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Appendix one – Response from agency

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23 June 2023

Published

Management of the Critical Communications Enhancement Program

Finance

Health

Justice

Whole of Government

Cyber security

Information technology

Infrastructure

Internal controls and governance

Project management

Risk

Service delivery

Shared services and collaboration

What the report is about

Effective radio communications are crucial to NSW's emergency services organisations.

The Critical Communications Enhancement Program (CCEP) aims to deliver an enhanced public safety radio network to serve the five emergency services organisations (ESOs), as well as a range of other users.

This report assesses whether the NSW Telco Authority is effectively managing the CCEP.

What we found

Where it has already been delivered (about 50% of the state), the enhanced network meets most of the requirements of ESOs.

The CCEP will provide additional infrastructure for public safety radio coverage in existing buildings agreed to with ESOs. However, radio coverage inside buildings constructed after the CCEP concludes will be at risk because building and fire regulations do not address the need for in-building public safety radio coverage.

Around 98% of radios connected to the network can be authenticated to protect against cloning, though only 42% are.

The NSW Telco Authority has not settled with ESOs on how call encryption will be used across the network. This creates the risk that radio interoperability between ESOs will not be maximised.

When completed, the public safety radio network will be the only mission critical radio network for ESOs. It is unclear whether governance for the ongoing running of the network will allow ESOs to participate in future network operational decisions.

The current estimated capital cost for the NSW Telco Authority to complete the CCEP is $1.293 billion. This is up from an estimated cost of $400 million in 2016. The estimated capital cost was not publicly disclosed until $1.325 billion was shown in the 2021–22 NSW Budget Papers.

We estimate that the full cost to government, including costs to the ESOs, of implementing the enhanced network is likely to exceed $2 billion.

We made recommendations about

The governance of the enhanced Public Safety Network (PSN) to support agency relationships.
The need to finalise a Traffic Mitigation Plan for when the network is congested.
The need to provide advice to the NSW Government about the regulatory gap for ensuring adequate network reach in future buildings.
The need to clarify how encryption and interoperability will work on the enhanced network.
The need for the NSW Telco Authority to comply with its policy on Infrastructure Capacity Reservation.
Expediting measures to protect against the risk of cloning by unauthenticated radios.

Public safety radio networks are critical for operational communications among Emergency Services Organisations (ESOs), which in New South Wales include:

NSW Ambulance
Fire and Rescue NSW
NSW Police Force
NSW Rural Fire Service
NSW State Emergency Service.¹

Since 1993, these five ESOs have had access to a NSW Government owned and operated radio communications network, the Public Safety Network (PSN), to support their operational communications. Around 60 to 70 other entities also have access to this network, including other NSW government entities, Commonwealth government entities, local councils, community organisations, and utility companies.

Pursuant to the Government Telecommunications Act 2018 ('the Act'), the New South Wales Government Telecommunications Authority ('NSW Telco Authority') is responsible for the establishment, control, management, maintenance and operation of the PSN.²

Separate to the PSN, all ESOs and other government entities have historically maintained their own radio communication capabilities and networks. Accordingly, the PSN has been a supplementary source of operational radio communications for these entities.

These other radio networks maintained by ESOs and other entities are of varying size and capability, with many ageing and nearing their end-of-life. There was generally little or no interoperability between networks, infrastructure was often co-located and duplicative, and there were large gaps in geographic coverage.

In 2016, the NSW Telco Authority received dedicated NSW Government funding to commence the Critical Communications Enhancement Program (CCEP).

According to NSW Telco Authority's 2021–22 annual report, the CCEP is a transformation program for operational communications for NSW government agencies. The CCEP '…aims to deliver greater access to public safety standard radio communications for the State’s first responders and essential service agencies'. The objective of CCEP is to consolidate the large number of separate radio networks that are owned and operated by various NSW government entities and to enhance the state’s existing shared PSN. The program also aims to deliver increased PSN coverage throughout New South Wales.

The former NSW Government intended that as the enhanced PSN was progressively rolled-out across NSW, ESOs would migrate their radio communications to the enhanced network, before closing and decommissioning their own networks.

About this Audit

This audit assessed whether the CCEP is being effectively managed by the NSW Telco Authority to deliver an enhanced PSN that meets ESOs' requirements for operational communications.

We addressed the audit objective by answering the following two questions:

Have agreed ESO user requirements for the enhanced PSN been met under day-to-day and emergency operational conditions?
Has there been adequate transparency to the NSW Government and other stakeholders regarding whole-of-government costs related to the CCEP?

In answering the first question, we also considered how the agreed user requirements were determined. This included whether they were supported by evidence, whether they were sufficient to meet the intent of the CCEP (including in considering any role for new or alternative technologies), and whether they met any relevant technical standards and compliance obligations (including for cyber security resilience).

While other NSW government agencies and entities use the PSN, we focused on the experience of the five primary ESOs because these will be the largest users of the enhanced PSN.

Both the cost and time required to complete the CCEP roll-out have increased since 2016. While it was originally intended to be completed in 2020, this is now forecast to be 2027. Infrastructure NSW has previously assessed the reasons for the increases in time and cost. A summary of the findings made by Infrastructure NSW is presented in Chapter 1 of this report. Accordingly, as these matters had already been assessed, we did not re-examine them in this performance audit.

The auditee for this performance audit is the NSW Telco Authority, which is a statutory authority within the Department of Customer Service portfolio.

In addition to being responsible for the operation of the PSN, section 5 of the Act also prescribes that the NSW Telco Authority is:

to identify, develop and deliver upgrades and enhancements to the government telecommunications network to improve operational communications for government sector agencies
to develop policies, standards and guidelines for operational communications using telecommunications networks.

The NSW Telco Authority Advisory Board is established under section 10 of the Act. The role of the board is to advise the NSW Telco Authority and the minister on any matter relating to the telecommunications requirements of government sector agencies and on any other matter relating to the functions of the Authority. As of 2 June 2023, the responsible minister is the Minister for Customer Service and Digital Government.

The five identified ESOs are critical stakeholders of the CCEP and therefore they were consulted during this audit. However, the ESOs were not auditees for this performance audit.

Conclusion

In areas of New South Wales where the enhanced Public Safety Network has been implemented under the Critical Communications Enhancement Program, the NSW Telco Authority has delivered a radio network that meets most of the agreed requirements of Emergency Services Organisations for routine and emergency operations.

In April 2023, the enhanced Public Safety Network (PSN) was approximately 50% completed. In areas where it is used by Emergency Services Organisations (ESOs), the PSN generally meets agreed user requirements. This is demonstrated through extensive performance monitoring and reporting, which shows that agreed performance standards are generally achieved. Reviews by the NSW Government and the NSW Telco Authority found that the PSN performed effectively during major flood events in 2021 and 2022.

Where it is completed, PSN coverage is generally equal to or better than each ESO's individual pre-existing coverage. The NSW Telco Authority has a dedicated work program to address localised coverage gaps (or 'blackspots') in those areas where coverage has otherwise been substantively delivered. Available call capacity on the network far exceeds demand in everyday use. Any operational issues that may occur with the PSN are transparent to ESOs in real time.

The NSW Telco Authority consulted extensively with ESOs on requirements for the enhanced PSN, with relatively few ESO requirements not being included in the specifications for the enhanced PSN. Lessons from previous events, including the 2019–20 summer bushfires, have informed the design and implementation of the enhanced PSN (such as the need to ensure adequate backup power supply to inaccessible sites). The network is based on the Project 25 technical standards for mission-critical radio communications, which is widely-accepted in the public safety radio community throughout Australia and internationally.

There is no mechanism to ensure adequate radio coverage within new building infrastructure after the CCEP concludes, but the NSW Telco Authority and ESOs have agreed an approach to prioritise existing in-building sites for coverage for the duration of the CCEP.

The extent to which the PSN works within buildings and other built structures (such as railway tunnels) is of crucial importance to ESOs, especially the NSW Police Force, NSW Ambulance, and Fire and Rescue NSW. This is because a large proportion of their operational communications occurs within buildings.

There is no mechanism to ensure the adequacy of future in-building coverage for the PSN in new or refurbished buildings after the CCEP concludes. Planning, building, and fire regulations are silent on this issue. We note there are examples in the United States of how in-building coverage for public safety radio networks can be incorporated into building or fire safety codes.

In regard to existing buildings, it is not possible to know whether a building requires its own in-building PSN infrastructure until nearby outside radio sites, including towers and antennae, have been commissioned into the network. Only then can it be determined whether their radio transmissions are capable of penetrating inside nearby buildings. Accordingly, much of this work for in-building coverage cannot be done until outside radio sites are finished and operating.

In March 2023, the NSW Telco Authority and ESOs agreed on a list of 906 mandatory and 7,086

non-mandatory sites for in-building PSN coverage. Most of these sites will likely be able to receive radio coverage via external antennae and towers, however this cannot be confirmed until those nearby external PSN sites are completed. The parties also agreed on an approach to prioritising those sites where coverage is needed but not provided by antennae and towers. Available funding will likely only extend to ensuring coverage in sites deemed mandatory, which is nonetheless expected to meet the overall benchmark of achieving 'same or better' coverage than what ESOs had previously.

There is a risk that radio interoperability between ESOs will not be maximised because the NSW Telco Authority has not settled with ESOs how encryption will be used across the enhanced PSN.

End-to-end encryption of radio transmissions is a security feature that prevents radio transmissions being intercepted or listened to by people who are not meant to. The ability of the PSN to provide end-to-end encryption of operational communications is of critical importance to the two largest prospective users of the PSN: the NSW Police Force and NSW Ambulance. Given that encryption excludes other parties that do not have the requisite encryption keys, its use creates an obstacle to achieving a key intended benefit of the CCEP, that is a more interoperable PSN, where first responders are better able to communicate with other ESOs.

Further planning and collaboration between PSN participants are necessary to consider how these dual benefits can be achieved, including in what operational circumstances encrypted interoperability is necessary or appropriate.

The capital cost to the NSW Telco Authority of the CCEP, originally estimated at $400 million in 2016, was not made public until the 2021–22 NSW Budget disclosed an estimate of $1.325 billon.

The estimated capital cost to complete all stages of the CCEP increased over time. This increasing cost was progressively disclosed to the NSW Government through Cabinet processes between 2015–16 and 2021–22.

In 2016, the full capital cost to the NSW Telco Authority of completing the CCEP was estimated to be $400 million. This estimated cost was not publicly disclosed, nor were subsequent increases, until the cost of $1.325 billion was publicly disclosed in the 2021–22 NSW Budget (revised down in the 2022–23 NSW Budget to $1.293 billion).

There has been no transparency about the whole-of-government cost of implementing the enhanced PSN through the CCEP.

In addition to the capital costs incurred directly by the NSW Telco Authority for the CCEP, ESOs have incurred costs to maintain their own networks due to the delay in implementing the CCEP. The ESOs will continue to incur these costs until they are able to fully migrate to the enhanced PSN, which is expected to be in 2027. These costs have not been tracked or reported as part of transparently accounting for the whole-of-government cost of the enhanced PSN. This is despite Infrastructure NSW in 2019 recommending to the NSW Telco Authority that it conduct a stocktake of such costs so that a whole-of-government cost impact is available to the NSW Government.

¹The definition of 'emergency services organisation' is set out in the State Emergency and Rescue Management Act 1989 (NSW). In addition to the five ESOs discussed in this report, the definition also includes: Surf Life Saving New South Wales; New South Wales Volunteer Rescue Association Inc; Volunteer Marine Rescue NSW; an agency that manages or controls an accredited rescue unit; and a non-government agency that is prescribed by the regulations for the purposes of this definition.
²Section 15(1) of the Government Telecommunications Act 2018 (NSW).

The NSW Telco Authority established and tracked its own costs for the CCEP

Over the course of the program from 2016, the NSW Telco Authority prepared a series of business cases and program reviews that estimated its cost of implementing the program in full, including those shown in Exhibit 6 below.

Exhibit 6: Estimated costs to fully implement the CCEP
Source	Capital cost ($ million)	Operating cost ($ million)	Completion date
March 2016 business case	400	37.3	2020
November 2017 internal review	476.7	41.7	2022
March 2020 business case	950–1,050	--	2025
October 2020 business case	1,263.1	56.1	2026

Source: CCEP business cases as identified.

In response to the 2016 CCEP business case, the then NSW Government approved the NSW Telco Authority implementing the CCEP in full, with funding provided in stages. The NSW Telco Authority tracked its costs against approved funding, with monthly reports provided to the multi-agency Program Steering Committee

Throughout the program, the NSW Government was informed of increasing costs being incurred by the NSW Telco Authority for the CCEP

The various business cases, program updates, and program reviews prepared by the NSW Telco Authority were provided to the NSW Government through the required Cabinet process when seeking approval for the program proceeding and requests for both capital and operational funding. These provided clear indication of the changing overall cost of the CCEP to the NSW Telco Authority, as well as the delays that were being experienced.

There was no transparency to the Parliament and community about changes in the capital cost of the CCEP until the 2021–22 NSW Budget

As the business cases for the CCEP were not publicly available, the only sources of information about capital cost were NSW Budget papers and media releases. The information provided in the annual Budget papers prior to the 2021–22 NSW Budget provided no visibility of the estimated full capital cost to complete all stages of the CCEP. As shown in Exhibit 7 below, this information was fragmented and complex.

Media releases about the progress of the CCEP did not provide the estimated total cost to the NSW Telco Authority of $1.325 billion to complete all stages of the CCEP until June 2021. Prior to this date, media releases only provided funding for the initial stages of the program or for the stages subject to a funding announcement.

Even during the September 2019 and March 2020 Parliamentary Estimate Committee hearings where the costings and delays to the CCEP were raised, the estimated full cost of the CCEP was not revealed.

Exhibit 7: CCEP funding in NSW Budget papers from 2015–16 to 2022–23
Financial year	Type of major work	Description of expenditure	Forecast estimate to complete ($ million)	Estimated duration
2015–16	New work	Infrastructure Rationalisation Program: Planning and Pilot	18.3	2015–16
2016–17	Work in progress	CCEP Planning and Pilot	18.3	2015–17
2016–17	New work	CCEP	45	2016–17
2017–18	New work	CCEP	190.75	2017–21
2018–19	Work in progress	CCEP North Coast and State-wide Detailed Design	190.75	2017–21
2018–19	New work	CCEP Greater Metropolitan Area	236	2018–22
2019–20	Work in progress	CCEP	426.9	2018–22
2020–21	Work in progress	CCEP	664.8	2018–22
2021–22	Work in progress	CCEP	1,325	2018–26
2022–23	Work in progress	CCEP	1,292.8	2018–26

Source: NSW Treasury, Annual State Budget Papers.

The original business case for the CCEP included estimated ESO costs, though these costs were not tracked throughout the program

Estimates for ESO costs for operating and maintaining their own radio networks over the four years from 2016–17 were included in the original March 2016 business case. They included $75.2 million for capital expenditure and $95 million for one-off operating costs. These costs, as well as costs incurred by ESOs due to the delay in the program, were not subsequently tracked by the NSW Telco Authority.

In January 2017, Infrastructure NSW reviewed the CCEP business case of March 2016. In this review, Infrastructure NSW recommended that the NSW Telco Authority identify combined and apportioned costs and cashflow for all ESOs over the CCEP funding period reflecting all associated costs to deliver the CCEP. These to include additional incidental capital costs accruing to ESOs, transition and migration to the new network and the cost (capital and operational) of maintaining existing networks. This recommendation was implemented in the November 2017 program review, with ESO capital costs estimated as $183 million.

In 2019, Infrastructure NSW conducted a Deep Dive Review on the progress of the CCEP. In this review, Infrastructure NSW made what it described as a 'critical recommendation' that the NSW Telco Authority:

…coordinate a stocktake of the costs of operational bridging solutions implemented by PSAs [ESOs] as a result of the 18-month delay, so that a whole-of-government cost impact is available to the NSW Government.

It should be noted that the delay to CCEP completion now is seven years and that further ‘operational bridging solutions’ have been needed by the ESOs.

'Stay Safe and Keep Operational' costs incurred by ESOs will be significantly higher than originally estimated

Stay Safe and Keep Operational (SSKO) funding was established to provide funding to ESOs to maintain their legacy networks while the CCEP was refreshing and enhancing the PSN. This recognised that much of the network infrastructure relied on by ESOs had reached – or was reaching – obsolescence and would either require extensive maintenance or replacement before the PSN was available for ESOs to migrate to it. ESOs may apply to NSW Treasury for SSKO funding, with their specific proposals being reviewed (and endorsed, where appropriate) by the NSW Telco Authority. Accordingly, SSKO expenditure does not fall within the CCEP budget allocation.

As shown in the table below, extracted from the March 2016 CCEP business case, the total expected cost for SSKO purposes over the course of the CCEP was originally $40 million, assuming the enhanced PSN would be fully available by 2020.

Exhibit 8: Stay Safe and Keep Operational forecast costs, 2017 to 2020
Year	2017	2018	2019	2020	Total
SSKO forecast ($ million)	12.5	15	10	2.5	40

Source: March 2016 CCEP business case.

In October 2022, the expected completion date for the CCEP was re-baselined to August 2027. Accordingly, ESOs will be required to continue to maintain their radio networks using legacy equipment for seven years longer than the original 2020 forecast. This will likely become progressively more expensive and require additional SSKO funding. For example, NSW Telco Authority endorsed SSKO bids for 2022–23 exceeded $35 million for that year alone.

Compared to the original forecast made in the March 2016 CCEP business case of $40 million, we found ESOs had estimated SSKO spending to 2027 will be $292.5 million.

A refresh of paging network used by ESOs and the decommissioning of redundant sites were both removed from the original 2016 scope of the CCEP

Paging

A paging network is considered an important user requirement by the Fire and Rescue NSW, NSW Rural Fire Service, and NSW State Emergency Service. The 2016 CCEP business case included a paging network refresh within the program scope of works. This was reiterated in the November 2017 internal review of the program. These documents did not estimate a cost for this refresh. The March 2020 and October 2020 business cases excluded paging from the program scope. The audit is unable to identify when, why or by whom the decision was made to remove paging from the program scope, something that was also not well communicated to the affected ESOs.

In 2021, after representations from the affected ESOs, the NSW Telco Authority prepared a separate business case for a refresh of the paging network at an estimated capital cost of $60.31 million. This program was subsequently approved by the NSW Government and included in the 2022–23 NSW Budget.

In determining an estimated full whole-of-government cost of delivering the enhanced PSN, we have included the budgeted cost of the paging network refresh on the basis that:

it was expressly included in the original approved March 2016 business case
the capability is deemed essential to the needs of three ESOs.

Decommissioning costs

The 2016 CCEP business case included cost estimates for decommissioning surplus sites (whether ‘old’ GRN sites or sites belonging to ESOs’ own networks). These estimates were provided for both the NSW Telco Authority ($38 million) and for the ESOs ($55 million). However, while these estimates were described, they were not included as part of the NSW Telco Authority's estimated capital cost ($400 million) or (more relevantly) operating cost ($37.3 million) for the CCEP. This is despite decommissioning being included as one of eight planned activities for the rollout of the program.

In the October 2020 business case, an estimate of $201 million was included for decommissioning agency networks based on a model whereby:

funding would be coordinated by the NSW Telco Authority
scheduling and reporting through an inter-agency working group and
where appropriate, agencies would be appointed as the most appropriate decommissioning party.

This estimated cost is not included in the CCEP budget.

In determining an estimated full whole-of-government cost of the enhanced PSN, we have included the estimated cost of decommissioning on the basis that:

decommissioning was included in the 2016 CCEP business case as one of eight 'planned activities for the rollout of the program'
effective decommissioning of surplus sites and equipment (including as described in the business case as incorporating asset decommissioning, asset re-use, and site make-good) is an inherent part of the program management for an enhanced PSN
costs incurred in decommissioning are entirely a consequence of the CCEP program.

The estimated minimum cost of building an enhanced PSN consistent with the original proposal is over $2 billion

We have derived two estimated minimum whole-of-government costs for delivering an enhanced PSN. These are:

$2.04 billion when calculated from NSW Telco Authority data – shown as estimate A in Exhibit 9 below.
$2.26 billion when calculated from ESO supplied data – shown as estimate B in Exhibit 9.

Both totals include:

budgeted amounts for both CCEP capital expenditure ($1,292.8 million) and operating expenditure ($139 million)
the NSW Telco Authority's 2020 estimated cost for decommissioning ($201 million)
the NSW Telco Authority's approved funding for paging refresh ($60.3 million).

The two estimated totals primarily vary around the capital expenditure of ESOs (particularly SSKO funding). To determine these costs, we used ESO provided actual SSKO costs to date, as well as their estimates for maintaining their legacy radio networks through to 2027.

The equivalent cost estimates from the NSW Telco Authority were sourced from the November 2017 internal review and the October 2020 business case for CCEP. It should be noted that the amounts for both estimates are not audited, or verified, but do provide an indication of how whole-of-government costs have grown over the course of the program.

The increase in and reasons for the increase in total CCEP costs (capital and one-off operating) incurred or forecast by the NSW Telco Authority (from $437.3 million in 2016 to $1,431.8 million in 2022) have been provided to the NSW Government through various business cases and reviews prepared by the NSW Telco Authority, as well as by reviews conducted by Infrastructure NSW as part of its project assurance responsibilities.

However, the growth in ESO costs and other consequential costs, such as paging and decommissioning, from around $263 million in the 2016 CCEP business case to between $600 million and $800 million, has to a large degree remained invisible and unexplained to the NSW Government and other stakeholders

Exhibit 9: Estimated whole-of-government costs of the enhanced PSN
	Estimated whole-of-government cost, over time
Cost type	2016¹	2017²	2020³	2023–Estimate A⁴	2023–Estimate B⁵
Cost type	$ million	$ million	$ million	$ million	$ million
CCEP capital expenditure	400^a	476.7^b	1,263.1^c	1,292.8^d	1,292.8^d
CCEP operating expenditure	37.3^a	41.7^b	41.5^e	139^d	139^d
CCEP total	437.3	518.4	1,304.6	1,431.8	1,431.8
ESO capital expenditure	75.2^a,f	183^b,e	75.4^e	258.4^g	292.5
ESO one-off operating expenditure	93^a	n.a.^l	86.5^e	86.5^h	273
ESO total	168.2	183	161.9	344.9	565.5
Paging	n.a.ⁱ	n.a.ⁱ	n.a.^j	60.3^k	60.3^k
Decommissioning	93	n.a.^l	201.0	201^h	201
Paging and decommissioning total	93	n.a.	201	261.3	261.3
Whole-of-government total	698.5	701.4	1,667.5	2,038	2,258.6

Notes:

Financial year 2016 to Financial year 2020.
Financial year 2016 to Financial year 2021.
Financial year 2016 to Financial year 2025.
Financial year 2016 to Financial year 2026.
Financial year 2022 to Financial year 2025.
Stay Safe and Keep Operational (SSKO) costs plus terminals costs.
November 2017 internal review and October 2020 Business case.
October 2020 Business case.
Included in CCEP capital expenditure at that time.
By 2020, a refresh of the paging network had been removed from the CCEP scope.
A separate business case for a refresh of the paging network was approved by government in 2022.
Figure not included in the source document.

Sources:

March 2016 CCEP business case.
November 2017 Internal Review conducted by the NSW Telco Authority.
October 2020 CCEP business case.
Derived from business cases, with ESO costs drawn from NSW Telco Authority data.
Derived from business cases, with ESO costs based on data provided to the Audit Office of New South Wales by each of the five ESOs.

Appendix two – Trunked public safety radio networks

Appendix three – About the audit

Appendix four – Performance auditing

Parliamentary reference - Report number #383 - released 23 June 2023

13 December 2022

Published

Stronger Communities 2022

Justice

Community Services

Asset valuation

Compliance

Cyber security

Financial reporting

Information technology

Internal controls and governance

Management and administration

Procurement

Project management

Risk

What the report is about

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

What we found

Unqualified audit opinions were issued on all completed 30 June 2022 financial statement audits. One audit is ongoing.

All 13 cluster agencies that have accommodation arrangements with Property NSW derecognised right-of-use assets and lease liabilities of $917 million and $1 billion respectively. The agencies also collectively recorded a gain on derecognition of $136 million.

The Department of Communities and Justice (the department) assumed the responsibility for delivery of the Process and Technology Harmonisation program from the Department of Customer Service. In 2021–22, the department incurred costs of $42.8 million in relation to the project, which remains ongoing.

The number of monetary misstatements identified during the audits decreased from 50 in 2020–21 to 48 in 2021–22.

What the key issues were

Six of the 15 cluster agencies required to submit 2021–22 mandatory early close procedures did not meet the statutory deadlines. One agency did not complete all mandatory procedures.

Five high-risk findings were identified in 2021–22. They related to deficiencies in:

user access administration at the department, NSW Rural Fire Service and New South Wales Aboriginal Land Council (NSWALC)
segregation of duties at the NSW Trustee and Guardian and NSWALC.

Recommendations were made to those agencies to address these control deficiencies.

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

financial reporting
audit observations.

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

This chapter outlines our audit observations related to the financial reporting of agencies in the Stronger Communities cluster (the cluster) for 2022.

Section highlights

Unqualified audit opinions were issued on all completed 30 June 2022 financial statement audits of cluster agencies, including the acquittal and compliance audits for the Legal Aid Commission of New South Wales and Crown Solicitor's Office. One audit is ongoing.
Reported corrected misstatements decreased from 30 in 2020–21 to 23 with a gross value of $187 million in 2021–22 ($101 million in 2020–21). Reported uncorrected misstatements increased from 20 in 2020–21 to 25 with a gross value of $92.3 million in 2021–22 ($107 million in 2020–21).
Six of the 15 cluster agencies required to submit 2021–22 early close financial statements and all other mandatory procedures did not meet the statutory deadlines. One agency did not complete all mandatory procedures.
All 13 cluster agencies that have accommodation arrangements with Property NSW accepted the changes in the Client Acceptance Letters, resulting in the derecognition of right-of-use assets and lease liabilities of $917 million and $1 billion respectively. The agencies also collectively recorded a gain on derecognition of $136 million.
The Department of Communities and Justice (the department) assumed the responsibility to deliver the Process and Technology Harmonisation program from the Department of Customer Service. In 2021–22, the department incurred costs of $42.8 million in relation to the project.
In 2021–22, the department continued to implement the International Financial Reporting Standards Interpretations Committee's agenda decision on 'Configuration or customisation costs in a cloud computing arrangement'. The department's review of the remaining arrangements, with a net book value of $233 million at 30 June 2021, resulted in the recognition as an expense (through accumulated funds at 1 July 2020) of previously capitalised intangible assets totalling $106 million.

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

This chapter outlines our observations and insights from our financial statement audits of agencies in the Stronger Communities cluster.

Section highlights

The number of issues reported to management has decreased from 130 in 2020–21, to 110 in 2021–22, and 43% were repeat issues (51% in 2020–21). Many repeat issues related to information technology, governance and oversight controls, and non-compliance with key legislation and/or agency policies.
Five high-risk issues were identified in 2021–22, all of which are repeat issues and related to user access administration and segregation of duties.
Of the 24 newly identified moderate risk issues, 11 related to information technology. The rest related to governance and oversight controls and internal control deficiencies or improvements in payroll, asset management and other processes.

Appendix one – Misstatements in financial statements submitted for audit

Appendix one – Misstatements in financial statements submitted for audit

Copyright notice

8 December 2022

Published

Regional NSW 2022

Environment

Industry

Planning

Asset valuation

Compliance

Financial reporting

Fraud

Information technology

Infrastructure

Internal controls and governance

Management and administration

Regulation

Risk

Shared services and collaboration

What the report is about

Result of the Regional NSW cluster agencies' financial statement audits for the year ended 30 June 2022.

What we found

Unmodified audit opinions were issued for Regional NSW cluster agencies. Two audits are ongoing.

What the key issues were

The Department of Regional NSW (the department) and Local Land Services (LLS) accepted changes to their office leasing arrangements managed by Property NSW.

These changes resulted in the collective derecognition of $100.6 million of rights-of-use-assets and $110.4 million of lease liabilities.

In 2021–22, the cluster agencies continued to assist communities in their recovery from recent weather emergencies, including significant flooding in New South Wales.

The Northern Rivers Reconstruction Corporation was established in May 2022 to rebuild communities in the Lismore and Northern Rivers region impacted by floods.

The number of matters reported to management decreased from 36 in 2020–21 to 14 in 2021–22.

Five moderate risk issues were identified and 14% of reported issues were repeat issues.

One moderate risk issue was a repeat issue related to Local Land Services' annual fair value assessment of the asset improvements on land reserves used for moving stock.

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

financial reporting
audit observations.

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

This chapter outlines our audit observations related to the financial reporting of agencies in the Regional NSW cluster (the cluster) for 2022.

Section highlights

Unqualified audit opinions were issued on the financial statements of cluster agencies. Two audits are ongoing.
Cluster agencies completed all required early close procedures.
Changes to accommodation arrangements managed by Property NSW on behalf of the department and cluster agencies resulted in the collective derecognition of approximately $100.6 million in right-of-use assets and corresponding lease liabilities totalling $110.4 million from the balance sheets of these agencies.
Cluster agencies continue to provide financial assistance to communities affected by natural disasters.

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 Regional NSW cluster.

Section highlights

The 2021–22 audits identified five moderate issues across the cluster. One moderate risk issue was a repeat issue related to Local Land Services' annual fair value assessment of the asset improvements on land reserves used for moving stock.
Of the four newly identified moderate rated issues, one related to internal control deficiencies and improvements and three related to financial reporting.
The number of findings reported to management has decreased from 36 in 2020–21 to 14 in 2021–22.

Appendix one – Misstatements in financial statements submitted for audit

7 December 2022

Published

Health 2022

Health

Whole of Government

Asset valuation

Compliance

Cyber security

Financial reporting

Information technology

Infrastructure

Internal controls and governance

Management and administration

Procurement

Risk

Service delivery

Shared services and collaboration

Workforce and capability

What the report is about

Result of Health cluster (the cluster) agencies' financial statement audits for the year ended 30 June 2022.

What we found

Unmodified audit opinions were issued for the financial statements for all Health cluster agencies.

The COVID-19 pandemic continued to increase the complexity and number of accounting matters faced by the cluster. The total gross value of corrected misstatements in 2021–22 was $353.3 million, of which $186.7 million related to an increase in the impairment provision for Rapid Antigen Tests (RATs).

A qualified audit opinion was issued on the Annual Prudential Compliance Statement related to five residential aged care facilities. There were 20 instances (19 in 2020–21) of non-compliance with the prudential responsibilities within the Aged Care Act 1997.

What the key issues were

The total number of matters we reported to management across the cluster decreased from 116 in 2020–21 to 67 in 2021–22. Of the 67 issues raised, four were high risk (three in 2020-21) and 37 were moderate risk (57 in 2020–21). Nearly half of all control deficiencies reported in 2021–22 were repeat issues.

Three unresolved high-risk issues were:

COVID-19 inventories impairment – we continued to identify issues relating to management’s impairment model which relies on anticipated future consumption patterns. RATs had not been assessed for impairment.
Asset capitalisation threshold – management has not reviewed the appropriateness of the asset capitalisation threshold since 2006.
Forced-finalisation of HealthRoster time records – we continued to observe unapproved rosters being finalised by system administrators so payroll can be processed on time. 2.6 million time records were processed in this way in 2021–22.

What we recommended

COVID-19 inventories impairment – ensure consumption patterns are supported by relevant data and plans.
Assets capitalisation threshold – undertake further review of the appropriateness of applying a $10,000 threshold before capitalising expenditure on property, plant and equipment.
Forced-finalisation of HealthRoster time records – develop a methodology to quantify the potential monetary value of unapproved rosters being finalised.

This report provides Parliament and other users of Health cluster (the cluster) agencies' financial statements with the results of our audits, analysis, conclusions and recommendations in the following areas:

financial reporting
audit observations.

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

This chapter outlines our audit observations related to the financial reporting of agencies in the Health cluster (the cluster) for 2022.

Section highlights

Unqualified audit opinions were issued for all cluster agencies required to prepare general purpose financial statements.
The total gross value of corrected monetary misstatements for 2021–22 was $353.3 million, of which, $186.7 million related to an increase in the impairment provision for Rapid Antigen Tests.
A qualified audit opinion was issued on the ministry's Annual Prudential Compliance Statements.

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

This chapter outlines our observations and insights from our financial statement audits of agencies in the cluster.

Section highlights

The total number of internal control deficiencies has decreased from 116 in 2020–21 to 67 in 2021–22. Of the 67 issues raised in 2021–22, four were high (2020–21: 3) and 37 were moderate (2020–21: 57); with nearly half of all control deficiencies reported in 2021–22 being repeat issues.
The following four issues were reported in 2021–22 as high risk:
- impairment of COVID-19 inventories
- inadequate review over the appropriateness of asset capitalisation threshold
- forced-finalisation of HealthRoster time records
- COVID-19 vaccination inventories – data quality issue at 31 March 2022.
Management of excessive leave balances and poor quality or lack of documentation supporting key agreements continued to be the key repeat issues observed in the 2021–22 financial reporting period.

Appendix one – Included reports, 2018–2022

Copyright notice

30 June 2022

Published

Audit Insights 2018-2022

Community Services

Education

Environment

Finance

Health

Industry

Justice

Local Government

Premier and Cabinet

Planning

Transport

Treasury

Universities

Whole of Government

Asset valuation

Cross-agency collaboration

Compliance

Cyber security

Financial reporting

Fraud

Information technology

Infrastructure

Internal controls and governance

Management and administration

Procurement

Project management

Regulation

Risk

Service delivery

Shared services and collaboration

Workforce and capability

What the report is about

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

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

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

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

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

What we found

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

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

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

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

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

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

Fast facts

72 audits included in the Audit Insights 2018–2022 analysis
4 years of audits tabled by the Auditor-General for New South Wales
6 key themes for Audit Insights 2018–2022.

picture of Margaret Crawford Auditor-General for New South Wales in black dress with city skyline as background I am pleased to present the Audit Insights 2018–2022 report. This report describes key findings, trends and lessons learned from the last four years of audit. It seeks to inform the New South Wales Parliament of key risks identified and to provide insights and suggestions to the agencies we audit to improve performance across the public sector.

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

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

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

Margaret Crawford
Auditor-General for New South Wales

Integrity and transparency	Performance and monitoring	Governance and oversight	Cyber security and data	System planning	Resource management
Insufficient documentation of decisions reduces the ability to identify, or rule out, misconduct or corruption.	Failure to apply lessons learned risks mistakes being repeated and undermines future decisions on the use of public funds.	The control environment should be risk-based and keep pace with changes in the quantum and diversity of agency work.	Building effective cyber resilience requires leadership and committed executive management, along with dedicated resourcing to build improvements in cyber security and culture.	Priorities to meet forecast demand should incorporate regular assessment of need and any emerging risks or trends. Absence of an overarching strategy to guide decision-making results in project-by-project decisions lacking coordination.	Governments must weigh up the cost of reliance on consultants at the expense of internal capability, and actively manage contracts and conflicts of interest.
Government entities should report to the public at both system and project level for transparency and accountability.	Government activities benefit from a clear statement of objectives and associated performance measures to support systematic monitoring and reporting on outcomes and impact.	Management of risk should include mechanisms to escalate risks, and action plans to mitigate risks with effective controls.	In implementing strategies to mitigate cyber risk, agencies must set target cyber maturity levels, and document their acceptance of cyber risks consistent with their risk appetite.	Service planning should establish future service offerings and service levels relative to current capacity, address risks to avoid or mitigate disruption of business and service delivery, and coordinate across other relevant plans and stakeholders.	Negotiations on outsourced services and major transactions must maintain focus on integrity and seeking value for public funds.
Entities must provide balanced advice to decision-makers on the benefits and risks of investments.	Benefits realisation should identify responsibility for benefits management, set baselines and targets for benefits, review during delivery, and evaluate costs and benefits post-delivery.	Active review of policies and procedures in line with current business activities supports more effective risk management.	Governments hold repositories of valuable data and data capabilities that should be leveraged and shared across government and non-government entities to improve strategic planning and forecasting.	Formal structures and systems to facilitate coordination between agencies is critical to more efficient allocation of resources and to facilitate a timely response to unexpected events.	Transformation programs can be improved by resourcing a program management office.
Clear guidelines and transparency of decisions are critical in distributing grant funding.	Quality assurance should underpin key inputs that support performance monitoring and accounting judgements.	Governance arrangements can enable input into key decisions from both government and non-government partners, and those with direct experience of complex issues.			Workforce planning should consider service continuity and ensure that specialist and targeted roles can be resourced and allocated to meet community need.
Governments must ensure timely and complete provision of information to support governance, integrity and audit processes.
Read more	Read more	Read more	Read more	Read more	Read more

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

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

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

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

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

Appendix two – About this report

Copyright notice

15 December 2021

Published

Health 2021

Health

Asset valuation

Compliance

Cyber security

Financial reporting

Infrastructure

Internal controls and governance

Procurement

This report analyses the results of our audits of the Health cluster agencies for the year ended 30 June 2021.

Our preferred approach is to table the ‘Report on State Finances’ in Parliament before any other cluster report. This is because the 'Report on State Finances' focuses on the audit results and observations relating to the Total State Sector Accounts, in effect a consolidation of all government agencies. This year the 'Report on State Finances' has been delayed due to significant accounting issues being considered in the Total State Sector Accounts and which may impact the Treasury and Transport clusters.

As there are no outstanding matters relating to audits in the Health cluster impacting the Total State Sector Accounts we have decided to break with normal practice and table this cluster report ahead of the ‘Report on State Finances’.

What the report is about

The results of Health cluster (the cluster) agencies' financial statements audits for the year ended 30 June 2021.

What we found

Unmodified audit opinions were issued for the financial statements of all Health cluster agencies.

The COVID-19 pandemic increased the complexity and number of accounting matters faced by the cluster. The total gross value of corrected misstatements in 2020–21 was $250.2 million, of which $226.0 million were pandemic related.

A qualified audit opinion was issued on the Annual Prudential Compliance Statement. The basis of the qualification related to 19 instances (18 in 2018–19) of non-compliance relating to three of the 20 prudential requirements across five aged care facilities.

What the key issues were

The total number of matters we reported to management across the cluster increased from 112 in 2019–20 to 116 in 2020–21. Of the 116 issues raised in 2020–21, three were high risk (one in 2019–20) and 57 were moderate risk (47 in 2019–20). Nearly one half of the issues were repeat issues.

The three new high-risk issues identified were:

Hotel Quarantine (HQ) fees

The absence of a tailored debt recovery strategy, data integrity issues and uncertainties around future HQ arrangements increased risks around the recoverability of HQ fees from travellers.

COVID-19 inventories

Data errors and anomalies in the impairment model and difficulties forecasting key factors impacting the management of Personal Protective Equipment (PPE) increased uncertainty associated with the valuation and impairment of COVID-19 inventories.

COVID-19 vaccines

The Commonwealth did not provide information about the cost of vaccines provided to NSW free of charge, which required the performance of internal valuations to reflect the consumption of vaccines in the financial statements.

What we recommended

Hotel Quarantine (HQ) fees

Develop a tailored assessment methodology to estimate recoverability of HQ fees and work with Revenue NSW to develop a tailored debt recovery strategy.

COVID-19 inventories

Review the current stocktaking and impairment methodology to incorporate validation of data key to the management of COVID-19 related PPE.

COVID-19 vaccines

Work with the Commonwealth to obtain primary price information on COVID-19 vaccines.

Fast facts

The Health cluster, comprising 15 local health districts, five pillars agencies, two specialty health networks and six shared state-wise services agencies, deliver health services to the people of New South Wales.

100% unqualified audit opinions were issued on agencies' 30 June 2021 financial statements
24 monetary misstatements were reported in 2020–21
3 high risk management letter findings were identified
47.4% of reported issues were repeat issues
$23.5b property, plant and equipment as at 30 June 2021
$26.8b total expenditure incurred in 2020–21

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

financial reporting
audit observations.

Financial reporting is an important element of good governance. Confidence and transparency in public sector decision-making are enhanced when financial reporting is accurate and timely. This chapter outlines our audit observations related to the financial reporting of agencies in the Health cluster (the cluster) for 2021.

Section highlights

Unqualified audit opinions were issued for all cluster agencies required to prepare general-purpose financial statements.
The total gross value of all corrected monetary misstatements for 2020–21 was $250.2 million, of which $226.0 million were related to complexities arising from the COVID-19 pandemic.
A qualified audit opinion was issued on the Ministry's Annual Prudential Compliance Statement.

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 Health cluster.

Section highlights

The total number of internal control deficiencies has increased from 112 issues in 2019–20 to 116 in 2020–21. Of the 116 issues raised in 2020–21, three were high (one in 2019–20) and 57 were moderate (47 in 2019–20); with nearly one half of all control deficiencies reported in 2020–21 being repeat issues.
The complexities arising from accounting for agreements between governments to respond to the COVID-19 pandemic presented three new high risk audit findings with respect to the:
- expected rate of recoverability of outstanding Hotel Quarantine fees
- procurement, stocktaking and impairment of COVID-19 inventories
- valuation and recognition of COVID-19 vaccines received from the Commonwealth Government.
Management of excessive leave balances and poor quality or lack of documentation supporting key agreements were amongst the repeat issues observed again in the 2020–21 financial reporting period.

Findings reported to management

The number of findings reported to management has increased, with 47.4 per cent of all issues being repeat issues

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

In 2020–21, there were 116 findings raised across the cluster (112 in 2019–20). 47.4 per cent of all issues were repeat issues (38.4 per cent in 2019–20).

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

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

Risk rating	Issue
Information technology
Moderate² 7 new, 3 repeat	We identified the need for agencies to improve information technology processes and controls that support the integrity of financial data used to prepare agencies' financial statements. Of particular concern are issues associated with: lack of reviews of user access and privileged user access for HealthRoster Assets and Facilities Management Online vMoney Powerhouse Patient Billing and Revenue Collection system. Repeat issues included: deficient password controls no independent review for data integrity of any changes made to HealthRoster incomplete reviews of StaffLink User Access.
Low¹ 4 new, 5 repeat
Internal control deficiencies or improvements
High³ 1 new, 0 repeat	We identified internal control weaknesses across key business processes, including new issues relating to: procurement, stocktaking and impairment of COVID-19 inventories (personal protective equipment) instances where employees' timesheets were approved in advance monthly reconciliations not reviewed in a timely manner asset revaluation processes at Illawarra Shoalhaven Local Health District. Repeat issues included: forced finalisation of rosters in order to finalise processing of payroll partial repeat issue relating to HealthShare NSW's stocktake process, refer to details in the following section of this report.
Moderate² 6 new, 12 repeat
Low¹ 10 new, 4 repeat
Financial reporting
High³ 2 new, 0 repeat	We identified weaknesses with respect to financial reporting in relation to the: expected rate of recoverability of outstanding Hotel Quarantine fees valuation and recognition of COVID-19 vaccines received from the Commonwealth Government application of AASB 16 'Leases' improvement in health agencies' grant register to better support management's accounting treatment under the applicable revenue accounting standards.
Moderate² 6 new, 1 repeat
Low¹ 8 new, 3 repeat
Governance and oversight
Moderate² 9 new, 5 repeat	We identified opportunities for agencies to improve governance and oversight processes, including: ensure better documentation around governance arrangements for major health capital works delivered by Health Infrastructure absence of documented practices at health agencies level relating to Visiting Medical Officer claims. Repeat issues include: delegations manual for Health Infrastructure remains in draft and has done so since 2017.
Low¹ 2 new, 2 repeat
Non-compliance with key legislation and/or central agency policies
Moderate² 1 new, 7 repeat	We identified the need for agencies to improve compliance with key legislation and central agency policies, with new findings including: bank signatories list not updated to remove terminated employees subsequent changes made to Junior Medical Officers' approved rosters not approved by an authorised delegate. Repeat issues include: management of excessive annual leave non-compliance with the Government Information (Public Access) Act 2009 (GIPA Act) by Ambulance NSW.
Low¹ 5 new, 13 repeat

⁴Extreme risk from the consequence and/or likelihood of an event that has had, or may have a negative impact on the entity.
³ High risk from the consequence and/or likelihood of an event that has had, or may have a negative impact on the entity.
² Moderate risk from the consequence and/or likelihood of an event that has had, or may have a negative impact on the entity.
¹ Low risk from the consequence and/or likelihood of an event that has had, or may have a negative impact on the entity.

Note: Management letter findings are based either on final management letters issued to agencies, or draft letters where findings have been agreed with management.

Complexities arising from the COVID-19 response

The 2020–21 audit identified three new high-risk findings

COVID-19 has presented the cluster with several new accounting challenges. New and evolving matters arose from changes to operating conditions, which characterised the 2020–21 financial reporting period. Issues with a high degree of estimation uncertainty will require ongoing attention as the strategies employed to deal with the COVID-19 pandemic evolve.

Expected rate of recovery of outstanding Hotel Quarantine invoices

The estimation of the amount likely to be recovered is complicated not only by the uncertainties that exist regarding the assumptions those estimations rely upon, but also the debt collection processes and strategies put into place to manage the accumulated debtors' balance. Debt collection is not administered by the cluster, but rather Revenue NSW. We observed an absence of a methodology to assess the likelihood of recovery. Instead, Sydney Local Health District was relying on Revenue NSW to develop and execute on a collection strategy. Sydney Local Health District was using the same approach to hotel quarantine debts as it did to other Health receivables. As the approach to managing international borders evolves over time, so too will the cluster's need to develop robust estimation models to assess the likely collectability of debtors.

Procurement, management and impairment of COVID-19 inventories

$656.2 million of COVID-19 inventories were procured in 2020–21, with $220.2 million consumed; $558.7 million impaired and a further $217.1 million written off. Estimates of the degree to which inventories are expired, not fit for purpose or are faulty is often based on management judgement at all stages in the procurement cycle.

With respect to the stocktaking methodology applied, the following issues were identified:

discrepancies noted in the stock bin listing provided for audit
discrepancies in the recount sheet generated
inconsistent application of the stocktake methodology
inconsistent labelling of quarantined stock
a lack of an approach for validating stock expiry dates, which is a key input to the impairment calculations.

Although management had developed processes and a methodology to count as well as to assess the level of inventory that was not fit for purpose, ongoing attention to the operating environment that emerges post pandemic will be important in assessing the degree to which existing COVID-19 inventories can be integrated into a ‘business as usual’ model going forward. Further refinement of the key elements of the stocktaking methodology will also be required to ensure that key inputs upon which management relies to calculate the year-end inventory impairment provision can be appropriately validated.

Valuation and recognition of COVID-19 vaccines received from the Commonwealth Government

The 2020–21 financial reporting period saw the Commonwealth acquire COVID-19 vaccines and provide these to state jurisdictions to dispense to their communities. The vaccines, although provided free of charge require recognition. However, Health entities were not responsible for acquiring the vaccines and data on the vaccines' cost was not shared by the Commonwealth. Management undertook a valuation using publicly available data to estimate the value to attribute to the vaccine inventory; developed new systems and leveraged existing pharmacy systems to track physical quantities received from the Commonwealth and ultimately distributed to NSW citizens. As the response to the pandemic evolves, larger quantities, and new lines of vaccine stock will be dealt with, and policy settings will need to adapt when patterns of distribution of those vaccines (e.g., timing of third booster shots) emerge. The Ministry of Health will need to ensure that the valuations applied to the prices of inventory distributed and held in stock are as accurate as possible. This can be done through further refinement of the existing valuation methodology, obtaining price information from the Commonwealth and engaging specialist pharmaceutical valuers.

Emerging trends

Recognition of provisions without sufficient support

Several NSW Health entities raised accruals and provisions in 2020–21, which did not have an appropriate basis for recognition. Liabilities can only be recognised where there is a present obligation to make a payment arising from a past event. A number of these errors remain uncorrected in the financial statements of those entities as they are not material, individually or in aggregate to the financial statements as a whole. Increased training and guidance are required to ensure that treatment within the cluster is consistent and reflects events that have occurred and give rise to obligations.

Treatment of Commonwealth funding

In the 2020–21 and 2019–20 financial reporting periods, we observed prior period errors arising from the treatment of Commonwealth funding. These errors related to recognising revenue under funding agreements entered into with the Commonwealth in the incorrect period. The conditions of these funding arrangements, the transactional information requiring validation and the circumstances when revenue should be recognised are not always clear and can be complex. Early and continuous engagement with the Commonwealth is required to ensure that revenue recognition principles are consistently applied across the cluster.

Key repeat issues

Management of excessive annual leave

NSW Treasury guidelines stipulate annual leave balances exceeding 30 days are considered excess annual leave balances. Managing excess annual leave balances has been reported as an issue for the cluster for more than five years, with the average percentage of employees with excessive leave balances over the last five years being 36.1 per cent (35.5 per cent over five years covering 2015–16 to 2019–20).

The operational demands required to manage the COVID-19 pandemic have presented new challenges for the cluster in trying to manage its excessive leave balances. 39.2 per cent of employees now have excess leave balances at 30 June 2021 (35.4 per cent at 30 June 2020).

The state's leave policy C2020-12 Managing Accrued Recreation Leave Balances requires agencies to manage excessive leave balances to 30 days or less to maintain their workforces physical and mental health.

Accurate time recording

Forced-finalisation of time records by system administrators within HealthRoster remains an issue and we continue to observe time records forced-finalised by system administrators so pay runs can be finalised on a timely basis. During 2020–21, a total of two million (2.2 million in 2019–20) time records were force approved, which represents 5.7 per cent of total time records (6.9 per cent in 2019–20).

Existence, completeness and accuracy of key agreements

Delivery of major capital projects

Health Infrastructure (a division of the Health Administration Corporation) is responsible for the delivery of major capital projects with a budgeted spend of more than $10.0 million. Health Infrastructure oversee the planning, design, procurement, and construction phases. Capital works in progress are recognised in the financial statements of the health entity that intends to use those assets upon completion. The health entities recognise both the capital work in progress and the revenue associated with the capital funding from the Ministry for the construction of the assets. Capital funding is currently agreed with health entities as part of the annual Service Agreement. The assumption that the health entities control the assets during their construction is consistent with Health Infrastructure's role as an agent for the health entity and the Ministry's policy directive PD2020-033 'Management and control of Health Administration Corporation owned Real Property'.

We continued to observe a lack of clarity regarding agreements between Health Infrastructure, the Ministry and the cluster agency that will eventually receive the completed asset. This can lead to confusion and uncertainty around the rights and obligations of each party to the transaction.

Cross border patient funding arrangements

When patients require medical care in a jurisdiction where they are not generally domiciled, there are arrangements in place to provide funding to support cross border patient treatments. We have previously observed that agreements between NSW and other jurisdictions have not been finalised, and this continues to be the case. In the case of Victoria, no agreement has been finalised for the past seven years.

We continue to note that the cluster has long outstanding receivables and payables with other states. The absence of formal agreements between the states hampers the settlement of the debts relating to the treatment of cross border patients. The following table shows the status of Cross Border Agreements between NSW and other jurisdictions:

States	2014–15	2015–16	2016–17	2017–18	2018–19	2019–20	2020–21
Queensland	Signed	Signed	Signed	Signed	Signed	Not finalised	Not finalised
Victoria	Not finalised	Not finalised	Not finalised	Not finalised	Not finalised	Not finalised	Not finalised
Australian Capital Territory	Signed	Signed	Signed	Signed	Signed	Signed	Not finalised
South Australia	Signed	Signed	Signed	Signed	Signed	Signed	Not finalised
Tasmania	Signed	Signed	Signed	Signed	Signed	Signed	Not finalised
Northern Territory	Signed	Signed	Signed	Signed	Signed	Signed	Not finalised
Western Australia	Signed	Signed	Signed	Signed	Signed	Signed	Not finalised

Albury Base Hospital

Albury Base hospital is located on the border of NSW and Victoria and services residents of both states. Documentation supporting the extension of the expired Intergovernmental Agreement 2009–2017 between NSW and Victoria in relation to the integration of health services in Wodonga and Albury could not be located.

Appendix one – Misstatements in financial statements submitted for audit