and Cabinet ensure that processes to check and verify data are in place for all agency data sources.
Transport 2018
The Auditor-General for New South Wales, Margaret Crawford released her report today on key observations and findings from the 30 June 2018 financial statement audits of agencies in the Transport cluster. Unqualified audit opinions were issued for all agencies' financial statements. However, assessing the fair value of the broad range of transport related assets creates challenges.
This report analyses the results of our audits of financial statements of the Transport cluster for the year ended 30 June 2018. The table below summarises our key observations.
This report provides Parliament and other users of the Transport cluster’s financial statements with the results of our audits, our observations, 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 Transport cluster for 2018.
| Observation | Conclusions and recommendations |
| 2.1 Quality of financial reporting | |
| Unqualified audit opinions were issued for all agencies' financial statements | Sufficient audit evidence was obtained to conclude the financial statements were free of material misstatement. |
| 2.2 Key accounting issues | |
| Valuation of assets continues to create challenges. Although agencies complied with the requirements of the accounting standards and Treasury policies on valuations, we identified some opportunities for improvements at RMS. |
RMS incorporated data from its asset condition assessments for the first time in the valuation methodology which improved the valuation outcome. Overall, we were satisfied with the valuation methodology and key assumptions, but we noted some deficiencies in the asset data in relation to asset component unit rates and old condition data for some components of assets. Also, a bypass and tunnel were incorrectly excluded from RMS records and valuation process since 2013. This resulted in an increase for these assets’ value by $133 million. The valuation inputs for Wetlands and Moorings were revised this year to better reflect the assets' characteristics resulting in a $98.0 million increase. |
| 2.3 Timeliness of financial reporting | |
| Residual Transport Corporation did not submit its financial statements by the statutory reporting deadline. | Residual Transport Corporation remained a dormant entity with no transactions for the year ended 30 June 2018. |
| With the exception of Residual Transport Corporation, all agencies completed early close procedures and submitted financial statements within statutory timeframes. | Early close procedures allow financial reporting issues and risks to be addressed early in the reporting and audit process. |
| 2.4 Financial sustainability | |
| NSW Trains and the Chief Investigator of the Office of Transport Safety Investigations reported negative net assets of $75.7 million and $89,000 respectively at 30 June 2018. | NSW Trains and the Chief Investigator of the Office of Transport Safety Investigations continue to require letters of financial support to confirm their ability to pay liabilities as they fall due. |
| 2.5 Passenger revenue and patronage | |
| Transport agencies revenue growth increased at a higher rate than patronage. | Public transport passenger revenue increased by $114 million (8.3 per cent) in 2017–18, and patronage increased by 37.1 million (5.1 per cent) across all modes of transport based on data provided by TfNSW. |
| Negative balance Opal Cards resulted in $3.8 million in revenue not collected in 2017–18 and $7.8 million since the introduction of Opal. A total of 1.1 million Opal cards issued since its introduction have negative balances. | Transport for NSW advised it is liaising with the ticketing vendor to implement system changes and are investigating other ways to reduce the occurrences. |
| 2.6 Cost recovery from public transport users | |
| Overall cost recovery from users has decreased. | Overall cost recovery from public transport users (on rail and bus services by STA) decreased from 23.2 per cent to 22.4 per cent between 2016–17 and 2017–18. The main reason for the decrease is due to expenditure increasing at a faster rate than revenue in 2017–18. |
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 Transport cluster for 2018
- the areas of focus identified in the Audit Office annual 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 | |
| There was an increase in findings on internal controls across the Transport cluster. | Key themes related to information technology, employee leave entitlements and asset management. Eighteen per cent of all issues were repeat issues. |
| 3.2 Audit Office Annual work program | |
| The Transport cluster wrote-off over $200 million of assets which were replaced by new assets or technology. |
Majority of this write-off was recognised by RMS, with $199 million relating to the write-off of existing assets which have been replaced during the year. |
| RailCorp is expected to convert to TAHE from 1 July 2019. | Several working groups are considering different aspects of the TAHE transition including its status as a for-profit Public Trading Enterprise and which assets to transfer to TAHE. We will continue to monitor developments on TAHE for any impact to the financial statements. |
| RMS' estimated maintenance backlog at 30 June 2018 of $3.4 billion is lower than last year. Sydney Trains' estimated maintenance backlog at 30 June 2018 increased by 20.6 per cent to $434 million. TfNSW does not quantify its backlog maintenance. | TfNSW advised it is liaising with Infrastructure NSW to develop a consistent definition of maintenance backlog across all transport service providers. |
| Not all agencies monitor unplanned maintenance across the Transport cluster. | Unplanned maintenance can be more expensive than planned maintenance. TfNSW should develop a consistent approach to define, monitor and track unplanned maintenance across the cluster. |
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 Transport cluster and to collate and present service information for different modes of transport 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 that the Department of Premier and Cabinet ensure that processes to check and verify data are in place for all agency data sources.
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 |
Mobile speed cameras
The primary goal of speed cameras is to reduce speeding and make the roads safer. Our 2011 performance audit on speed cameras found that, in general, speed cameras change driver behaviour and have a positive impact on road safety.
Transport for NSW published the NSW Speed Camera Strategy in June 2012 in response to our audit. According to the Strategy, the main purpose of mobile speed cameras is to reduce speeding across the road network by providing a general deterrence through anywhere, anytime enforcement and by creating a perceived risk of detection across the road network. Fixed and red-light speed cameras aim to reduce speeding at specific locations.
Roads and Maritime Services and Transport for NSW deploy mobile speed cameras (MSCs) in consultation with NSW Police. The cameras are operated by contractors authorised by Roads and Maritime Services. MSC locations are stretches of road that can be more than 20 kilometres long. MSC sites are specific places within these locations that meet the requirements for a MSC vehicle to be able to operate there.
This audit assessed whether the mobile speed camera program is effectively managed to maximise road safety benefits across the NSW road network.
The mobile speed camera program requires improvements to key aspects of its management to maximise road safety benefits. While camera locations have been selected based on crash history, the limited number of locations restricts network coverage. It also makes enforcement more predictable, reducing the ability to provide a general deterrence. Implementation of the program has been consistent with government decisions to limit its hours of operation and use multiple warning signs. These factors limit the ability of the mobile speed camera program to effectively deliver a broad general network deterrence from speeding.
Many locations are needed to enable network-wide coverage and ensure MSC sessions are randomised and not predictable. However, there are insufficient locations available to operate MSCs that meet strict criteria for crash history, operator safety, signage and technical requirements. MSC performance would be improved if there were more locations.
A scheduling system is meant to randomise MSC location visits to ensure they are not predictable. However, a relatively small number of locations have been visited many times making their deployment more predictable in these places. The allocation of MSCs across the time of day, day of week and across regions is prioritised based on crash history but the frequency of location visits does not correspond with the crash risk for each location.
There is evidence of a reduction in fatal and serious crashes at the 30 best-performing MSC locations. However, there is limited evidence that the current MSC program in NSW has led to a behavioural change in drivers by creating a general network deterrence. While the overall reduction in serious injuries on roads has continued, fatalities have started to climb again. Compliance with speed limits has improved at the sites and locations that MSCs operate, but the results of overall network speed surveys vary, with recent improvements in some speed zones but not others.
There is no supporting justification for the number of hours of operation for the program. The rate of MSC enforcement (hours per capita) in NSW is less than Queensland and Victoria. The government decision to use multiple warning signs has made it harder to identify and maintain suitable MSC locations, and impeded their use for enforcement in both traffic directions and in school zones.
Appendix one - Response from agency
Appendix two - About the audit
Appendix three - Performance auditing
Parliamentary reference - Report number #308 - released 18 October 2018
Procurement and reporting of consultancy services
NSW Government agencies engage consultants to provide professional advice to inform their decision‑making. The spend on consultants is measured and reported in different ways for different purposes and the absence of a consistently applied definition makes quantification difficult.
The NSW Government’s procurement principles aim to help agencies obtain value for money and be fair, ethical and transparent in their procurement activities. All NSW Government agencies, with the exception of State Owned Corporations, must comply with the NSW Procurement Board’s Direction when engaging suppliers of business advisory services. Business advisory services include consultancy services. NSW Government agencies must disclose certain information about their use of consultants in their annual reports. The table below illustrates the detailed procurement and reporting requirements.
| Relevant guidance | Requirements | |
|---|---|---|
| Procurement of consultancy services | PBD 2015 04 Engagement of major suppliers of consultancy and other services (the Direction) including the Standard Commercial Framework (revised on 31 January 2018, shortly before it was superseded by 'PBD 2018 01') |
Required agencies to seek the Agency Head or Chief Financial Officer's approval for engagements over $50,000 and report the engagements in the Major Suppliers' Portal (the Portal). |
| PBD 2018 01 Engagement of professional services suppliers (replaced 'PBD 2015 04' in May 2018) |
Requires agencies to seek the Agency Head or Chief Financial Officer's approval for engagements that depart from the Standard Commercial Framework and report the engagements in the Portal. Exhibit 3 in the report includes the key requirements of these three Directions. |
|
| Reporting of consultancy expenditure | Annual Reports (Departments) Regulation 2015 and Annual Reports (Statutory Bodies) Regulation 2015 | Requires agencies to disclose, in their annual reports, details of consultants engaged in a reporting year. |
| Premier's Memorandum 'M2002 07 Engagement and Use of Consultants' |
Outlines additional reporting requirements for agencies to describe the nature and purpose of consultancies in their annual reports. |
We examined how 12 agencies complied with their procurement and reporting obligations for consultancy services between 1 July 2016 and 31 March 2018. Participating agencies are listed in Appendix two. We also examined how NSW Procurement supports the functions of the NSW Procurement Board within the Department of Finance, Services and Innovation.
This audit assessed:
- agency compliance with relevant procurement requirements for their use of consultants
- agency compliance with disclosure requirements about consultancy expenditure in their annual reports
- the effectiveness of the NSW Procurement Board (the Board) in fulfilling its functions to oversee and support agency procurement of consultancy services.
Matching skills training with market needs
In 2012, governments across Australia entered into the National Partnership Agreement on Skills Reform. Under the National Partnership Agreement, the Australian Government provided incentive payments to States and Territories to move towards a more contestable Vocational Education and Training (VET) market. The aim of the National Partnership Agreement was to foster a more accessible, transparent, efficient and high quality training sector that is responsive to the needs of students and industry.
The New South Wales Government introduced the Smart and Skilled program in response to the National Partnership Agreement. Through Smart and Skilled, students can choose a vocational course from a list of approved qualifications and training providers. Students pay the same fee for their chosen qualification regardless of the selected training provider and the government covers the gap between the student fee and the fixed price of the qualification through a subsidy paid to their training provider.
Smart and Skilled commenced in January 2015, with the then Department of Education and Communities having primary responsibility for its implementation. Since July 2015, the NSW Department of Industry (the Department) has been responsible for VET in New South Wales and the implementation of Smart and Skilled.
The NSW Skills Board, comprising nine part-time members appointed by the Minister for Skills, provides independent strategic advice on VET reform and funding. In line with most other States and Territories, the Department maintains a 'Skills List' which contains government subsidised qualifications to address identified priority skill needs in New South Wales.
This audit assessed the effectiveness of the Department in identifying, prioritising, and aligning course subsidies to the skill needs of NSW. To do this we examined whether:
- the Department effectively identifies and prioritises present and future skill needs
- Smart and Skilled funding is aligned with the priority skill areas
- skill needs and available VET courses are effectively communicated to potential participants and training providers.
Smart and Skilled is a relatively new and complex program, and is being delivered in the context of significant reform to VET nationally and in New South Wales. A large scale government funded contestable market was not present in the VET sector in New South Wales before the introduction of Smart and Skilled. This audit's findings should be considered in that context.
The Department needs to better use the data it has, and collect additional data, to support its analysis of priority skill needs in New South Wales, and direct funding accordingly.
- funding scholarships and support for disadvantaged students
- funding training in regional and remote areas
- providing additional support to deliver some qualifications that the market is not providing.
The Department needs to evaluate these funding strategies to ensure they are achieving their goals. It should also explore why training providers are not delivering some priority qualifications through Smart and Skilled.
Training providers compete for funding allocations based on their capacity to deliver. The Department successfully manages the budget by capping funding allocated to each Smart and Skilled training provider. However, training providers have only one year of funding certainty at present. Training providers that are performing well are not rewarded with greater certainty.
The Department needs to improve its communication with prospective students to ensure they can make informed decisions in the VET market.
The Department also needs to communicate more transparently to training providers about its funding allocations and decisions about changes to the NSW Skills List.
The Department relies on stakeholder proposals to update the NSW Skills List. Stakeholders include industry, training providers and government departments. These stakeholders, particularly industry, are likely to be aware of skill needs, and have a strong incentive to propose qualifications that address these needs. The Department’s process of collecting stakeholder proposals helps to ensure that it can identify qualifications needed to address material skill needs.
It is also important that the Department ensures the NSW Skills List only includes priority qualifications that need to be subsidised by government. The Department does not have robust processes in place to remove qualifications from the NSW Skills List. As a result, there is a risk that the list may include lower priority skill areas. Since the NSW Skills List was first created, new additions to the list have outnumbered those removed by five to one.
The Department does not always validate information gathered from stakeholder proposals, even when it has data to do so. Further, its decision making about what to include on, or delete from, the NSW Skills List is not transparent because the rationale for decisions is not adequately documented.
The Department is undertaking projects to better use data to support its decisions about what should be on the NSW Skills List. Some of these projects should deliver useful data soon, but some can only provide useful information when sufficient trend data is available.
Recommendation
The Department should:
- by June 2019, increase transparency of decisions about proposed changes to the NSW Skills List and improve record-keeping of deliberations regarding these changes
- by December 2019, use data more effectively and consistently to ensure that the NSW Skills List only includes high priority qualifications
Only qualifications on the NSW Skills List are eligible for subsidies under Smart and Skilled. As the Department does not have a robust process for removing low priority qualifications from the NSW Skills list, some low priority qualifications may be subsidised.
The Department allocates the Smart and Skilled budget through contracts with Smart and Skilled training providers. Training providers that meet contractual obligations and perform well in terms of enrolments and completion rates are rewarded with renewed contracts and more funding for increased enrolments, but these decisions are not based on student outcomes. The Department reduces or removes funding from training providers that do not meet quality standards, breach contract conditions or that are unable to spend their allocated funding effectively. Contracts are for only one year, offering training providers little funding certainty.
Smart and Skilled provides additional funding for scholarships and for training providers in locations where the cost of delivery is high or to those that cater to students with disabilities. The Department has not yet evaluated whether this additional funding is achieving its intended outcomes.
Eight per cent of the qualifications that have been on the NSW Skills List since 2015 are not delivered under Smart and Skilled anywhere in New South Wales. A further 14 per cent of the qualifications that are offered by training providers have had no student commencements. The Department is yet to identify the reasons that these high priority qualifications are either not offered or not taken up by students.
Recommendation
The Department should:
- by June 2019, investigate why training providers do not offer, and prospective students do not enrol in, some Smart and Skilled subsidised qualifications
- by December 2019, evaluate the effectiveness of Smart and Skilled funding which supplements standard subsidies for qualifications on the NSW Skills List, to determine whether it is achieving its objectives
- by December 2019, provide longer term funding certainty to high performing training providers, while retaining incentives for them to continue to perform well.
In a contestable market, it is important for consumers to have sufficient information to make informed decisions. The Department does not provide some key information to prospective VET students to support their decisions, such as measures of provider quality and examples of employment and further education outcomes of students completing particular courses. Existing information is spread across numerous channels and is not presented in a user friendly manner. This is a potential barrier to participation in VET for those less engaged with the system or less ICT literate.
The Department conveys relevant information about the program to training providers through its websites and its regional offices. However, it could better communicate some specific information directly to individual Smart and Skilled training providers, such as reasons their proposals to include new qualifications on the NSW Skills List are accepted or rejected.
While the Department is implementing a communication strategy for VET in New South Wales, it does not have a specific communications strategy for Smart and Skilled which comprehensively identifies the needs of different stakeholders and how these can be addressed.
Recommendation
By December 2019, the Department should develop and implement a specific communications strategy for Smart and Skilled to:
- support prospective student engagement and informed decision making
- meet the information needs of training providers
Appendix one - Response from agency
Appendix two - About the audit
Appendix three - Performance auditing
Parliamentary reference - Report number #305 - released 26 July 2018
Universities 2017
The Auditor-General, Margaret Crawford released her report today on the results of financial audits of NSW universities for the year ended 31 December 2017. No qualified audit opinions were issued for any university and the quality and timeliness of financial reporting continues to improve.
This report analyses the results of our audits of financial statements of the ten NSW universities and their controlled entities for the year ended 31 December 2017. The table below summarises our key observations.
This report focuses on our observations on the common issues identified in our audits of the financial statements of the ten NSW universities and their controlled entities in 2017. The universities and controlled entities are listed in Appendix three and four respectively.
The report provides our analysis of universities’ results and findings in the following areas:
- Financial reporting and performance
- Teaching and research
- Financial controls and governance.
Accurate and timely financial reporting is important for universities to make efficient and effective economic decisions. Sound financial performance provides the platform for universities to deliver high quality teaching and research outcomes.
This chapter outlines our audit observations on the financial reporting and performance of NSW universities for 2017.
| Observation | Conclusion or recommendation |
| 3.1 Financial reporting | |
| Audit results | |
| The financial statements of all ten NSW universities and 66 out of 69 of their controlled entities received unmodified audit opinions. | Two controlled entities did not fully comply with the financial reporting and audit requirements of the Public Finance and Audit Act 1983 as they did not submit their financial statements to the Auditor-General. One of these entities was audited under the requirements applicable in its foreign jurisdiction. A third controlled entity submitted financial statements, but only after the statutory due date. |
| Quality and timeliness of financial reporting | |
| The number of uncorrected misstatements continues to decrease. | The quality of financial statements of the universities improved in 2017. |
| Two universities simplified disclosures in their financial statements. | The financial statements of the University of Sydney and Macquarie University are more concise, readable and understandable than those of other universities. |
| Six universities finalised their financial statements earlier than in previous years. | Universities that performed aspects of early close procedures improved the timeliness of their financial reporting and helped us conclude our audits earlier. |
| Eight universities are yet to quantify the impact of new accounting standards applicable in future years. | The two universities that have assessed the impact of the new accounting standards believe the impact will be material. |
| An accounting issue was identified relating to the recognition and measurement of payroll tax liabilities on employees' defined benefit superannuation contributions payable to the superannuation funds. | Recommendation: NSW universities should clarify the recognition and measurement of their liability for payroll tax on their defined benefit superannuation obligations before 31 December 2018. |
| 3.2 Financial performance | |
| Sources of revenue from operations | |
| Government grants as a proportion of total revenue decreased over the past five years by 6.4 per cent. |
The Australian Government announced funding freezes to Australian Government grants revenue for the next two years. Universities are expanding other revenue streams to decrease their reliance on grant funding. The revenue stream that has increased the most significantly over the past five years is overseas student revenue. |
| Revenue from overseas student course fees increased by 23 per cent in the last year and contributed $2.8 billion to the NSW university sector in 2017. | Overseas student revenue exceeded domestic student revenue by 37 per cent, and comprised over a quarter of NSW universities' total revenues in 2017. The growth in overseas student revenue has not been shared equally in the sector. Some universities are more dependent on overseas student revenue than others. |
| Revenue from overseas students from four countries comprised 37 per cent of total student revenues for all NSW universities. | Recommendation: NSW universities should assess their student market concentration risk where they rely heavily on students from a single country of origin. This increases their sensitivity to economic or political changes in that country. Universities' data shows as much as 71 per cent of their overseas student revenue comes from a single country of origin. |
| Research income of NSW universities was $1.1 billion in 2016 and has grown by 9.8 per cent between 2012 and 2016. | Two universities attracted 65.2 per cent of the total research income received by all NSW universities. |
| Other revenues | |
| Total philanthropic revenue increased by 1.0 per cent to $151 million in 2017. |
Philanthropic revenue has been increasing for the past five years. Two universities attracted 76.8 per cent of the total philanthropic dollars received by all NSW universities. |
| Average investment returns fell from 7.0 per cent in 2013 to 5.8 per cent in 2017, while total investments grew to $5.4 billion in 2017 from $3.5 billion in 2013. |
Universities have structured their investment portfolios between fixed and non-fixed income assets, seeking to optimise their returns in a low interest rate environment within the limits of their risk management strategies. Investment income is a significant source of revenue for some, but not all universities. Two universities' investment funds represented 52.3 per cent of the total investment funds of all NSW universities combined. |
| Low interest rates have made investment in fixed income assets less attractive for universities. Over the last five years universities have increased their investment in non-fixed income (or market based) assets by 67.1 per cent. | |
| Most NSW universities have established investment governance frameworks. | |
| Financial sustainability indicators | |
| Operating expenditure per equivalent full-time student load (EFTSL) increased by 3.0 per cent in 2017. | The universities that have been able to attract international students to grow their operational revenues have been able to leverage economies of scale to maximise their average margin per EFTSL. Other universities have had to rely on containing costs to achieve higher EFTSL margins. |
| For six universities, the growth in operating expenditure has exceeded the growth in operating revenue, reducing operating margins. The risk associated with narrowing margins is compounded where universities have a high reliance on student revenues from a single source. Sudden changes in demand can challenge the ability of those universities to adjust their cost structures. |
As the margin between operating revenue and operating expenditure decreases, operational results are more at risk from unexpected fluctuations, such as Australian Government higher education reforms and reduced overseas student enrolments. Smaller operating margins reduce the funds available to invest in upgrading infrastructure and implement corporate strategies to meet future challenges. |
| Eight universities have current ratios greater than one in 2017. | |
| Controlled entities | |
| Sixteen of the universities' 58 controlled entities that operate business activities reported losses in 2017 (15 in 2016). | Overall, the financial performance of controlled entities operating business activities was positive, but results in 2017 were lower than in 2016. |
| The total profit of controlled entities operating business activities decreased 5.5 per cent to $77.5 million in 2017 ($82.6 million in 2016). | Universities may be able to improve their overall performance by reassessing the viability of business ventures that continue to make losses and/or rely on them for financial support. |
| Eighteen controlled entities relied on guarantees of financial support from their parent entity in 2017 (19 in 2016). | |
Teaching and research are key objectives of universities and they invest most of their resources in achieving high quality academic and research outcomes to maintain or advance their reputations and rankings in Australia and abroad. Universities have also committed to achieving certain government objectives.
This chapter outlines teaching and research outcomes for NSW universities for 2017.
| Observation | Conclusion or recommendation |
| 4.1 Teaching outcomes | |
| Achieving Australian Government target | |
| NSW universities met the Australian Government target of having 40 per cent of 25 to 34 year-olds with bachelor degrees ten years earlier than the original target date of 2025. |
The proportion of 25 to 34 year-olds in NSW holding a bachelor degree increased to 43.4 per cent in 2017. In 2009, when the target was originally set, only 35.5 per cent of 25 to 34 year-olds held a bachelor degree. |
| Graduate employment rates | |
|
Seven universities exceeded the national average of 71.8 per cent for the proportion of their undergraduates who obtain full-time employment. Four universities achieved better than the national average of 86.1 per cent for the proportion of their postgraduates who obtain full-time employment. |
Most NSW universities' employment outcomes are better than the national average. |
| Student enrolments by field of education | |
| NSW universities have increased enrolments in fields of study that align with known skills shortages in NSW identified by the Australian Government for 2016 and 2017. | Alignment of student intake with identified shortages helps ensure graduates secure timely employment on completion of their studies. |
| Achieving diversity outcomes | |
|
NSW universities agreed to targets set by the Australian Government for enrolments of students from low socio economic status (SES) and Aboriginal or Torres Strait Islander backgrounds. |
NSW universities can improve outcomes for these students by implementing policies to increase enrolments and support students to graduation. |
|
Three universities exceeded the target of 20 per cent of low SES student enrolments in 2017. Six universities met their Indigenous student enrolment target in 2017. The target is having a growth rate in the enrolment of Indigenous students that is more than 50 per cent higher than the growth rate of non-Indigenous student enrolments. |
At the current rate, it is unlikely most universities will reach the agreed low SES target by 2020. |
Appropriate financial controls help ensure efficient and effective use of resources, and the implementation and monitoring of university policies. Governance consists of frameworks, processes and behaviours that enable the universities to operate effectively and comply with relevant laws and policies.
This chapter outlines our audit observations on the financial control and governance of NSW universities for 2017.
| Observation | Conclusion or recommendation |
| 5.1 Internal controls | |
| Internal control findings | |
|
Eighty-three internal control deficiencies were identified during our audits, of which 40 related to Information Technology (IT). |
Recommendation: NSW universities should ensure controls, including information technology controls, are properly designed and operate effectively to protect intellectual property, staff and student data, and assets. Universities should rectify identified deficiencies in a timely manner. |
| Repeat findings Twenty-four findings were repeat internal control deficiencies, of which 18 related to IT. |
IT issues can take some time to rectify because specialist skill and/or partnering with software suppliers is often required to implement new controls. However, until rectified, the vulnerabilities those control deficiencies present can be significant. |
| Cyber security Our audits identified opportunities to improve cyber security controls and processes to reduce risks, including risks relating to financial loss, reputational damage and breaches of privacy laws. |
Recommendation: NSW universities should strengthen their cyber security frameworks to manage cyber security risks. This includes developing:
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Use of credit card and work-related travel The risks of unauthorised use can be mitigated by regular monitoring, and reporting breaches for investigation and disciplinary action. |
Appropriately designed and implemented preventive and detective controls are most effective when enforcement and disciplinary activities are oversighted by university audit and risk committees. |
