Unqualified financial audit opinions

The financial statements of NSW Health and its 25 controlled entities received unqualified opinions.

The number of corrected and uncorrected misstatements increased from the prior year. Misstatements related predominantly to the implementation of new accounting standards, asset revaluations and accounting for new revenue streams to cover the cost of HSW Health’s response to the COVID-19 pandemic.

Qualified compliance audit opinion

We issued a qualified audit opinion for the Ministry of Health’s Annual Prudential Compliance Statement for aged care facilities operated by NSW Health. We identified 18 instances of material non-compliance with the Fees and Payments Principles 2014 (No. 2) (the Principles) in 2019–20 (30 in 2018–19).

NSW Health received an additional $3.3 billion in funding to cover costs associated with its response to the COVID-19 pandemic.

The impacts of the COVID-19 pandemic on the cluster were significant for health entities and included changes to operations, increased revenues, expenditure, assets and liabilities. Cancellation of elective surgery and decreased emergency department presentations meant that despite the pandemic, activity levels at many health entities decreased. Health Pathology and HealthShare were notable exceptions.

In the period to the 30 June 2020, NSW Health reported that over 900,000 COVID-19 tests were conducted. Health Pathology conducted over 500,000 of these tests. Health Pathology's surge requirements were enhanced through arrangements with 13 private sector providers. HealthShare purchased $864.2 million of personal protective equipment.

Overall, NSW Health recorded an operating surplus of $3.1 billion in 2019–20, an increase of $2.0 billion from 2018–19. As in previous years, the surplus largely resulted from additional revenue received to fund capital projects including the construction of new facilities, upgrades and redevelopments. In 2019–20 additional Commonwealth and State funding for the purchase and stockpiling of personal protective equipment also contributed to the operating surplus.

We identified more internal control deficiencies in 2019–20. The number of repeat issues from prior years also remains high.

NSW Health addressed 18 out of the 25 information system control deficiencies during the year.

Several key agreements lacked formal documentation. This included agreements between the Ministry and health entities, between health entities and agencies in other clusters and between the Ministry and health departments in other jurisdictions.

• establish an operating model in line with the original intent of a commercial return
• finalise commercial agreements with the public rail operators
• confirm forecast financial information to assess valuation of TAHE infrastructure
• finalise asset and safety management plans.

Resolution of the above matters are critical as they may significantly impact the financial reporting arrangements for TAHE for 2020–21, in particular, accounting policies adopted as well as measurement principles of its significant infrastructure asset base.

• agencies are fully aware of contractual and other obligations
• appropriate assessment of financial reporting implications
• ongoing assessments of accounting standards, in particular AASB 16 ‘Leases’, AASB 15 'Revenue from Contract with Customers', AASB 1058 'Income of Not-for-Profit Entities' and new accounting standard AASB 1059 'Service Concession Arrangements: Grantors' are accurate and complete.

Section highlights

• Total patronage and revenue for public transport decreased by approximately 18 per cent in 2019–20 due to COVID-19.
• Unqualified audit opinions were issued on all Transport agencies' financial statements.
• Transport cluster agencies continued to experience challenges with accounting of land and infrastructure assets.

Section highlights

• While there was a decrease in findings on internal controls across the Transport cluster, 43 per cent of all issues were repeat issues. Many repeat issues related to information technology controls around user access management.
• RailCorp transitioned to TAHE on 1 July 2020. TAHE's operating model and commercial arrangements with public rail operators has not been finalised despite government original plans to be operating from 1 July 2019. TAHE management should finalise its operating model and commercial agreements with public rail operators as they may significantly impact the financial reporting arrangements for TAHE for 2020–21.
• Completeness and accuracy of contracts registers remains an ongoing issue for the Transport cluster.

There are 45 separate entities in the cluster. Unqualified audit opinions were issued for 38 cluster agencies' 30 June 2020 financial statements audits. Four financial statements audits are still ongoing, and three agencies were not subject to audit due to NSW Treasury reporting exemptions.

The majority of cluster agencies subject to statutory reporting deadlines met the revised timeline for submitting financial statements. Twenty‑four of the 26 cluster agencies required to submit early close financial statements met the revised timeframe.

Due to issues identified during the audit, 13 financial statements audits were not completed and audit opinions not issued by the statutory deadline.

Significant deficiencies were identified in Property NSW's lease data maintenance and lease calculations.

Recommendation (partially repeat):

Property NSW should:

• review and document the accounting implications for each lease
• ensure the accuracy and validity of lease data used for the lease calculations
• review user access to the leasing system, including privileged users.

Our audits of the cluster agencies identified there was a lack of thorough quality assurance over the accuracy of lease information provided by Property NSW.

Recommendation:

The Department and cluster agencies should:

• quality assure and validate the information provided by Property NSW
• ensure changes made by Property NSW on lease data are supported and that assumptions and judgements applied are appropriate
• document their review of the data supplied.

In 2019–20, the Department resolved an additional 468 Aboriginal land claims compared to the prior year. However, the total number of unprocessed Aboriginal land claims increased by 914 to 36,769 at 30 June 2020. The number of claims remaining unprocessed for more than ten years after lodgement increased by 10.9 per cent from last year. Until claims are resolved, there is an uncertainty over who is entitled to the land and the uses and activities that can be carried out on the land.

Auditor-General's Reports to Parliament since 2007 have recommended action to address the increasing number of unprocessed claims. To date, the Department has not been able to resolve this issue.

During 2020–21, a performance audit will assess the effectiveness and efficiency of the administration of Aboriginal land claims.

The Department will need to provide additional support and guidance to help Crown land managers (CLMs) meet their financial reporting obligations.

Recommendation:

The Department should:

• in consultation with NSW Treasury, develop an appropriate statutory reporting framework for CLMs
• ensure sufficient resources are available to help CLMs meet their reporting obligations.

During 2019–20, NSW Treasury established the reporting exemption criteria for the CLMs. Based on available information, the Department determined 31 CLMs would not meet the exemption criteria and therefore are required to prepare annual financial statements.

Six high‑risk issues were identified across the cluster in 2019–20:

• 5 of those were related to financial reporting issues identified in Property NSW, Wentworth Park Sporting Complex Land Manager, Lord Howe Island Board, Planning Ministerial Corporation and Hunter and Central Coast Development Corporation
• 1 issue was related to Lord Howe Island Board's outdated business continuity plan.

One in three internal control issues identified and reported to management in 2019–20 were repeat issues.

Recommendation:

Management letter recommendations to address internal control weaknesses should be actioned promptly, with a focus on addressing high‑risk and repeat issues.

The unprecedented bushfires and COVID‑19 pandemic presented challenges for the cluster. Agencies established taskforces or response teams to respond to these emergencies.

With more staff working from home, agencies implemented protocols and procedures to manage risks associated with the remote working arrangements, and also needed to address certain technology issues.

The Department is responsible for the new Planning System Acceleration Program, which aims to fast‑track planning assessments, boost the State's economy and keep people in jobs during COVID‑19 pandemic. Between April and October 2020, the Department announced and determined 101 major projects and planning proposals.

Crown land is an important asset of the State. Management and recognition of Crown land assets is weakened when there is confusion over who is responsible for a particular Crown land parcel.

Auditor-General's Reports to Parliament since 2017 have recommended that the Department should ensure the database of Crown land is complete and accurate. Whilst the Department has commenced actions to improve the database, this remained an issue in 2019–20.

Recommendation (repeat issue):

The Department should prioritise action to ensure the Crown land database is complete and accurate. This allows state agencies and local councils to be better informed about the Crown land they control.

Since its creation on 1 July 2019, the Department has largely established its governance arrangements, including setting up the Audit and Risk Committee and internal audit function for the Department and relevant cluster agencies.

The Department still operated three main financial reporting systems in 2019–20, and has commenced the process to consolidate some of the systems.

The recent Regional NSW MoG change led to the transfer of $446 million net assets and $284 million 2019–20 budget from the Department to the newly created Department of Regional NSW on 2 April 2020.

Section highlights

• Unqualified audit opinions were issued for all completed 30 June 2020 financial statements audits. Timeliness of financial reporting remains an issue for 13 agencies.
• Significant deficiencies were identified in Property NSW's lease data maintenance and lease calculations. Cluster agencies can also improve their management of lease information provided by Property NSW.
• The number of unprocessed Aboriginal land claims continued to increase. During 2020–21, a performance audit will assess the effectiveness and efficiency of the administration of Aboriginal land claims.

The Department has not yet developed a statutory reporting framework for Crown land managers and will need to provide additional resources to help Crown land managers meet their financial reporting obligations.

Section highlights

• Six high risk issues were identified during 2019–20 audits. One in three issues identified and reported to management in 2019–20 were repeat issues.
• The Department has fast tracked the assessment and determination of 101 projects as a part of the Planning System Acceleration Program.
• There continues to be significant deficiencies in Crown land records. The Department should ensure the Crown land database is complete and accurate.

Agencies implemented three new accounting standards during the year.

Our financial statement audits of the Department of Education (the Department) and NSW Education Standards Authority (NESA) identified issues with the leasing information provided by Property NSW (PNSW). Despite the outsourcing arrangement, both the Department and NESA remain ultimately responsible for the completeness and accuracy of this information, which would have benefited from a more thorough quality assurance, validation and review process before they placed reliance upon it.

Recommendation:

We recommend the Department and NESA:

• quality assure and validate the information provided by PNSW
• ensure changes made by PNSW to lease data are supported and that assumptions and judgements applied are appropriate
• document their review of the data supplied.

Emergency legislation was enacted during the year in response to the COVID-19 pandemic. The legislation revised the statutory reporting deadlines for agencies to submit their financial statements and allowed the Treasurer to continue authorising payments from the consolidated fund until the enactment of the 2020–21 budget.

All cluster agencies prepared their financial statements on a going concern basis and submitted their financial statements within the revised statutory deadlines.

The State provided $159.0 million in stimulus funding to support the operations of cluster agencies during emergency events. Nearly half of this funding was to support cleaning activities by the Department and the Technical and Further Education Commission (the TAFE Commission) during the COVID-19 pandemic.

The number of monetary misstatements identified in agencies' financial statements decreased to 14 (23 in 2018–19).

While the number of corrections made to the financial statements after the submission date increased to eight (two in 2018–19), it is important to note these corrections provide parliament and other users of the financial statements increased confidence in the accuracy and presentation of agencies' performance and financial position.

We identified 33 internal control issues, including 15 findings that were repeated from previous years.

A high-risk issue was reported at the Department relating to the inadequate monitoring and follow up of privileged user activity in its enterprise resource planning system – SAP.

Repeat findings relate to ongoing deficiencies in information technology controls and management policies, practices and procedures.

Recommendation:

Cluster agencies should:

• prioritise and action recommendations to address internal control deficiencies
• review and confirm the appropriateness of existing privileged user access accounts
• implement a rigorous monitoring regime to ensure that any improper use of privileged user accounts can be detected in a timely manner.

The Department established a separate bushfire relief directorate and COVID-19 Taskforce to assist and support school communities in response to recent emergencies.

Other cluster agencies have established committees or response teams to oversee and address all aspects of the impact of COVID-19.

Since 2015, the NSW Government has encouraged the use of purchasing cards by public sector agencies. Purchasing cards are efficient to transact low value, high volume procurement of goods and services, but the use must be effectively monitored.

Our review of the Department's purchasing cards identified weaknesses in its oversight and monitoring controls, including the issue and cancellation of purchasing cards

Opportunities exist for the Department to better monitor card use. Tools such as data analytics are an efficient and effective detective control to identify irregular activity or misuse by cardholders.

Recommendation:

The Department should:

• improve the accuracy and completeness of exit procedures for terminated employees to ensure cards are returned and cancelled
• perform periodic reviews to ensure active cards are held only by current employees
• set transaction limits that do not exceed the limits of the user’s financial delegation
• establish a data analytics regime to help analyse and identify high risk patterns and anomalies in their purchasing card usage, augmenting their existing monitoring and detective controls.

Section highlights

• A high-risk issue regarding inadequate monitoring of privileged user access was identified at the Department.
• We continue to observe issues by schools in relation to cash management and non-compliance with procurement guidelines and purchasing card use.
• Opportunities exist for the Department and cluster agencies to enhance their monitoring and review of purchasing card activities. Tools such as data analytics procedures provide an efficient and effective detective control, particularly when used in conjunction with independent spot-checks.

Internal control deficiencies increased by 13 per cent compared to last year. This is predominately due to a seven per cent increase in new internal control deficiencies and 24 per cent increase in repeat internal control deficiencies. There were ten high risk findings compared to four last year.

The recent emergencies have consumed agency time and resources and may have contributed to the increase in internal control deficiencies, particularly repeat deficiencies.

Agencies should:

• prioritise addressing high-risk findings
• address repeat internal control deficiencies by re-setting action plans and timeframes and monitoring the implementation status of recommendations.

A number of findings remain common across multiple agencies over the last four years, including:

• out of date or missing policies to guide appropriate decisions
• poor record keeping and document retention
• incomplete or inaccurate centralised registers or gaps in these registers.

We found deficiencies in information security controls over key financial systems including:

• user access administration deficiencies relating to inadequate oversight of the granting, review and removal of user access at 53 per cent of agencies
• privileged users were not appropriately monitored at 43 per cent of agencies
• deficient password controls that did not align to the agency's own password policies at 25 per cent of agencies.

The deficiencies above increase the risk of non-compliance with the NSW Cyber Security Policy, which requires agencies to have processes in place to manage user access, including privileged user access to sensitive information or systems and remove that access once it is not required or employment is terminated.

The response to the recent emergencies and the COVID-19 pandemic has encompassed a wide range of activities, including policy setting, on-going service delivery, safety and availability of staff, availability of IT and other systems and financial management. Agencies were required to activate their business continuity plans in response, and with the continued impact of COVID-19 have not yet returned to a business-as-usual environment.

Our audits focused on the preparedness of agency business continuity and disaster recovery planning arrangements prior to the onset of the COVID-19 pandemic.

We identified deficiencies in agency business continuity and disaster recovery planning arrangements. Twenty-three per cent of agencies had not conducted a business impact analysis (BIA) to identify critical business functions and determine business continuity priorities. Agencies can also improve the content of their BIA. For example, ten per cent of agencies' BIAs did not include recovery time objectives and six per cent of agencies did not identify key IT systems that support critical business functions. Scenario testing improves the effectiveness with which a live crisis is handled, but 40 per cent of agencies had not conducted a business continuity scenario testing exercise in the period from 1 January 2019 to 31 December 2019. There were also opportunities to improve the effectiveness of scenario testing exercises by:

• involving key dependent or inter-dependent third parties who support or deliver critical business functions
• testing one or more high impact scenarios identified in their business continuity plan
• preparing a formalpost-exercise report documenting the outcome of their scenario testing.

Agencies have responded to the recent emergencies but addressing deficiencies will ensure agencies have adequate safeguards in their processes to again respond in the future, if required.

During 2020–21 we plan to conduct a performance audit on 'Business continuity and disaster recovery planning'. This audit will consider the effectiveness of agency business continuity planning arrangements to maintain business continuity through the recent emergencies and/or COVID-19 pandemic and return to a business-as-usual environment. We also plan to conduct a performance audit on whole-of-government 'Coordination of emergency responses'.

We found agencies' governance functions could have been better informed about responses to disruptive incidents that had activated a business continuity or disaster recovery response between 1 January 2019 to 31 December 2019. For instance:

in 89 per cent of instances where a business continuity response was activated, a post-incident review had been performed. In 82 per cent of these instances, the outcomes were reported to a relevant governance or executive management committee

in 95 per cent of instances where a disaster recovery response was activated, a post incident review had been performed. In 86 per cent of these instances, the outcomes were reported to a relevant governance committee or executive management committee.

Examples of recorded incidents included extensive air quality issues and power outages due to bushfires, system and network outages, and infected and hijacked servers.

Agencies should assess their response to the recent emergencies and the COVID-19 pandemic and update business continuity, disaster recovery and other business resilience frameworks to incorporate lessons learned. Agencies should report to those charged with governance on the results and planned actions.

Agency procurement policies did not capture the requirements of several key NSW Procurement Board Directions (the Directions), increasing the risk of non-compliance with the Directions. We noted: 

• 67 per cent of agencies did specify that procurement above $650,000 must be open to market unless exempt or procured through an existing Whole of Government Scheme or contract
• 36 per cent of agencies did specify that procurements above $500,000 payable in foreign currencies must be hedged
• 69 per cent of agencies' policies did specify that the agency head or cluster CFO must authorise the engagement of consultants where the engagement of the supplier does not comply with the standard commercial framework.

Recommendation: Agencies should review their procurement policies and guidelines to ensure they capture the key requirements of the NSW Government Procurement Policy Framework, including NSW Procurement Board Directions.

Eighty-eight per cent of agencies maintain a central contract register to record all details of contracts above $150,000, which is a requirement of GIPA legislation. Of the agencies that maintained registers, 13 per cent did not capture all contracts and eight per cent did not include all relevant contract details.

Sixteen per cent of agencies did not periodically review their contract register. Timely review increases compliance with GIPA legislation, and enhances the effectiveness with which procurement business units monitor contract end dates, contract extensions and commence new procurement.

Ninety-three per cent of agencies provide training to staff involved in procurement processes, and a further 77 per cent of agencies provide this training on an on-going basis. Of the seven per cent of agencies that had not provided training to staff, we noted gaps in aspects of their procurement activity, including:

• not conducting value for money assessments prior to renewing or extending the contract with their existing supplier
• not obtaining approval from a delegated authority to commence the procurement process
• procurement documentation not specifying certain key details such as the conditions for participation including any financial guarantees and dates for the delivery of goods or supply of services.

Training on procurement activities ensures there is effective management of procurement processes to support operational requirements, and compliance with procurement directions.

As at 30 June 2020, agencies within the scope of this report reported conducting 32,239 emergency procurements with a total contract value of $316,908,485. Emergency procurement activities included the purchase of COVID-19 cleaning and hygiene supplies.

The government, through NSW Procurement released the 'COVID-19 Emergency procurement procedure', which relaxed procurement requirements to allow agencies to make COVID-19 emergency procurements. Our review against the emergency procurement measures found most agencies complied with requirements. For example:

• 95 per cent of agencies documented an assessment of the need for the emergency procurement for the good and/or service
• 86 per cent of agencies obtained authorisation of the emergency procurement by the agency head or the nominated employee under Public Works and Procurement Regulation 2019
• 76 per cent of agencies reported the emergency procurement to the NSW Procurement Board.

Complying with the procedure helps to ensure government resources are being efficiently, effectively, economically and in accordance with the law.

Recommendation: Agency procurement frameworks should be reviewed and updated so they can respond effectively to emergency situations that may arise in the future. This includes:

• updating procurement policies and guidelines to define an emergency situation, specify who can approve emergency procurement and capture other key requirements
• using standard templates and documentation to prompt users to capture key requirements, such as needs analysis, supplier selection criteria, price assessment criteria, licence and insurance checks
• having processes for reporting on emergency procurements to those charged with governance and NSW Procurement.

We found that agencies have established financial and human resources delegations, but some had not revisited their delegation manuals following the legislative and machinery of government changes. For those agencies impacted by machinery of government changes we noted:

• 16 per cent of agencies had not updated their financial delegations to reflect the changes
• 16 per cent of agencies did not update their human resources delegations to reflect the changes.

Delegations manuals are not always complete; 16 per cent of agencies had no delegation for writing off bad debts and 26 per cent of agencies had no delegation for writing off capital assets.

Recommendation: Agencies should ensure their financial and human resources delegation manuals contain regular set review dates and are updated to reflect the Government Sector Finance Act 2018, machinery of government changes and their current organisational structure and roles and responsibilities.

Agencies did not understand or correctly apply the requirements of the Government Sector Finance Act 2018 (GSF Act), resulting in non-compliance with the Act. We found that 18 per cent of agencies spent deemed appropriations without obtaining an authorised delegation from the relevant Minister(s), as required by sections 4.6(1) and 5.5(3) of the GSF Act.

Further detail on this issue will be included in our Auditor-General's Reports to Parliament on Central Agencies, Education, Health and Stronger Communities, which will be tabled throughout December 2020.

Recommendation: Agencies should review financial and human resources delegations to ensure they capture all key functions of laws and regulations, and clearly specify the relevant power or function being conferred on the officer.

Recommendations were made last year to improve transparency over reporting on gifts and benefits and improve the visibility management and those charged with governance had over actions taken to address conflicts of interest that may arise. This year, we continue to note:

• 38 per cent of agencies have not updated their gifts and benefits register to include all the key fields required under the minimum standards set by the Public Service Commission
• 56 per cent of agencies have not provided training to staff and 63 per cent of agencies have not implemented an annual attestation process for senior management
• 97 per cent of agencies have not published their gifts and benefits register on their website and 41 per cent of agencies are not reporting on trends in the gifts and benefits register to those charged with governance.

While we acknowledge the significance of the recent emergencies, which have consumed agency time and resources, we note limited progress has been made implementing these recommendations. Further detail on the status of implementing all recommendations is in Appendix 2.

Recommendation: Agencies should re-visit the recommendations made in last year's report on internal controls and governance and action these recommendations.

Section highlights

We identified ten high risk findings, compared to four last year with two findings repeated from the previous year. There was an overall increase of 13 per cent in the number of internal control deficiencies compared to last year due to a seven per cent increase in new internal control deficiencies, and a 24 per cent increase in repeat internal control deficiencies. The recent emergencies have consumed agency time and resources and may have contributed to the increase in internal control deficiencies, particularly repeat deficiencies.

We identified a number of findings that remain common across multiple agencies over the last four years. Some of these findings related to areas that are fundamental to good internal control environments and effective organisational governance. Examples include:

• out of date or missing policies to guide appropriate decisions
• poor record keeping and document retention
• incomplete or inaccurate centralised registers, or gaps in these registers.

Policies, procedures and internal controls should be properly designed, be appropriate for the current organisational structure and its business activities, and work effectively.

Section highlights

Government agencies’ financial reporting is heavily reliant on information technology (IT). We continue to see a high number of deficiencies related to IT general controls, particularly those related to user access administration. These controls are key in adequately protecting IT systems from inappropriate access and misuse.

IT is also important to the delivery of agency services. These systems often provide the data to help monitor the efficiency and effectiveness of agency processes and services they deliver. Our financial audits do not review all agency IT systems. For example, IT systems used to support agency service delivery are generally outside the scope of our financial audit. However, agencies should also consider the relevance of our findings to these systems.

Agencies need to continue to focus on assessing the risks of inappropriate access and misuse and the implementation of controls to adequately protect their systems, focussing on the processes in place to grant, remove and monitor user access, particularly privileged user access.

Section highlights

We identified deficiencies in agency business continuity and disaster recovery planning arrangements and opportunities for agencies to enhance their business continuity management and disaster recovery planning arrangements. This will better prepare them to respond to a disruption to their critical functions, resulting from an emergency or other serious event. Twenty-three per cent of agencies had not conducted a business impact analysis (BIA) to identify critical business functions and determine business continuity priorities and 40 per cent of agencies had not conducted a business continuity scenario testing exercise in the period from 1 January 2019 to 31 December 2019. Scenario testing improves the effectiveness with which a live crisis is handled.

This section focusses on the preparedness of agency business continuity and disaster recovery planning arrangements prior to the onset of the COVID-19 pandemic. While agencies have responded to the recent emergencies, proactively addressing deficiencies will ensure agencies have adequate safeguards in their processes to again respond in the future, if required.

During 2020–21 we plan to conduct a performance audit on 'Business continuity and disaster recovery planning'. This audit will consider the effectiveness of agency business continuity planning arrangements to maintain business continuity through the recent emergencies and/or COVID-19 pandemic and return to a business-as-usual environment. We also plan to conduct a performance audit on whole-of-government 'Coordination of emergency responses'.

Section highlights

We found agencies have procurement policies in place to manage procurement activity, but the content of these policies was not sufficiently detailed to ensure compliance with NSW Procurement Board Directions (the Directions). The Directions aim to ensure procurement activity achieves value for money and meets the principles of probity and fairness.

Agencies have generally implemented controls over their procurement process. In relation to emergency procurement activity, agencies reported conducting 32,239 emergency procurements with a total contract value of $316,908,485 up to 30 June 2020. Our review of emergency procurement activity conducted during 2019–20 identified areas where some agencies did not fully comply with the 'COVID-19 Emergency procurement procedure'.

We also found not all agencies are maintaining complete and accurate contract registers. This not only increases the risk of non-compliance with GIPA legislation, but also limits the effectiveness of procurement business units to monitor contract end dates, contract extensions and commence new procurement in a timely manner. We noted instances where agencies renewed or extended contracts without going through a competitive tender process during the year.

The 2019 financial statements of all ten NSW universities received unmodified audit opinions.

One controlled entity of the Western Sydney University received a qualified audit opinion.

Five NSW universities finalised their audited financial statements this year on or before the date they did last year.

New accounting standards, which changed how universities report income and treat operating leases, became effective from 1 January 2019.

Government grants as a proportion of the total income of NSW universities continued to decrease.

Fee revenue from overseas students continued to grow faster than fees from domestic students. Forty-one per cent of NSW universities' total student revenue came from overseas students from three countries.

Five NSW universities increased the proportion of revenue they receive from overseas students from a single country. Two universities sourced over 73 per cent of their total overseas student revenue from students from a single country of origin in 2019.

All six NSW universities with overseas controlled entities have devolved responsibility for governance and legislative compliance to their overseas controlled entities.

Recommendation (repeat issue): NSW universities should strengthen their governance arrangements to oversight their overseas controlled entities' legal and policy compliance functions.

The 2019 financial results for universities are reported as at 31 December. Consequently, the results for the 2019 year were unaffected by the impact of the COVID-19 pandemic.

NSW universities provided data on the COVID-19 impacted student enrolments for semester one 2020. Overall numbers of student enrolments were 5.8 per cent beneath projections. Overseas student enrolments were 13.8 per cent beneath expectations and domestic student enrolments were 2.4 per cent beneath expectations.

NSW universities are responding to the challenges presented by COVID-19 by moving course delivery online, expanding student support and introducing cost saving measures.

Our audits identified 108 internal control deficiencies in 2019 (99 in 2018).

Gaps in information technology (IT) controls comprised the majority of these deficiencies. Deficiencies included a lack of sufficient user access reviews, inadequate review and approval of change management processes, and issues with password settings.

We identified one high risk financial control deficiency at the University of New South Wales, which resulted in the University providing for a potential underpayment of casual staff salaries.

NSW universities continue to implement recommendations arising from 35 findings raised in previous years.

Five NSW universities still do not have formal processes to internally review and validate performance information published in their annual reports.

Recommendation (repeat issue): NSW universities should strengthen processes to review and validate published performance information.

Two universities have not yet implemented a cyber risk policy and three universities have not formally trained staff in cyber awareness.

Recommendation (repeat issue): NSW universities should strengthen cyber security frameworks and controls to protect sensitive data and prevent financial and reputational losses.

All universities have a procurement policy. Most universities have a documented procurement manual and contact management policy.

Recommendation: NSW universities should review their procurement and contract management policies and procedures to ensure that they are relevant and effective in reducing risk and improving purchasing outcomes.

Five universities in 2018 (five in 2017) met the target enrolment rate for students from low socio-economic status (SES) backgrounds.

Eight universities increased enrolments of students from Aboriginal and Torres Strait Islander backgrounds in 2018.

The Machinery of Government (MoG) changes abolished the former Planning and Environment cluster and former Industry cluster, and created the Planning, Industry and Environment cluster on 1 July 2019.

The Department of Planning and Environment (DPE), the Department of Industry (DOI), the Office of Environment and Heritage, and the Office of Local Government were abolished and the majority of their functions were transferred to the new Department of Planning, Industry and Environment (DPIE).

The MoG changes bring risks and challenges to the cluster. A MoG Steering Committee, with the support of various project control groups and working groups, identified and developed responses to key risks arising from the changes.

However, the DPIE will take some time to fully integrate the policies, systems and processes of the abolished Departments and agencies.

Fifty-five of the 57 agencies subject to statutory deadlines submitted their financial statements on time.

Due to issues identified during the audit, 13 financial statements audits were not completed and audit opinions issued by the statutory deadline.

Agencies prepared and submitted their early close procedures in accordance with the mandatory timeframe set by NSW Treasury. However, 17 of the 49 agencies where we reviewed early close procedures were assessed as either partially addressing or not addressing one or more of the mandatory requirements. The cluster agencies could benefit from an increased focus on early close procedures.

We noted errors in the lease data used in Property NSW's AASB 16 impact calculations, which affect both Property NSW and other government agencies. These errors were significant enough to present a risk of material misstatements to the financial statements of Property NSW and other government agencies in future reporting periods.

We had similar findings in our recent performance audit on 'Property Asset Utilisation', which highlighted issues with the quality of Property NSW's records.

Recommendation: Property NSW should urgently address the deficiencies in the lease data used to calculate the impact of the new leasing standard effective from 1 July 2019.

Despite an increase in the number of claims resolved, the number of unprocessed Aboriginal land claims increased by 7.2 per cent from the prior year to 35,855 at 30 June 2019. Claims can be made over Crown land assets of the DPIE or other government agencies. Until claims are resolved, there is an uncertainty over who is entitled to the land and the uses and activities that can be carried out on the land. We first recommended action to address unprocessed claims in 2007.

Recommendation (repeat issue): The DPIE should prioritise action to reduce unprocessed Aboriginal land claims.

One in five internal control issues identified and reported to management in 2018–19 were repeat issues.

The lack of user access review was the most common IT general control issue in the cluster.

The NSW Government announced an emergency drought relief package of $500 million in 2018, in addition to other financial assistance measures already in place.

Limited documentation and written agreements between relevant delivery agencies resulted in a $31.0 million misstatement relating to grant revenue.

Crown land is an important asset of the state. Management and recognition of Crown land assets is weakened when there is confusion over who is responsible for a particular Crown land parcel. Last year we recommended the DOI should ensure the database of Crown land is complete and accurate. While the DOI has commenced actions to improve the database, this continued to be an issue in 2018–19.

Recommendation (repeat issue): The DPIE should ensure the Crown land database is complete and accurate so state agencies and local government councils are better informed about the Crown land they control.

Unqualified audit opinions were issued for all cluster agencies' 30 June 2019 financial statements audits.

The number of corrections to disclosures in the financial statements, which increased this year, could have been reduced by a more thorough quality assurance over the information underpinning the financial statements.

Recommendation: Cluster agencies should improve their quality assurance processes for financial reporting to improve the accuracy of financial statements presented for audit.

Agencies will implement four new accounting standards shortly. Three are effective from 1 July 2019 and the fourth is effective from 1 July 2020. Cluster agencies needed to do more work on their impact assessments to better prepare for their implementation from 1 July 2019.

Recommendation: Cluster agencies should finalise their plans to implement the new accounting standards as soon as possible.

All cluster agencies met the statutory deadline for completing early close procedures and submitting their financial statements for audit.

The Department of Education (the Department) delays tabling its financial statements in parliament so it can report its operational outcomes, which are aligned to the calendar year, in a single report. This reduces transparency over the Department's financial statements as they are tabled more than ten months after the end of the financial year.

Recommendation: The Department should table its financial statements in parliament earlier, in line with other NSW Government agencies.

We identified 55 internal control issues, including 14 findings that were repeated from the previous year.

Issues were identified with user access administration, segregation of duties in the Department's key application system and timely preparation and review of key reconciliations.

Recommendation: Cluster agencies should prioritise and action recommendations to address internal control weaknesses.

Our review of a selection of NSW schools identified deficiencies in how they applied the Department of Education's ‘Finance in Schools Handbook’, resulting in control weaknesses in key areas such as governance, cash management and procurement.

Recommendation: The Department should ensure all schools apply the Department’s ‘Finance in Schools Handbook’ as it is a key internal control.

The NSW Government announced its intention to integrate Roads and Maritime Services (RMS) into Transport for NSW (TfNSW) as part of the Machinery of Government changes.

This change was not included in the Administrative Orders as the Transport Administration Act 1988 No. 109 governs the composition of the Transport cluster. The Transport Administration Amendment (RMS Dissolution) Act 2019 (the Act) received assent on 22 November 2019. The Act dissolves RMS and transfers the assets, rights and liabilities of RMS to TfNSW. As at the date of this Report, the Act is not yet in force.

Transport is considering the impact of the changes on its operating model and financial reporting.

Unqualified audit opinions were issued on the 2018–19 financial statements of all agencies in the Transport cluster.

TfNSW and Sydney Metro obtained a three-week extension from NSW Treasury to submit their financial statements for audit to resolve accounting issues surrounding the valuation of property, plant and equipment.

The Department of Transport reported total consolidated property, plant and equipment of $158 billion at 30 June 2019. In 2018–19, there were issues with asset valuations at TfNSW, RMS, Sydney Metro and Rail Corporation New South Wales (RailCorp), resulting in adjustments after the submission of financial statements for audit and the correction of a prior period error.

There was also a prior period error resulting from an agreement between TfNSW and the former UrbanGrowth Development Corporation due to a lack of assessment of the financial reporting implications at the time of signing the agreement.

Recommendation: Agency finance teams need to be consulted on major business decisions and commercial transactions to assess their accounting impacts at the time of their execution, rather than at the end of a financial year. Agencies also need to resolve all key accounting issues such as valuations as part of the early close procedures.

This would improve the quality of financial reporting and avoid the need for extensions for agencies to submit their financial statements for audit.

Whilst agencies complied with the requirements of the accounting standards and NSW Treasury policies on valuations, the Audit Office identified some deficiencies in relation to asset valuations across the cluster.

TfNSW reported a retrospective correction of a prior period error at 1 July 2017 which resulted in a reduction in the valuation of its Country Rail Network earthworks by $2.1 billion. This was due to survey results which identified the earthworks were flatter and lower than estimated in the valuation at 30 June 2017.

RMS made several adjustments during the year to correct asset values due to changes to valuation assumptions or data improvements. This included:

• reduction of $318 million in the value of land under roads
• decrease of $84.9 million to the value of land and buildings
• changes to the value of traffic control and traffic signal network assets, due to data improvements.

Sydney Metro North West officially opened in May 2019 and reported total assets of $9.1 billion. Sydney Metro derecognised $322 million in assets constructed to facilitate its operation but transferred to councils and utilities.

There was an inconsistency identified in the cluster relating to the valuation of substratum land. In 2018–19, RailCorp derecognised $109 million of substratum land to ensure consistency in its approach with other Transport agencies.

As the parent entity, the Department of Transport needs to ensure accounting policies are consistently applied across all controlled entities for consolidation purposes. Inconsistencies in the application of accounting standards across agencies will impact comparability of financial reporting and decision making across the Transport cluster.

Recommendation: The Department of Transport should ensure consistent accounting policies are applied across its controlled entities.

Public transport passenger revenue increased by $89.0 million (5.9 per cent) in 2018–19, and patronage increased by 37.8 million (4.9 per cent) across all modes of transport based on data provided by TfNSW.

The increase in revenue is mainly due to an increase in patronage as well as the annual increase in fares.

Negative balance Opal cards resulted in $2.9 million in revenue not collected in 2018–19 ($10.4 million since the introduction of Opal).

In January 2019, Transport made a change to the Sydney Airport stations to prevent customers with high negative balances exiting the station. In addition, in late 2018, Transport increased the minimum top up values for new cards at the airport stations.

Recommendation (repeat): TfNSW should implement further measures to prevent the loss of revenue from passengers tapping off with negative balance Opal cards.

Twenty-six per cent of Transport employees have annual leave balances exceeding 30 days. Of the employees with excess leave balances, 732 (10.3 per cent) did not take any annual leave in 2018–19.

Recommendation (repeat): Transport entities should further review the approach to managing excess annual leave in 2019–20. They should:

• monitor current and projected leave balances to the end of the financial year each month
• agree formal leave plans with employees to reduce leave balances over an acceptable timeframe
• ensure leave plans are actioned appropriately
• encourage all staff with excess leave balances take a minimum two-week period of leave per year.

There are no centralised processes to record all significant contracts and agreements in a register across the Transport cluster.

Across the Transport cluster, contracts and agreements are maintained by the individual agencies using disparate registers. Agencies must perform detailed assessments of their existing contracts and agreements to quantify the impact of the new accounting standards (AASB 16 ‘Leases’, AASB 15 ‘Revenue from Contracts with Customers’, AASB 1058 ‘Income of Not-for-Profit Entities’ and AASB 1059 'Service Concession Arrangements: Grantors').

In 2018–19, there was also a prior period error resulting from an agreement between TfNSW and another government agency due to a lack of assessment of the financial reporting implications at the time of signing the agreement.

A lack of a complete register of all contracts and agreements increases the risk that agencies may not be able to assess the full impact of the new accounting standards, as well as perform a complete assessment of the financial reporting implications of contracts and agreements.

Recommendation: Transport agencies should implement a process to centrally capture all significant contracts and agreements entered. This will ensure:

• agencies are fully aware of contractual and other obligations
• appropriate assessment of financial reporting implications
• assessment of new accounting standards, in particular AASB 16 ‘Leases’, AASB 15 'Revenue from Contract with Customers', AASB 1058 'Income of Not-for-Profit Entities ' and AASB 1059 'Service Concession Arrangements: Grantors' are accurate and complete.