The Auditor-General for New South Wales, Margaret Crawford, released a report today on whether the Department of Communities and Justice (the department) effectively supports the efficient operation of the District Criminal Court system.

The audit found that in the provision of data and technology services, the department is not effectively supporting the efficient operation of the District Criminal Court system. The department has insufficient controls in place to ensure that data in the system is always accurate.

The department is also using outdated technology and could improve its delivery of technical support to courts.

The audit also assessed the implementation of the Early Appropriate Guilty Pleas reform. This reform aims to improve court efficiency by having more cases resolved earlier with a guilty plea in the Local Court. The audit found that the department effectively governed the implementation of the reform but is not measuring achievement of expected benefits, placing the objectives of the reform at risk.

The Auditor-General made seven recommendations to the department, aimed at improving the controls around courts data, reporting on key performance indicators, improving regional technical support and measuring the success of the Early Appropriate Guilty Pleas reform. 

The District Court is the intermediate court in the New South Wales court system. It hears most serious criminal matters, except murder, treason and piracy. The Department of Communities and Justice (the Department) provides support to the District Court in a variety of ways. For example, it provides security services, library services and front-desk services. This audit examined three forms of support that the Department provides to the District Court:

• data collection, reporting and analysis - the Department collects data from cases in its case management system, JusticeLink, based on the orders Judges make in court and court papers
• technology - the Department provides technology to courts across New South Wales, as well as technical support for this technology
• policy - the Department is responsible for proposing and implementing policy reforms.

Recent years have seen a worsening of District Court efficiency, as measured in the Productivity Commission's Report on Government Services (RoGS). Efficiency in the court system is typically measured through timeliness of case completion. There is evidence that timeliness has worsened. For example, the median time from arrest to finalisation of a case in the District Court increased from 420 days in 2012–13 to 541 days in 2017–18.

As a result, the government has announced a range of measures to improve court performance, particularly in the District Court. These measures included the Early Appropriate Guilty Pleas (EAGP) reform. One of the objectives of EAGP is to improve court efficiency, which would be achieved by having more cases resolve with a guilty plea in the Local Court.

This audit assessed whether the Department of Communities and Justice effectively supports the efficient operation of the District Criminal Court system. We assessed this with the following lines of inquiry:

• Does the Department effectively collect, analyse and report performance information relevant to court efficiency?
• Does the Department effectively provide technology to support the efficient working of the courts?
• Does the Department have effective plans, governance and monitoring for the Early Appropriate Guilty Pleas reform?

The audit did not consider other support functions provided by the Department. Further information on the audit, including detailed audit criteria, may be found in Appendix two.

The Department is responsible for providing technology to the courts, which can improve the efficiency of court operations by making them faster and cheaper. The Department is also responsible for providing technical support to courtrooms and registries. It is important that technical support is provided in a timely manner because some technical incidents can delay court sittings and thus impact on court efficiency. A 2013 Organisation for Economic Co‑operation and Development report emphasised the importance of technology and digitisation for reducing trial length.

While the Department may provide technology to the courts, they are not responsible for deciding when, how or if the technology is used in the courtroom.

The Department is using a significant amount of outdated technology, risking court delays

As of April 2019, the whole court system had 2,389 laptops or desktop computers out of warranty, 56.0 per cent of the court system's fleet. The court system also had 786 printing devices out of their normal warranty period, 75.1 per cent of all printers in use. The Department also advised that many of its court audio transcription machines are out of date. These machines must be running for the court to sit and thus it is critical that they are maintained to a high degree. The then Department of Justice estimated the cost of aligning its hardware across the whole Department with desired levels at $14.0 million per year for three years. Figures for the court system were not calculated but they are likely to be a significant portion of this figure.

Using outdated technology poses a risk to the court system as older equipment may be more likely to break down, potentially delaying courts or slowing down court services. In the court system throughout 2018, hardware made up 30.8 per cent of all critical incidents reported to technical support and 41.9 per cent of all high priority incidents. In addition, 16.2 per cent of all reported issues related to printing devices or printing.

From 2017 to 2018, technical support incidents from courts or court services increased. There were 4,379 technical support incidents in 2017, which increased significantly to 9,186 in 2018. The Department advised that some outside factors may have contributed to this increase. The Department was rolling out its new incident recording system throughout 2017, meaning that there would be an under‑reporting of incidents in that year. The Department also advised that throughout 2018 there was a greater focus on ensuring that every issue was logged, which had not previously been the case. Despite these factors, the use of outdated technology has likely increased the risk of technology breakages and may have contributed to the increase in requests for technical support.

Refreshing technology on a regular basis would reduce the risk of hardware failures and ensure that equipment is covered by warranty.

The Department did not meet all court technical support targets in 2017 and 2018

The Digital and Technology Services branch (DTS) was responsible for providing technical support to the courts and the Courts and Tribunal Services branch prior to July 2019. DTS provided technical support in line with a Service Level Agreement (SLA) with the Department. In 2017, DTS did not provide this support in a timely manner. Performance improved in 2018, though DTS fell short of its targets for critical and moderate priority incidents. Exhibit 7 outlines DTS' targets under the SLA.

Critical incidents are particularly important for the Department to deal with in a timely manner because these include incidents which may delay a court sitting until resolved or incidents which impact on large numbers of staff. Some of the critical incidents raised with DTS specifically stated that they were delaying a court sitting, often due to transcription machines not working. High priority incidents include those where there is some impact on the functions of the business, which may in turn affect the efficiency of the court system. High priority incidents also include those directly impacting on members of the Judiciary. 

This audit examined DTS' performance against its SLA in the 2017 and 2018 calendar years across the whole court system, not just the District Court. The total number of incidents, as well as critical and high priority incidents, can be seen in Exhibit 8.

The Department's results against its SLA in 2017 and 2018 are shown in Exhibit 9.

The Early Appropriate Guilty Pleas (EAGP) reform consists of five main elements:

• early disclosure of evidence from NSW Police Force to the prosecution and defence
• early certification of what the accused is going to be charged with to minimise changes
• mandatory criminal case conferencing between the prosecutor and accused's representation
• changes to Local Court case management
• more structured sentence discounts.

More detailed descriptions of each of these changes can be found in the Introduction. These reform elements are anticipated to have three key effects:

• accelerate the timing of guilty pleas
• increase the overall proportion of guilty pleas
• decrease the average length of contested trials.

Improving District Court efficiency is one of the stated aims of EAGP, which would be achieved by having more cases resolve in the Local Court and having fewer defendants plead guilty on the day of their trial in the District Court. The reform commenced in April 2018 and it is too early to state the impact of this reform on District Court efficiency.

The Department is responsible for delivering EAGP in conjunction with other justice sector agencies. They participated in the Steering Committee and the Working Groups, as well as providing the Project Management Office (PMO).

The Department is not measuring the economic benefits stated in the EAGP business case

The business case for EAGP listed nine quantifiable benefits which were expected to be derived from the achievement of the three key effects listed above. The Department is not measuring one of these benefits and is not measuring the economic benefits for five more, as shown in Exhibit 12.

Benefit	Economic benefit (over ten years)	Being measured?
Accelerated timing of guilty pleas	$54.6m
Increased guilty plea rate	$90.7m
Decreased average trial length	$27.5m
A reduction in the delay of indictable matters proceeding to trial	N/A
Increase the number of finalised matters per annum	N/A
Reduction of the current backlog of criminal trials in the District Court	N/A
Reduction in bed pressure on the correction system due to reduced average time in custody	$13.7m
Productivity improvements due to reduction in wasted effort	$53.3m
Bankable cost savings due to jury empanelment avoided	$2.5m

Exhibit 12: The Department's measurement of quantifiable benefits

Key

Measuring

Not measuring economic benefit

Not measuring

While it is too early to comment on the overall impact of EAGP, better practice in benefits realisation involves an ongoing effort to monitor benefits to ensure that the reform is on target and determine whether any corrective action is needed.

The Department is measuring the number of finalised matters per annum and while the Department is not measuring the reduction in the backlog as part of this program, this measure is reported as part of the Department's internal reporting framework. The Department is not monitoring the reduction in delay of indictable matters proceeding to trial directly as part of this reform, but this does form part of the monthly Operational Performance Report which the Department sends to the EAGP Steering Committee.

The Department is not monitoring any of the economic benefits stated in the business case. These economic benefits are a mixture of bankable savings and productivity improvements. This amounts to a total of $242.3 million over ten years which was listed in the business case as potential economic benefits from the implementation of this reform against the total cost of $206.9 million over ten years. The Department is collecting proxy indicators which would assist in these calculations for several indicators, but it is not actively monitoring these savings. For example, the Department is monitoring average trial length, but is not using this information to calculate economic benefits derived from changes in trial length.

The Department is also not collecting information related to the average length of custody as part of this program. This means that it is unable to determine if EAGP is putting less pressure on the correctives system and it is not possible for the Department to calculate the savings from this particular benefit.

While stakeholders are optimistic about the impact of EAGP, not measuring the expected benefits stated in the business case means that the Department does not know if the reform is achieving what it was designed to achieve. Further, the Department does not know if it must take corrective action to ensure that the program achieves the stated benefits. These two things put the overall program benefits at risk.

The Department has not assigned responsibility for the realisation of each benefit stated in the business case. The Department holds the Steering Committee responsible for the realisation of all benefits. Benefits realisation is the process which ensures that the agency reaches benefits as stated in the business case. Assigning responsibility for benefits realisation to the Steering Committee rather than individuals is not in line with good practice.

Good practice benefits realisation involves assigning responsibility for the realisation of each benefit to an individual at the business unit level. This ensures there is a single point of accountability for each part of the program with knowledge of the benefit and the ability to take corrective action if it looks like that benefit will not be realised. This responsibility should sit at the operational level where detailed action can most easily be undertaken. The role of a Steering Committee in benefits realisation is to ensure that responsible parties are monitoring their benefits and taking appropriate corrective action.

The Department advised that it believes the Steering Committee should have responsibility for the realisation of benefits due to the difficulty of attributing the achievement of each benefit to one part of the reform alone. Given the Steering Committee meets only quarterly, it is not well placed to take action in response to variances in performance.

BOCSAR are planning to undertake an overall evaluation of EAGP which is planned for release in 2021. Undertaking this evaluation will require high quality data to gain an understanding of the drivers of the reform. However, data captured throughout the first year of EAGP has proven unreliable, which may reduce the usefulness of BOCSAR's evaluation. These data issues were discussed in Exhibit 5 in Chapter 2, above. Access to accurate data is vital for conducting any program evaluation and inaccurate data raises the risk that the BOCSAR evaluation will not be able to provide an accurate evaluation of the impact of EAGP.

In addition to the BOCSAR evaluation, the Department had plans for a series of 'snapshot' evaluations for some of the key elements of the reform to ensure that they were operating effectively. These were initially delayed due to an efficiency dividend which affected EAGP. In August 2019, the Department commissioned a review of the implementation of several key success factors for EAGP.

The implementation stage of EAGP had clear governance, lines of authority and communication. The Steering Committee, each Working Group and each agency had clear roles and responsibilities, and these were organised through a Project Management Office (PMO) provided by the former Department of Justice. The governance structure throughout the implementation phase can be seen at Exhibit 13.

The Steering Committee was established in December 2016 and met regularly from March 2017. It comprised senior members of key government agencies, as well as the Chief Judge and the Chief Magistrate for most of the duration of the implementation period. The Steering Committee met at least monthly throughout the life of the program. The Steering Committee was responsible for overseeing the delivery of EAGP and making key decisions relating to implementation, including spending decisions. The Chief Judge and the Chief Magistrate abstained from financial decisions. The Steering Committee updated the governance and membership of the Steering Committee as appropriate throughout the life of the reform.

Appendix one – Response from agency
 
Appendix two – About the audit 

Appendix three – Performance auditing 

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Parliamentary Reference: Report number #329 - released 18 December 2019

The Auditor-General for New South Wales, Margaret Crawford, released her report today on the results of the financial audits of NSW Government central agencies, namely the Premier and Cabinet, Treasury and Customer Service clusters. There are 191 agencies in these clusters, including government financial, superannuation and insurance entities.

Unqualified audit opinions were issued on the financial statements for all agencies in the clusters. There were two high risk and 99 moderate risk audit findings on internal controls. Of these, 31 percent were repeat issues, and most related to weaknesses in information technology access controls.

The report notes a number of audit observations including:

• a qualified opinion on information technology internal controls at an outsourced service provider
• self-insurance losses of $1.4 billion partly due to unfavourable movements in the risk free discount rate, and increases in workers compensation claims, including psychological injury claims
• a shortfall (unfunded liability) of $637 million at 30 June 2019 in the Home Building Compensation Fund, due to premiums not being sufficient to meet costs of the scheme
• agencies self-assessed against the Australian Cyber Security Centre’s ‘Essential 8’ cyber risk mitigation strategies for the first time in 2018-19. Based on their own self assessments, more work needs to be done to improve cyber security resilience.

This report analyses the results of our financial statement audits of the Treasury, Premier and Cabinet and Customer Service clusters for the year ended 30 June 2019. Our key observations are summarised below.

This report provides parliament and other users of the NSW Government's central agencies and their cluster agencies financial statements with the results of our audits, observations, analysis, conclusions and recommendations in the following areas:

• financial reporting
• audit observations
• government financial services.

Central agency clusters were significantly impacted by Machinery of Government changes which took effect on 1 July 2019. This report is focussed on agencies now in the Treasury, Premier and Cabinet and Customer Service clusters. Some of these agencies may have been in another cluster during 2018–19. Please refer to the section on Machinery of Government changes for more details.

Central agencies and their key responsibilities are set out below.

Machinery of Government (MoG) refers to how the government organises the structures and functions of the public service. MoG changes are where the government reorganises these structures and functions and they are given effect by Administrative orders.

The MoG changes announced following the NSW State election on 23 March 2019 significantly impacted Central Agencies’ clusters through Administrative Changes Orders issued on 2 April 2019 and 1 May 2019. These orders took effect on 1 July 2019.

Financial reporting is an important element of good governance. Confidence and transparency in public sector decision making are enhanced when financial reporting is accurate and timely.

This chapter outlines our audit observations on the 2019 financial reporting of agencies in the Treasury, Premier and Cabinet, and Customer Service clusters.

Appropriate financial controls help ensure the efficient and effective use of resources and administration of agency policies. They are essential for quality and timely decision making.

This chapter outlines our observations and insights from our financial statement audits of agencies in the Treasury, Premier and Cabinet and Customer Service clusters.

Background

This chapter outlines our audit observations, conclusions and recommendations specific to NSW Government agencies providing financial services.

Appendix one – Timeliness of financial reporting by agency

Appendix two – Management letter findings by agency

Appendix three – Status of 2018 recommendations

Appendix four – Cluster agencies

Appendix five – Financial data

Copyright notice

© Copyright reserved by the Audit Office of New South Wales. All rights reserved. No part of this publication may be reproduced without prior consent of the Audit Office of New South Wales. The Audit Office does not accept responsibility for loss or damage suffered by any person acting on or refraining from action as a result of any of this material.

A report has been released on the NSW Stronger Communities cluster.

From 1 July 2019, the functions of the former Department of Justice, the former Department of Family and Community Services and many of the cluster agencies moved to the new Stronger Communities cluster. The Department of Communities and Justice is the principal agency in the new Stronger Communities cluster.

The report focuses on key observations and findings from the most recent financial audits of agencies in the Stronger Communities cluster.

Unqualified audit opinions were issued on the financial statements for all agencies in the cluster.  

There were 157 audit findings on internal controls. Two of these were high risk and 59 were repeat findings from previous financial audits. ‘Cluster agencies should prioritise actions to address internal control weaknesses promptly with particular focus given to issues that are assessed as high risk’, the Auditor-General said.

The report notes that the NSW Government’s new workers' compensation legislation, which gave eligible firefighters presumptive rights to workers' compensation, cost emergency services agencies $180 million in 2018–19, mostly in increased premiums.

Download the PDF version of report

This report analyses the results of our audits of financial statements of the agencies comprising the Stronger Communities cluster for the year ended 30 June 2019. The table below summarises our key observations.

This report provides parliament and other users of the financial statements of agencies in the Stronger Communities cluster with the results of our audits, our observations, analyses, conclusions and recommendations in the following areas:

• financial reporting
• audit observations.

This cluster was significantly impacted by the Machinery of Government (MoG) changes on 1 July 2019. This report focuses on the agencies that from 1 July 2019, comprised the Stronger Communities cluster. The MoG changes moved some agencies from the clusters to which they belonged in 2018–19 to the Stronger Communities cluster. Conversely, the MoG also moved some agencies formerly in the Family and Community Services cluster and Justice cluster elsewhere. Please refer to the section on Machinery of Government changes for more details.

The Department of Communities and Justice is the principal agency of the cluster. The newly created department combines functions of the former Department of Justice and the Department of Family and Community Services.

Machinery of Government (MoG) refers to how the government organises the structures and functions of the public service. MoG changes occur when the government reorganises these structures and functions and those changes are given effect by Administrative Orders.

The MoG changes announced following the NSW State election on 23 March 2019 significantly impacted the Stronger Communities cluster through Administrative Changes Orders issued on 2 April 2019 and 1 May 2019. These orders took effect on 1 July 2019.

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 relating to the financial reporting of agencies in the Stronger Communities cluster for 2019.

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 Stronger Communities cluster.

Appendix one – Timeliness of financial reporting by agency

Appendix two – Management letter findings by agency

Appendix three – List of 2019 recommendations 

Appendix four – Status of 2018 recommendations 

Appendix five – Cluster agencies 

Appendix six – Financial data 

Copyright notice

© Copyright reserved by the Audit Office of New South Wales. All rights reserved. No part of this publication may be reproduced without prior consent of the Audit Office of New South Wales. The Audit Office does not accept responsibility for loss or damage suffered by any person acting on or refraining from action as a result of any of this material.

This report covers the findings and recommendations from the 2018–19 financial audits that relate to internal controls and governance at 40 of the largest agencies in the NSW public sector. The 40 agencies selected for this report constitute around 84 per cent of total expenditure for all NSW public sector agencies.

The report provides insights into the effectiveness of controls and governance processes across the NSW public sector. It evaluates how agencies identify, mitigate and manage risks related to:

• financial controls
• information technology controls
• gifts and benefits
• internal audit
• contingent labour
• sensitive data.

The Auditor-General recommended that agencies do more to prioritise and address vulnerabilities in their internal controls and governance. The Auditor-General also recommended agencies increase the transparency of their management of gifts and benefits by publishing their registers on their websites.

This report analyses the internal controls and governance of 40 of the largest agencies in the NSW public sector for the year ended 30 June 2019.

1. Internal control trends

2. Information technology controls

3. Gifts and benefits

4. Internal audit

5. Managing contingent labour

6. Managing sensitive data

This report covers the findings and recommendations from our 2018–19 financial audits that relate to internal controls and governance at 40 of the largest agencies (refer to Appendix three) in the NSW public sector. The 40 agencies selected for this volume constitute around 84 per cent of total expenditure for all NSW public sector agencies.

Although the report includes several agencies that have changed as a result of the Machinery of Government changes that were effective from 1 July 2019, its focus on sector wide issues and insights means that its findings remain relevant to NSW public sector agencies, including newly formed agencies that have assumed the functions of abolished agencies.

This report offers insights into internal controls and governance in the NSW public sector

This is the third report dedicated to internal controls and governance at NSW State Government agencies. The report provides insights into the effectiveness of controls and governance processes in the NSW public sector by:

• highlighting the potential risks posed by weaknesses in controls and governance processes
• helping agencies benchmark the adequacy of their processes against their peers
• focusing on new and emerging risks, and the internal controls and governance processes that might address those risks.

Without strong governance systems and internal controls, agencies increase the risks associated with effectively managing their finances and delivering services to citizens. For example, if they do not have strong information technology controls, sensitive information may be at risk of unauthorised access and misuse.

Areas of specific focus of the report have changed since last year

Last year's report topics included transparency and performance reporting, management of purchasing cards and taxi use, and fraud and corruption control. We are reporting on new topics this year and re-visiting agency management of gifts and benefits, which we first covered in our 2017 report. Re-visiting topics from prior years provides a baseline to show the NSW public sectors’ progress implementing appropriate internal controls and governance processes to mitigate existing, new and emerging risks in the public sector.

Our audits do not review all aspects of internal controls and governance every year. We select a range of measures and report on those that present heightened risks for agencies to mitigate. This year the report focusses on:

• internal control trends
• information technology controls, including access to agency systems
• protecting sensitive information held within agencies
• managing large and diverse workforces (controls around employing and managing contingent workers)
• maintaining an ethical culture (management of gifts and benefits)
• effectiveness of internal audit function and its oversight by Audit and Risk Committees.

The findings in this report should not be used to draw conclusions on the effectiveness of individual agency control environments and governance arrangements. Specific financial reporting, internal controls and audit observations are included in the individual 2019 cluster financial audit reports, which will be tabled in parliament from November to December 2019.

Internal controls are processes, policies and procedures that help agencies to:

• operate effectively and efficiently
• produce reliable financial reports
• comply with laws and regulations
• support ethical government.

This chapter outlines the overall trends for agency controls and governance issues, including the number of audit findings, the degree of risk those deficiencies pose to the agency, and a summary of the most common deficiencies we found across agencies. The rest of this report presents this year’s controls and governance findings in more detail.

This chapter outlines our audit observations, conclusions and recommendations, arising from our review of agency controls to manage key financial systems.

This chapter outlines our audit observations, conclusions and recommendations, arising from our review of agency controls to manage gifts and benefits. 

This chapter outlines our audit observations, conclusions and recommendations, arising from our review of agency internal audit functions.

This chapter outlines our audit observations, conclusions and recommendations, arising from our review of agency controls to on-board, manage and off-board contingent labour.

This chapter outlines our audit observations, conclusions and recommendations, arising from our review of governance and processes in relation to the management of sensitive data.

Appendix one – List of 2019 recommendations 

Appendix two – Status of 2018 recommendations

Appendix three – In-scope agencies

© Copyright reserved by the Audit Office of New South Wales. All rights reserved. No part of this publication may be reproduced without prior consent of the Audit Office of New South Wales. The Audit Office does not accept responsibility for loss or damage suffered by any person acting on or refraining from action as a result of any of this material.

The Auditor-General, Margaret Crawford, has released her report on the State Finances for the year ended 30 June 2019.

‘I am pleased to once again report that I issued an unmodified audit opinion on the State’s consolidated financial statements,’ the Auditor-General said.

The report acknowledges NSW Treasury and agency efforts to reduce the number and value of errors compared with the previous year. ‘Strong financial management and transparent reporting are key elements of our system of government. Treasury and agency finance teams need to be consulted on major business decisions at the time of their execution. This will ensure agencies assess the accounting implications earlier and support accurate financial statements being presented for audit on a timely basis,’ said the Auditor-General.

The report summarises the financial audit result of the Total State Sector Accounts. The Total State Sector comprises 304 entities controlled by the NSW Government with total assets of $468 billion and total liabilities of $218 billion.

The General Government sector comprises 212 entities that provide goods and services that are funded centrally by the State. General Government expenditure grew by 5.5 per cent in 2018-19, which was below the long-term revenue growth of 5.6 per cent target established by the Fiscal Responsibility Act 2012.

Download PDF of State Finances 2019 report

Pursuant to the Public Finance and Audit Act 1983, I present my Report on State Finances 2019.

Strong financial management and transparent reporting are key elements of our system of government.

I am pleased to once again report that I issued an unmodified audit opinion on the State’s consolidated financial statements. 

The number of errors in agencies’ 2018–19 financial statements fell to six compared to the 23 recorded in 2017–18. This reflects Treasury’s focus on early close and the resolution of complex accounting matters before submission. 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. This would improve the quality of financial reporting and avoid the need for extensions for agencies to submit their financial statements for audit.

To further increase transparency, a Key Audit Matters section was included in my Independent Auditor Report on the Total State Sector Accounts this year. This explains those matters considered most significant to the conduct of the audit and requiring significant management judgement.

Looking forward, certain factors have the potential to impact the accuracy and completeness of the Total State Sector Accounts in coming years. First, three new accounting standards are effective from 1 July 2019 and a fourth from 1 July 2020. Transitioning to new standards requires significant planning and resources to ensure the impacts are appropriately assessed and accounted for. Second, the Government Sector Finance Act 2018 will be implemented in stages over three years to 2020–21. This Act is intended to focus on performance, transparency, accountability, and efficiency of financial management in the government sector. I encourage agencies to build their awareness of this important reform and ensure their alignment with the principles of the Act. 

I want to thank Treasury staff for the way they engaged with my staff in the conduct of the audit. Our partnership is critical to ensuring the quality of financial management and reporting.

Margaret Crawford
Auditor-General, 10 October 2019

Our audit opinion on the State’s 2018–19 financial statements was unmodified. There were fewer reported errors but earlier resolution of accounting matters is still required.

Our audit opinion on the State’s 2018–19 financial statements was unmodified.

This year, six errors exceeding $20 million were found in agencies’ 2018–19 financial statements that make up the State’s consolidated financial statements. The total value of these errors was $927 million compared to $3.8 billion in 2017–18. The errors identified in 2018–19 resulted from:

• incorrectly applying Australian Accounting Standards and Treasury Policies
• using inappropriate assumptions and inaccurate data
• incorrectly assessing the fair value of non-current physical assets.

The introduction of mandatory ‘early close procedures’ in 2011–12, saw the number of errors in agencies’ financial statements fall progressively, to a low of five in 2015–16.

In 2016–17, Treasury narrowed the scope of its mandatory early close procedures to focus on non-current physical asset valuations and pro-forma financial statements. Following this, the number of significant errors increased to 23 in 2017–18, the

highest number in six years and similar to the numbers identified before mandatory early close procedures were introduced.

In 2018–19, Treasury and agencies’ refocused their efforts around early close procedures and other year-end processes resulting in this year’s lower error total of six.

Errors in agency financial statements exceeding $20m (2015–2019)

Correction of prior year’s reported values    

Correction of earthwork assets ($2.1 billion)

Some of the State’s earthworks were first valued in 2016–17. These included earth excavations and embankments for the Country Rail and Metropolitan Network created before the year 2000 and dating back to the early 1900s.

For many years, the State did not account for earthworks because it believed the value could not be reliably measured. In 2016–17, the State engaged an external valuer who identified a methodology showing the earthworks could be valued. That valuer performed a valuation using topography maps for the Country Rail Network (CRN) because information in this earthworks database was of poor quality and incomplete. The valuation resulted in the State recognising $7.5 billion of earthworks for the first time in 2016–17. This was disclosed as a prior period error.

Over the following years, the State improved the quality of the CRN earthworks database by engaging an engineering firm to perform more detailed earthworks surveys. The work involved the use of technology to survey most of the CRN lines.

In 2018–19, the State once again engaged an external valuer to assess the fair value of the CRN earthworks. The valuer determined that incorrect assumptions were used in the 2016–17 valuation. These primarily related to land elevations, which were corrected in the earthworks database and this resulted in a new fair value of $5.4 billion, $2.1 billion less than the previous valuation. The error reported in the 2017–18 value has been corrected in the 2018–2019 financial statements to reflect the revised value.

Previously reported value for earthworks reduced from $7.5 billion to $5.4 billion.

Correction of museum collection assets ($27 million)

The Australian Museum’s collection assets were restated by $27 million to $800 million in 2017–18.

After the 2017–18 financial statements were published, the Australian Museum identified additional collection assets that were not included in the original valuation. This resulted in a $27 million error relating to collection asset values. As last year’s valuation was based on an incomplete listing of collection assets, the 2017-18 value has been corrected in the 2018–19 financial statements to reflect the revised value.

Correction of lease liability ($46.2 million)

On 1 July 1995, the Department of Justice entered into a 25-year lease arrangement with an option to extend for a further 15 years.

The Department accounted for the arrangement as a finance lease by recognising a building asset and a corresponding finance lease liability for the period of 25 years. The Department depreciated the leased asset based on a useful life of 40 years.

As it was reasonably certain the Department would exercise the lease option at inception, it should have recognised a liability that reflected the entire 40 year lease period. To correct the prior year error and properly reflect the extended lease period, the Department of Justice increased the lease liability and decreased retained earnings by $46.2 million as at 1 July 2017.

Abuse Claims remain a significant contingent liability of the State

The State discloses a contingent liability in its financial statements when the possibility of settling the liability in the future is considered less than probable, but more likely than remote, or the amount of the obligation cannot be measured with sufficient reliability.

If the expected settlement subsequently becomes probable and reliably estimable, a provision is recognised.

The State has numerous contingent liabilities. Some are quantifiable while others are not. As contingent liabilities are potentially material future liabilities of the State, every effort should be made to quantify these as accurately as possible. They also need to be monitored closely to ensure that they are recognised and brought on balance sheet as they crystallise.

At 30 June 2019, NSW Self Insurance Corporation (SiCorp) could not reliably measure the claims liability arising from past incidences of abuse that occurred within NSW Government institutions which have not yet been reported. These are referred to as incurred but not reported claims (IBNR).

Since 1 July 2018, victims of child sexual abuse can opt to claim compensation through the National Redress Scheme, or to lodge a civil claim. Civil claims for incidents that occurred within NSW Government institutions may be covered by SiCorp. An estimate of an IBNR for child abuse claims within SiCorp will be impacted by the extent that victims claim compensation through redress as compared to civil claims.

Recent legislative changes have added further uncertainty to estimating the extent of IBNR claims. SiCorp requires more reliable data on the number of IBNR child abuse claims and the expected average size of the related payments. As such, the liabilities presented in the SiCorp and the State financial statements do not include an allowance for IBNR abuse claims.

As more information becomes available it may be possible for SiCorp to reasonably estimate the value of abuse claim liabilities. It is possible that such an estimate may be material to SiCorp and the State’s financial statements. 

TAFE update

In prior years we reported on information system limitations at TAFE NSW, specifically relating to its student administration system. TAFE NSW continues to implement additional processes to verify the accuracy and completeness of revenue from student fees for the 2018–19 financial year.

In 2017–18 TAFE NSW started implementing a new student management system. Significant delays have occurred in implementing this system, mainly due to the complexity of integrating the vendor solution with the requirements of TAFE. TAFE will now bring the final commissioning and operation of the system in house. Final project delivery timeframes and estimated completion costs are being reviewed. Costs incurred to date amount to $67 million. The original budget for this new system is $89.4 million.

Light Rail settlement

The CBD and South East Light Rail is a new twelve kilometre light rail network for Sydney, currently under construction. Passenger trips are set to begin on the light rail by December between Circular Quay and Randwick. The second stage from Randwick to Kingsford is planned to open in March 2020. The original budget for construction work of $1.6 billion was revised to $2.1 billion in 2014.

The State Government has been in dispute with the firm responsible for delivering and operating the CBD and South East light rail project. In May 2019, the parties reached a Settlement Arrangement resulting in the State agreeing to pay a settlement amount of $576 million, which is in addition to the revised budget. Transport has advised a final cost is still to be determined following project completion.

The Audit Office has commenced a follow up audit on the CBD South East Light Rail. This audit will consider whether recommendations of our previous audit have been implemented. We will also review the current status and budget of this project.

Sydney Metro Northwest project commissioning

The Sydney Metro North West officially opened in May 2019.

In constructing the metro, some assets were built to facilitate its operation. These included pavements, roadworks, and electricity
and water connections.

When the project was completed, the assets and the responsibility for maintaining them transferred to third parties, primarily Councils and utility providers. In 2018–19, the State expensed (derecognised) the assets, valued at $306 million, because it no longer controlled them.

Financial Reporting by Crown Land Reserve Trusts

Approximately 700 reserve trusts, managed by Trust Boards, did not prepare the financial statements at 30 June 2019 as required by the
Public Finance and Audit Act 1983.

These Crown reserves contain showgrounds, cemeteries, racecourses, local parks, and other community facilities and public areas. Some of the Crown reserves have independent streams of revenue from user charges.

In 2016–17, Treasury determined that NSW cemetery trusts and a holiday park reserve trust were controlled entities of the State. As such, the Public Finance and Audit Act 1983 requires them to prepare financial statements and have these audited by the Auditor-General.

In 2017–18, three reserve trusts accepted NSW Treasury’s view, prepared financial statements and had them audited by the Auditor-General.

However, three cemetery reserve trusts continue to maintain they are not controlled by the State and therefore their financial statements are not audited by the Audit Office. These cemeteries shared their unaudited financial statements with Treasury so they could be incorporated into the State’s financial statements. At 30 June 2019, the value of their combined assets and liabilities, which are not audited by the Audit Office, was $564 million.

The State included an additional $319 million in assets that relate to Crown land values of approximately 700 reserve trusts that did not prepare or submit financial statements.

We performed additional audit procedures to obtain some assurance over the value of these crown lands. The nature and extent of the limitations to the scope of these procedures was not significant enough to impact our audit opinion. Treasury should ensure these trusts comply with the requirements of the Public Finance and Audit Act.

Derecognition of investment in City West Housing

In 2017–18, the State had an equity investment of $680 million in a community housing provider, City West Housing Pty Limited (CWH).

During 2018–19, CWH amended its constitution to ensure alignment with its charitable status. The unintended impact of this change was that on windup the net assets would not be distributed to the State. The accounting implications to the State’s investment was not considered by Treasury at the time of approving the amended constitution. Consequently, the State wrote off its $680 million investment in CWH in 2018–19.

It is important that accounting impacts of such changes are discussed and agreed upon early. At the time of approving the decision to change the constitution, all accounting implications should be made available and understood. Such information is relevant when approving decisions. The theme of what is relevant
information will be explored further in our Performance Audit of ‘Advice on Major Decisions’.

Machinery of government (MoG) changes refers to how the government reorganises agency structures and functions and realigns ministerial responsibilities.

Cluster changes

On 2 April 2019, the Government reorganised public sector agencies into eight clusters (ten in 2017–18) with effect from 1 July 2019.

Prior to 30 June 2019, two subsequent administrative arrangement orders were made to amend and finalise the MoG changes.

The key MoG changes included:

• abolishing the following five departments:
  • Finance, Services and Innovation
  • Industry
  • Planning and Environment
  • Family and Communities
  • Justice
• transferring their functions into three new departments:
  • Department of Customer Service
  • Department of Planning, Industry and Environment
  • Department of Communities and Justice

The State’s consolidated financial statements at 30 June 2019 were not impacted by the changes, as they were effective from 1 July 2019.

The chart below shows the cluster arrangements before and after the MoG changes to the General Government Sector. It compares total budgeted expenses presented in the 2018–19 and 2019–20 Budget Papers (1).

Each cluster’s share of the General Government Sector’s (GGS) total expenditure remains relatively unchanged after the MoG changes. Further details on other functions transferred between clusters are detailed in the 2019–20 Budget Papers.

Of the clusters, Education is affected most by the MoG changes from the perspective of increased expenditure in the 2019–20 budget. This is because the TAFE Commission transferred into this cluster from the former Department of Industry on 1 July 2019, resulting in a corresponding decrease in the new Planning, Industry and Environment cluster’s expenditure.

Cluster expenses

$1.2 billion surplus, $0.2 billion below 2018–19 budget of $1.4 billion

The Total State Sector comprises 304 entities controlled by the NSW Government.

The General Government Sector, which comprises 212 entities, generally provides goods and services funded centrally by the State.
The non-General Government Sector, which comprises 92 Government businesses, generally provides goods and services, such as water, electricity and financial services that consumers pay for directly.

A principal measure of a Government’s overall performance is its Net Operating Balance (Budget Result). This is the difference
between the cost of General Government service delivery and the revenue earned to fund these sectors.

What changed from 2018 to 2019?

The State maintained its AAA credit rating.

The object of the Fiscal Responsibility Act 2012 is to maintain the State’s AAA credit rating.

The Government manages NSW’s finances in accordance with the Fiscal Responsibility Act 2012 (the Act).

The Act establishes the framework for fiscal responsibility and the strategy to protect the State’s AAA credit rating and service delivery to the people of New South Wales.

The legislation sets out targets and principles for financial management to achieve this.

New South Wales has credit ratings of AAA/Stable from Standard & Poor’s and Aaa/Stable from Moody’s Investors Service.

The fiscal targets for achieving this objective are:

General Government annual expenditure growth is lower than long term average revenue growth.

General Government expenditure grew by 5.5 per cent in 2018–19 (5.1 per cent in 2017–18 based on restated balances). This was slightly below the long-term revenue growth rate of 5.6 per cent.

Eliminating unfunded superannuation liabilities by 2030.

The Act sets a target to eliminate unfunded superannuation liabilities by 2030.

The State’s funding plan is to contribute amounts escalated by five per cent each year so the schemes will be fully funded by 2030. In 2018–19, the State made employer contributions of $1.73 billion ($1.67 billion in 2017–18), an increase of $64 million or 3.8 per cent ($52 million or 3.2 per cent in 2017–18). This was under the five per cent target by $19.5 million.

For fiscal responsibility purposes, the State uses AASB 1056: Superannuation Entities. This accounting standard discounts superannuation liabilities using the expected return from the assets backing the liability.

Using this method, the State’s unfunded superannuation liability was $13.2 billion at 30 June 2019 ($14.0 billion).

Superannuation funding position since inception of the Act - AASB 1056 Valuation

State revenues fell $604 million to $86.1 billion in 2018–19    

In the prior years, revenue growth was underpinned by cyclical increases in land tax, payroll tax and one-off large stamp duty receipts from the lease of the State’s electricity network assets. In 2018–19, the State’s revenue fell by $604 million to $86.1 billion ($86.7 million in 2017–18).

Taxation revenue remained relatively stable

Taxation revenue only grew slightly, mainly due to:

• a $517 million increase in payroll tax from NSW wages growth
• a $469 million increase in land tax from growth in land values
• offset by a $1.2 billion decrease in stamp duty due to lower than expected growth in the property market. This decrease would have been higher had the State not received $555 million in stamp duty from the new 51 per cent owner of WestConnex.

The gap between payroll tax and stamp duty reduced significantly in 2018–19. Stamp duty still remains the largest source of revenue for the State at $9.2 billion, only $42 million above payroll tax.

Australian Government grants and subsidies

The State received $31.8 billion in grants and subsidies from the Australian Government, $158 million less than the previous year. This was due to falls in other grants and subsidies of $98 million and GST revenues of $48 million.

GST revenues fell due to weaker growth in national consumption expenditure and a smaller GST pool. The GST pool represents funds made available by the Commonwealth for transfer to the States as untied financial assistance. The allocation of GST is determined by the Commonwealth, not the State.

A $392 million decrease in National Partnership Payments was offset by a $380 million increase in Specific Purpose Payments.
 
In 2018–19, sales of goods and services fell $395 million mainly due to the sale of WestConnex.

Other dividends and distributions fell by $122 million due to lower distributions from associates. This reflected weaker performance in the electricity sector (Ausgrid and Endeavour) resulting in lower distributions paid to the State following changes in the Electricity Network Service Providers regulatory environment and the sale of Snowy Hydro Pty Ltd in 2017–18.

Fines, regulatory fees and other revenues increased by $242 million largely from mineral royalties. The increase was attributed to strong demand across Asian markets for coal exports, which the State expects will continue to experience steady growth.

Expenses increased $4 billion to $87.9 billion in 2018–19    

Overall, the State’s expenses increased 4.8 per cent in 2018–19 compared to 2017–18. Most of the increase was due to higher employee expenses, operating costs and grants and subsidies.

Employee expenses, including superannuation, increased by 3.9 per cent to $40.3 billion.

Salaries and wages increased to $40.3 billion in 2018–19 from $38.8 billion 2017–18. This was mainly due to salary and wage increases. The Government wages policy aims to limit growth in employee remuneration and other employee related costs to no more than 2.5 per cent per annum.

Operating expenses increased 6.1 per cent from 2017–18.

Within operating expenses, payments for supplies, services and other expenses increased due to:

• increased operating costs associated with the commencement of the new Sydney Metro
• higher operating activity levels experienced in the Health sector resulting in higher visiting medical officer costs, surgical supplies and information management costs
• higher school operating expenses in Education, mainly relating to teaching cloud tools and purchase of computer equipment.

Health costs remain the highest expense of the State.

The following clusters have the highest expenses as a percentage of total government expenses:

• Health - 25.8 per cent (24.6 per cent in 2017–18)
• Education - 20 per cent (18.5 per cent)
• Transport - 14.7 per cent (17.6 per cent).

Other, mainly relates to Economic Affairs, Housing and Community, Recreation and Culture functions of the State.

Transport expenses have decreased in 2018–19 mainly due to the sale of WestConnex. This is partially offset by costs associated with the new Sydney Metro, which commenced operations from 1 July 2018. The graph highlights annual expenditure by function in 2018–19 compared to 2017–18.

Grants and subsidies increased by $782 million to $11.7 billion.

This was mainly due to:

• the $239 million Emergency Drought Relief Package
• a $226 million increase in funding to the Human Services sector to deliver key election commitments, including 5,000 more nurses and midwives
• $123 million in funding for sporting facilities and creating NSW Centre's of Excellence.

Assets grew by $26.7 billion to $468 billion in 2018–19    

Overall, the States total assets increased by $26.7 billion to $468 billion in 2018–19. This is a six per cent increase compared to 2017–18. Most of this was due to increases in carrying value of the State’s physical assets and investments.

Valuing the State's physical assets

The State’s physical assets were valued at $352 billion at 30 June 2019.

The State’s physical assets include land and buildings ($166 billion) and infrastructure ($168 billion). The value of the State’s physical assets at 30 June 2018 was restated from $339 billion to $337 billion. The restatement was required to correct errors in the fair value of earthworks previously reported at $7.5 billion and subsequently corrected to $5.4 billion.

Our audits assess the reasonableness and appropriateness of assumptions used to value physical assets. This includes
obtaining an understanding of the valuation methodologies used and judgements made. We also review the completeness of asset registers and the mathematical accuracy of valuation models.

Net movements between years include additions, disposals, depreciation and valuations. The State’s physical assets increased by $15.2 billion compared with 2017–18.

Movement in the State's physical assets

Liabilities increased $28.6 billion to $217.5 billion in 2018–19    

The State relies on actuarial assessments to value its liabilities

Nearly half of the State’s liabilities relate to its employees. They include unfunded superannuation and employee benefits, such as long service and recreation leave.

Valuing these obligations involves complex estimation techniques and significant judgements. Small changes in assumptions can materially impact balances in the financial statements, such as a lower discount rate.

Superannuation obligations rose by $14.3 billion.

The State’s $70.7 billion unfunded superannuation liability represents obligations to past and present employees less the value of assets set aside to meet those obligations. The unfunded superannuation liability rose by $14.3 billion from $56.4 billion at 30 June 2018 to $70.7 billion at 30 June 2019. This was mainly due to a lower discount rate.

Borrowings totalled $79.9 billion at 30 June 2019.

The State’s borrowings of $79.9 billion at 30 June 2019 were $8.6 billion higher than they were at 30 June 2018.

TCorp issues bonds to raise funds for NSW Government agencies. These are actively traded in financial markets, which provides price transparency and liquidity to public sector borrowers and institutional investors. All TCorp bonds are guaranteed by the NSW Government.

The Government manages its debt liabilities through its balance sheet management strategy. The strategy extends to TCorp, which applies an active risk management strategy to the Government’s debt portfolio.

General Government Sector debt has been restructured by replacing shorter-term debt with longer-term debt. This lengthens the portfolio to match liabilities with the funding requirements for infrastructure assets.

Implementing the requirements of new accounting standards will be challenging

Risks to the quality and timeliness of financial reporting

The State and its agencies will be implementing the requirements of new accounting standards shortly. These are likely to have a major impact on the financial positions and operating results of agencies across the sector.

Accounting standards require agencies to assess and disclose where possible, the impact of the new standards in their 2018–19 financial statements.

Our review found agencies needed to do more work on their impact assessments to minimise the risk of errors in the financial statement disclosures. Some agencies disclosed that the new standards would not have a material impact on their reported financial position and performance, but had little evidence to support this.

Each agency is unique and implementing the new standards is not straight forward as many new principles apply. Management judgement is needed to interpret how the principles apply to each agency. As a result, agencies face the following risks and challenges:

• having the required technical skills in house
• having accurate data to assess the impacts
• correctly and consistently interpreting the new requirements
• adequately planning and preparing for their application
• implementing new systems to capture the information needed to meet the new reporting obligations.

To help agencies implement the new standards consistently across the sector, Treasury:

• issued guidance to agencies
• prepared position papers on proposed accounting treatments
• provided briefing sessions to agencies
• mandated which option in the new standards agencies had to adopt on transition.

Key dates

Section 45 of the Public Finance and Audit Act 1983 requires the Auditor-General to perform audits of the financial statements of entities prescribed for the purposes of that section.
The following were prescribed entities as at 30 June 2019:

This report found the Department of Family and Community Services (FACS) needs to do more to demonstrate it is effectively and efficiently contracting NGOs to deliver community services in the Permanency Support Program (a component of out-of-home-care services) and Specialist Homelessness Services. It notes that FACS is moving to an outcomes-based commissioning model and recommends this be escalated consistent with government policy.

Government agencies, such as the Department of Family and Community Services (FACS), are increasingly contracting non-government organisations (NGOs) to deliver human services in New South Wales. In doing so, agencies are responsible for ensuring these services are achieving expected outcomes. Since the introduction of the Commissioning and Contestability Policy in 2016, all NSW Government agencies are expected to include plans for customer and community outcomes and look for ways to use contestability to raise standards.

Two of the areas receiving the greatest funding from FACS are the Permanency Support Program and Specialist Homelessness Services. In the financial year 2017–18, nearly 500 organisations received $784 million for out-of-home care programs, including the Permanency Support Program. Across New South Wales, specialist homelessness providers assist more than 54,000 people each year and in the financial year 2017–18, 145 organisations received $243 million for providing short term accommodation and homelessness support, including Specialist Homelessness Services.

In the financial year 2017–18, FACS entered into 230 contracts for out-of-home care, of which 49 were for the Permanency Support Program, representing $322 million. FACS also entered into 157 contracts for the provision of Specialist Homelessness Services which totalled $170 million. We reviewed the Permanency Support Program and Specialist Homelessness Services for this audit.

This audit assessed how effectively and efficiently FACS contracts NGOs to deliver community services. The audit could not assess how NGOs used the funds they received from FACS as the Audit Office does not have a mandate that could provide direct assurance that NGOs are using government funds effectively.

Appendix one – Response from agency

Appendix two – About the audit

Appendix three – Performance auditing

Parliamentary Reference: Report number #323 - released 26 June 2019

Copyright reserved by the Audit Office of New South Wales. All rights reserved. No part of this publication may be reproduced without prior consent of the Audit Office of New South Wales. The Audit Office does not accept responsibility for loss or damage suffered by any person acting on or refraining from action as a result of any of this material.

Agencies need to do more to address risks posed by information technology (IT).

Effective internal controls and governance systems help agencies to operate efficiently and effectively and comply with relevant laws, standards and policies. We assessed how well agencies are implementing these systems, and highlighted opportunities for improvement.
 

1. Overall trends

2. Information Technology

3. Asset Management

4. Governance

5. Ethics and Conduct

6. Risk Management 

This report covers the findings and recommendations from our 2016–17 financial audits related to the internal controls and governance of the 39 largest agencies (refer to Appendix three) in the NSW public sector. These agencies represent about 95 per cent of total expenditure for all NSW agencies and were considered to be a large enough group to identify common issues and insights.

The findings in this report should not be used to draw conclusions on the effectiveness of individual agency control environments and governance arrangements. Specific financial reporting, controls and service delivery comments are included in the individual 2017 cluster financial audit reports tabled in Parliament from October to December 2017.

This new report offers strategic insight on the public sector as a whole

In previous years, we have commented on internal control and governance issues in the volumes we published on each ‘cluster’ or agency sector, generally between October and December. To add further value, we then commented more broadly about the issues identified for the public sector as a whole at the start of the following year.

This year, we have created this report dedicated to internal controls and governance. This will help Parliament to understand broad issues affecting the public sector, and help agencies to compare their own performance against that of their peers.

Without strong control measures and governance systems, agencies face increased risks in their financial management and service delivery. If they do not, for example, properly authorise payments or manage conflicts of interest, they are at greater risk of fraud. If they do not have strong information technology (IT) systems, sensitive and trusted information may be at risk of unauthorised access and misuse.

These problems can in turn reduce the efficiency of agency operations, increase their costs and reduce the quality of the services they deliver.

Our audits do not review every control or governance measure every year. We select a range of measures, and report on those that present the most significant risks that agencies should mitigate. This report divides these into the following six areas:

1. Overall trends
2. Information technology
3. Asset management
4. Governance
5. Ethics and conduct
6. Risk management.

Internal controls are processes, policies and procedures that help agencies to:

• operate effectively and efficiently
• produce reliable financial reports
• comply with laws and regulations.

This chapter outlines the overall trends for agency controls and governance issues, including the number of findings, level of risk and the most common deficiencies we found across agencies. The rest of this volume then illustrates this year’s controls and governance findings in more detail.

Information technology (IT) has become increasingly important for government agencies’ financial reporting and to deliver their services efficiently and effectively. Our audits reviewed whether agencies have effective controls in place over their IT systems. We found that IT security remains the source of many control weakness in agencies.

Agency service delivery relies on developing and renewing infrastructure assets such as schools, hospitals, roads, or public housing. Agencies are currently investing significantly in new assets. Agencies need to manage the scale and volume of current capital projects in order to deliver new infrastructure on time, on budget and realise the intended benefits. We found agencies can improve how they:

• manage their major capital projects
• dispose of existing assets.

Governance refers to the high-level frameworks, processes and behaviours that help an organisation to achieve its objectives, comply with legal and other requirements, and meet a high standard of probity, accountability and transparency.

This chapter sets out the governance lighthouse model the Audit Office developed to help agencies reach best practice. It then focuses on two key areas: continuous disclosure and shared services arrangements. The following two chapters look at findings related to ethics and risk management.

All government sector employees must demonstrate the highest levels of ethical conduct, in line with standards set by The Code of Ethics and Conduct for NSW government sector employees.

This chapter looks at how well agencies are managing these requirements, and where they can improve their policies and processes.

We found that agencies mostly have the appropriate codes, frameworks and policies in place. But we have highlighted opportunities to improve the way they manage those systems to reduce the risks of unethical conduct.

Risk management is an integral part of effective corporate governance. It helps agencies to identify, assess and prioritise the risks they face and in turn minimise, monitor and control the impact of unforeseen events. It also means agencies can respond to opportunities that may emerge and improve their services and activities.

This year we looked at the overall maturity of the risk management frameworks that agencies use, along with two important risk management elements: risk culture and risk registers.

Effective risk management can improve agency decision-making, protect reputations and lead to significant efficiencies and cost savings. By embedding risk management directly into their operations, agencies can also derive extra value for their activities and services.

The following report focuses on key observations and findings from the most recent audits of agencies in the Family and Community Services cluster.

The report includes a range of findings on service delivery. The Department of Family and Community Services' data indicates that family preservation programs are having a positive impact on children and young people entering statutory care. On the other hand, waiting times for social housing applicants increased in 2016-17.
 

1. Financial reporting and controls

2. Service Delivery

This report provides Parliament and others with the audit results, observations, conclusions and recommendations for Family and Community Services cluster agencies. The report has been structured into two chapters focusing on financial reporting and controls and service delivery.

The Family and Community Services cluster works with children, adults, families and communities to improve lives and help people realise their potential.

This chapter outlines audit observations, conclusions and recommendations related to the financial reporting and controls of agencies in the Family and Community Services cluster for 2016–17.

Financial reporting is an important element of good governance. Confidence in public sector decision making and transparency is enhanced when financial reporting is accurate and timely.

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.

Government outcomes can be improved by delivering the right mix of services, whether from the public, private or not for profit sectors. Service delivery reform will be most successful if there is clear accountability for service delivery outcomes, decisions are aligned to strategic direction and performance is monitored and evaluated.

This chapter outlines our audit observations, conclusions and recommendations related to service delivery by agencies in the Family and Community Services cluster for 2016–17.

Appendix one - Status of 2015 and 2016 recommendations

Appendix two - Summary financial information 

Appendix three - Cluster information

This report highlights the results of the financial audits of NSW Government central agencies. The report focuses on key observations and findings from the most recent financial statement audits of agencies in the Treasury, Premier and Cabinet, and Finance, Services and Innovation clusters.

The report includes a range of findings in respect to service delivery. One repeat finding is that while the Government regularly reports on the 12 Premier's priorities, there is no comprehensive reporting on the 18 State priorities. 

1. Financial reporting and controls

2. Service delivery

3. Government financial services

This report sets out the results of the 30 June 2017 financial statement audits of NSW Government's central agencies and their cluster agencies.

Central agencies play a key role in ensuring policy coordination, good administrative and people management practices and prudent fiscal management. The central agencies and their key responsibilities are set out below.

Confidence in public sector decision‑making and transparency is enhanced when financial reporting is accurate and timely. Appropriate financial controls help ensure the efficient and effective use of resources and administration of agency policies. This chapter outlines our audit observations, conclusions or recommendations related to financial reporting and controls of agencies for 2016–17.

This chapter outlines our audit observations, conclusions and recommendations relating to service delivery for 2016–17. 

This chapter outlines our audit observations, conclusions and recommendations specific to NSW Government agencies providing financial services.

Appendix one - List of 2017 recommendations

Appendix two - Status of 2016 recommendations

Appendix three - Agencies selected for this volume

Appendix four - Timeliness of financial reporting and audit reporting

Appendix five - Financial audit reporting

Appendix six - Financial analysis

Total State Sector Accounts received an unqualified audit opinion for the fifth consecutive year.

There was a $5.7 billion State budget surplus and continued investment in new infrastructure, in part funded by the long-term leases of Ausgrid and Endeavour Energy assets. This report also comments on key accounting matters, including the correction of some previously reported balances and the first time reporting of combined Cabinet members’ compensation in the Total State Sector Accounts.

Pursuant to the Public Finance and Audit Act 1983, I present my Report on State Finances 2017.

You will note that the format of this report has changed from previous years.

The intent of this change is to draw attention to the key matters that have been the focus of our audit and highlight significant factors that have contributed to the outcome.

First, it is pleasing to report once again that I issued a clear audit opinion on the State’s consolidated financial statements. This outcome demonstrates the Government’s continued focus on the quality of financial reporting across the NSW public sector.

High quality financial management and reporting are crucial to properly inform the public and build community confidence in our system of government.

The Treasury’s Financial Management Transformation program also aims to improve financial governance, budgeting and reporting arrangements across the sector. My Office is working collaboratively with The Treasury on reforms to reduce the burden of reporting, without weakening established safeguards.

The reforms should include measures to provide independent assurance of the budget process, of outcome reporting by agencies, and the power to “follow the dollar” given the increasing use of non-government organisations to deliver Government programs.

This Report also highlights another year of strong financial performance. The State’s budget result was a $5.7 billion surplus, and investment in new infrastructure has continued, in part funded by the long-term leases of Ausgrid and Endeavour Energy assets.

Finally, could I take this opportunity to thank the staff of The Treasury for the way they approached this audit. Our partnership is critical to ensuring NSW is an exemplar of quality financial management and reporting.

Margaret Crawford 
24 October 2017

A clear audit opinion on the State’s consolidated financial statements was issued.

Timely and accurate financial reporting is essential for informed decision making, effective management of public funds and enhancing public accountability.

This year’s clear audit opinion reflects the Government’s continued efforts to improve the quality of financial reporting across the NSW public sector.

Since the introduction of ‘early close procedures’ in 2011-12, the number of significant errors in financial statements of agencies has generally fallen largely due to identifying and resolving complex accounting issues early. Agencies’ 2016-17 financial statements submitted for audit contained nine errors exceeding $20 million. All errors were subsequently corrected in the individual agencies financial statements.

Agencies should continue to respond to key accounting issues as soon as they are identified. Where issues are identified, accounting position papers should be prepared for consideration by the Audit Office, their Audit and Risk Committee members, and when relevant, The Treasury.

The State addressed the following key accounting matters during 2016-17. 

The State recognised rail tunnels and earthworks valued at $8.5 billion.

Some rail tunnels and earthworks have never been valued by the State. These include the City Circle, the country rail network and other tunnels and earthworks built before the year 2000. Some of these tunnels and earthworks date back to the early 1900s.

For many years, the State did not account for these assets as they believed that their value could not be reliably measured. This year an independent valuer was engaged to perform a comprehensive valuation. The methodology used demonstrated
that the assets could have been reflected in the financial statements earlier.

The State recorded an additional $8.5 billion to correct the value of infrastructure assets at 1 July 2016.

Cabinet member’s compensation and related party transactions were reviewed.

Due to changes in Accounting Standards, the State had to consider 'related party information' in the financial statements. Previously this only applied to for-profit entities.

This year, requirements to report related party information extended to members of Cabinet, considered to be “key management personnel” of the State, as defined by Accounting Standards.

The Treasury implemented a process to assess and report Cabinet member’s compensation, and transactions between Cabinet members and/or their close family members, and government agencies.

Collectively, Cabinet members’ remuneration was $8.8 million, which was mainly salaries and allowances, and $3.5 million of non-monetary benefits such as security and drivers. The Treasury determined there were no other specific “related party” transactions or balances that required disclosure in the State’s financial statements.

Information system limitations continue at TAFE NSW.

TAFE NSW has experienced ongoing issues with its student administration system.

TAFE NSW has again implemented additional processes to verify the accuracy and completeness of revenue from sales of goods and services.

TAFE NSW expects to spend up to $89 million on a new information system to address these issues. Modules of the new student enrolment system are expected to be in place for the 2018 enrolment period.

Restatements relating to the General Government Sector's investment in the commercial sector.

The State corrected two previously reported balances relating to the General Government Sector’s investment in the commercial sector.

Accounting Standards require the General Government Sector to effectively store gains or losses related to its investment in the commercial sector in reserves until the investment is derecognised.

When these investments are disposed of, the cumulative gains and losses must be cleared and recognised in the operating result. However, the Government had previously cleared the cumulative gains and losses directly to Accumulated Funds within equity.

To comply with Accounting Standards, a total of $6 billion previously reported as a movement in equity  at 30 June 2016, has now been corrected to the operating result.

In addition, Accounting Standards only allow gains or losses on its investments to be stored in reserves. In past years, the State recognised all changes in the value of its investment in Available for Sale Reserves, including the capital contributed to establish the State’s investment. In 2016-17, a total of $23.4 billion of contributed capital was corrected to accumulated funds at 1 July 2015.

The State’s budget result was a $5.7 billion surplus, $2.0 billion higher than the budget estimate.

The Total State Sector comprises 310 entities controlled by the NSW Government.

Of the total, the General Government Sector comprises 215 entities that provide goods and services not directly paid for by consumers.

The non-General Government Sector comprises 95 Government businesses that provide goods and services such as water and electricity, or financial services.

A principal measure of a Government’s overall performance is its Net Operating Balance, or Budget Result. The Net Operating Balance reports the difference between the cost of General Government service delivery and the revenue earned to fund these sectors.

The State has recorded budget surpluses and exceeded the original budget result in nine of the last ten years.

The State maintained its AAA credit rating.

The object of the Act is to maintain the AAA credit rating.

NSW’s finances are managed in alignment with the Fiscal Responsibility Act 2012 (the Act).

The Act established the framework for fiscal responsibility and strategy needed to protect the State’s AAA credit rating and service delivery to the people of NSW.

The purpose of maintaining the AAA credit rating is to reduce the cost of, and ensure the broadest access to, borrowings.

A triple-A credit rating also helps maintain business and consumer confidence so economic activity and employment are sustained. The legislation sets out targets and principles for financial management to achieve this.

New South Wales has credit ratings of AAA/Negative from Standard & Poor’s and Aaa/Stable from Moody’s Investors Service.

The fiscal targets for achieving this objective are:

General Government expenditure growth is lower than long term revenue growth.

General Government expenditure growth was 4.2 per cent in 2016-17, below the long-term revenue growth of 5.6 per cent.

Eliminating unfunded superannuation liabilities by 2030.

The Act sets a target of eliminating unfunded defined benefit superannuation liabilities by 2030. The State’s net superannuation liability was $58.6 billion at 30 June 2017 ($71.2 billion at 30 June 2016).

The Government predicts the 2030 target will be achieved. The State’s funding plan is to contribute amounts escalated by five per cent each year so the schemes will be fully funded by 2030. In 2016-17, the State made employer contributions of $1.5 billion, which is largely consistent with contributions over the past five years.

The liability values in the graph below do not reflect the values recorded in the Total State Sector Accounts. For financial reporting purposes, Accounting Standards (AASB 119 Employee Benefits) require the State to discount its superannuation liability using the government bond rate (refer to page 10 of this report). 

The relevant government bond rate in the current economic climate is 2.62 per cent.

The State’s target for the unfunded superannuation liability is measured using AASB 1056 Superannuation Entities. This is because it adopts a measurement basis that reflects expected earnings on fund assets, which are currently between 5.9 and 7.4 per cent. Using these rates, the liability is $15.0 billion at 30 June 2017 ($16.1 billion at 30 June 2016). The unfunded liability is $2.4 billion less than when the Act was introduced.

The State’s assets grew by $31.6 billion during 2016-17 to $409 billion.

Valuing the State’s physical assets.

When we audit the financial statements, we focus on areas we consider as higher risk. These areas are often complex, and require the use of estimates and judgements.

The State has $307.2 billion of physical assets measured at fair value in accordance with Australian Accounting Standards. Fair value calculations are inherently complex and sensitive to assumptions and estimates, increasing the risk these assets are incorrectly valued.

In our audits, we assess the reasonableness and appropriateness of assumptions used in valuing physical assets. This includes obtaining an understanding of the valuation methodologies applied and judgements made. We also review the completeness of asset registers, and the mathematical accuracy of valuation models.

Net movements between years includes additions, disposals, depreciation and valuations. This year, valuations of physical assets added $16.2 billion to the State’s assets, comprising: 

• Transport for NSW and Railcorp $8.5 billion

• New South Wales Land and Housing Corporation $4.8 billion

• Roads and Maritime Services $930 million

• Crown Entity $400 million.    

The State’s financial assets increased $27.5 billion in 2016-17

The State’s financial assets have increased by 88 per cent over the past four years. In 2016-17, financial assets increased primarily due to proceeds from the sale of government assets and businesses.

The Government implemented reforms to better use the State’s financial assets. A key element was the creation of an Asset and Liability Committee (ALCO) to provide advice on ways to improve balance sheet management.

Since the creation of the ALCO, reforms include:

• Establishment of the New South Wales Infrastructure Future Fund (NIFF). The net proceeds from the State’s asset recycling program are invested into the NIFF, which is managed by TCorp, with a balance of $14.6 billion by 30 June 2017. Funds raised are invested through the NIFF until the Government requires them for critical infrastructure projects that are part of the Restart NSW and Rebuilding NSW program of works. ALCO and TCorp provide advice on the NIFF’s performance and management

• Establishment of the Social and Affordable Housing Fund ($1.1 billion at 30 June 2017). ALCO oversees the Fund to ensure an appropriate investment approach that will maintain funding certainty for new social and affordable housing stock

• Cash and liquidity management reforms to centralise cash previously held by agencies in the Treasury Banking System. This reform is designed to ensure agencies have adequate levels of liquidity but with surplus funds invested centrally for better returns.

The State’s liabilities decreased by $13.1 billion during 2016-17 to $182 billion.

Valuing the State’s liabilities relies on an actuarial assessment.

Nearly half of the State’s liabilities relate to its employees. This includes unfunded superannuation, and employee benefits, such as long service and recreation leave.

Valuation of these obligations is subject to complex estimation techniques and significant judgements. Small changes in assumptions can materially impact the financial statements.

We address the risk associated with auditing these balances:

• using actuarial specialists

• testing controls around underlying employee data used in data models, and testing the accuracy of the calculations

• evaluating assumptions applied in calculating employee entitlements such as the discount rate and the probability of long service leave vesting conditions being met.

The State’s superannuation obligations reduced by $12.6 billion in 2016-17.

The State’s $58.6 billion superannuation liability represents obligations for past and present employees, less the value of assets set aside to meet those obligations. The superannuation liability decreased from $71.2 billion to $58.6 billion, largely due to an increase in the discount rate from 1.99 per cent to 2.62 per cent. This alone reduced the liability by $9.2 billion

The State’s borrowings totalled $70.6 billion at 30 June 2017.

The State’s borrowings totalled $70.6 billion at 30 June 2017, $9.5 billion less than the previous year. This was largely due to the repayment of borrowings when the assets of Ausgrid and Endeavour Energy were leased to the private sector.

TCorp issues bonds to raise funds for NSW Government agencies. The bonds are actively traded in financial markets providing price transparency and liquidity to public sector borrowers and institutional investors. All TCorp bonds are guaranteed by the NSW Government.

The Government manages its debt liabilities through its balance sheet management strategy. The strategy extends to TCorp, which applies an active risk management strategy to the Government’s debt portfolio.

General Government Sector debt is being restructured by replacing shorter-term debt with longer-term debt. This lengthens the portfolio to better match liabilities with the funding requirements of infrastructure assets and reduces refinancing risks. It also allows the Government to take advantage of the low interest rate environment.

The State recorded revenue of $83.5 billion in  2016-17, an increase of $5.3 billion from 2015-16.

The State’s results are underpinned by revenue growth in taxation, fees and fines.

Taxation, fees, fines and other revenue comprises $30.5 billion of taxation ($28.7 billion in 2015-16) and $5.3 billion of fees, fines and other revenue ($4.6 billion).

Tax revenue for the Total State Sector increased by $1.8 billion, or 6.4 per cent compared to 2015-16, primarily due to:

• one-off business asset sales and lease transactions, including $718 million in transfer duty from the Ausgrid and Endeavour Energy lease transactions

• $385 million increase in payroll tax from growth in NSW employment and average employee compensation

• a $426 million increase in land taxes.

Growth in stamp duty is expected to slow over the next 4 years.

General Government Sector stamp duties have increased from $6.2 billion in 2012-13 to $11.5 billion in 2016-17, an annual average growth rate of 16.5 per cent. The Government’s budget forecasts the growth in stamp duties to decline, to an average annual growth rate of 2.6 per cent between 2016-17 and 2020-21.

The State received Commonwealth grants and subsidies of $30.8 billion in 2016-17.

The State received $30.8 billion from the Commonwealth Government in 2016-17, $1.6 billion more than in 2015-16. This was primarily due to transaction based asset recycling grants of $1.0 billion and a $720 million increase in national land transport grants. This increase was offset by a $435 million decrease in General Purpose Grants, which mainly comprises New South Wales’ share of the Goods and Services Tax (GST). 

The State spent $79.4 billion in 2016-17 to deliver services to the community, an increase of $3.9 billion from 2015-16.

Overall expenses increased 5.2 per cent from last year. Most of the increase was due to higher employee costs and operating costs.

Total salaries and wages increased by 4.2 per cent from 2015-16.

Total salaries and wages increased to $30 billion from $28.8 billion in 2015-16. The Government wages policy aims to limit the growth in remuneration and other employee costs to no more than 2.5 per cent per annum.

Operating expenses increased by 12.4 per cent from 2015-16.

Within operating expenses, payments for supplies, services and other expenses increased, in part, due to the State:

• reacquiring mining licenses worth $482 million and additional land remediation costs of $101 million

• spending more on health including additional drug supplies relating to Hepatitis C.

State spend on transport and communications increased by 68.1 per cent since 2012-13.

While spending on health and education remain the largest functional areas provided by Government, expenditure on transport and communication increased, on average, by 13.9 per cent annually between 2012-13 and 2016-17. This increase reflects the Government’s investment in transport infrastructure such as the Sydney Metro and Westconnex. Over the same period, spending on health increased by $3.9 billion.

Expenditure on fuel and energy has decreased by an average of 44.7 per cent since 2012-13, reflecting the State’s leases of electricity network assets.

In 2011, the Government established Restart NSW to fund high priority infrastructure projects.

Restart NSW projects are primarily funded from the proceeds from the asset recycling program enabling Government to deliver new infrastructure investment.

Restart NSW provides funding for the delivery of Rebuilding NSW, which is the Government’s 10-year plan to invest $20 billion in new infrastructure.

The State finalised long-term leases of Ausgrid and Endeavour Energy assets.

In June 2017, the Government finalised its long-term lease of 50.4 per cent of Endeavour Energy. This transaction follows on from the long-term leases of TransGrid in December 2015 and 50.4 per cent of Ausgrid in December 2016. Net proceeds of $15.0 billion were paid into Restart NSW relating to these transactions.

The Government also finalised an arrangement for the private sector to provide land titling and registry services to the public for 35 years. The State, through Restart NSW, received an upfront payment of $2.6 billion from the new operator.

Restart NSW is funding $29.8 billion of new infrastructure.

The Government has detailed its plan to invest $20 billion into the Rebuilding NSW plan from Restart NSW.

At 30 June 2017, around $2.9 billion has already been spent on Rebuilding NSW projects from Restart NSW, with a further $9 billion included in the budget aggregates. The Government has also earmarked a further $8.1 billion in Restart NSW for future projects.

The most significant project is the Sydney Metro. The Government has committed $7.0 billion from Restart NSW to build a 30-kilometre metro line, linking Sydney Metro Northwest at Chatswood, through new stations in the lower North Shore, the Sydney CBD and southwest to Bankstown. At 30 June 2017, $2.4 billion has been spent on this project from Restart NSW.

Other significant projects funded by Restart NSW include a $1.8 billion contribution to WestConnex and reserved funding of $1 billion towards the State’s Major Stadia Network program.

The Treasury initiated the Financial Management Transformation (FMT) program with the aim of changing and improving financial governance, budgeting and reporting arrangements of the New South Wales public sector.

FMT aims to deliver better outcomes for the people of New South Wales and focuses on transparency and accountability for expenditure, and better value for money.

New Financial Management System

PRIME is the Information Technology (IT) solution component of the FMT program, replacing several historical systems. PRIME will provide both financial and performance information within one IT platform for all agencies in the NSW public sector.

It is expected to give Government more timely information to plan and deliver its policy priorities and the budget.

Independent assurance over the budget process would improve confidence in the reliability of the State’s financial information.

Appendix one - Prescribed entities

Appendix two - Legal opinions