What this report is about

Results of the local government sector financial statement audits for the year ended 30 June 2023.

Findings

Unqualified audit opinions were issued for 85 councils, eight county councils and 12 joint organisations.

Qualified audit opinions were issued for 36 councils due to non-recognition of rural firefighting equipment vested under section 119(2) of the Rural Fires Act 1997.

The audits of seven councils, one county council and one joint organisation remain in progress at the date of this report due to significant accounting issues.

Fifty councils, county councils and joint organisations missed the statutory deadline of submitting their financial statements to the Office of Local Government, within the Department of Planning, Housing and Infrastructure, by 31 October.

Audit management letters included 1,131 findings with 40% being repeat findings and 91 findings being high-risk. Governance, asset management and information technology continue to represent 65% of the key areas for improvement.

Fifty councils do not have basic governance and internal controls to manage cyber security.

Recommendations

To improve quality and timeliness of financial reporting, councils should:

• adopt early financial reporting procedures, including asset valuations
• ensure integrity and completeness of asset source records
• perform procedures to confirm completeness, accuracy and condition of vested rural firefighting equipment.

To improve internal controls, councils should:

• track progress of implementing audit recommendations, and prioritise high-risk repeat issues
• continue to focus on cyber security governance and controls.

Read the PDF report

What this report is about

Results of the Regional NSW financial statements audits for the year ended 30 June 2023.

What we found

Unqualified audit opinions were issued on all completed audits in the Regional NSW portfolio agencies.

The number of monetary misstatements identified in our audits increased from 28 in 2021–22 to 30 in 2022–23.

What the key issues were

Effective 1 July 2023, staff employed in the Northern Rivers Reconstruction Corporation Division of the Department of Regional NSW transferred to the NSW Reconstruction Authority Staff Agency.

The Regional NSW portfolio agencies were migrated into a new government wide enterprise resourcing planning system.

The total number of audit management letter findings across the portfolio of agencies decreased from 36 to 23.

A high risk matter was raised for the NSW Food Authority to improve the internal controls in the information technology environment including monitoring and managing privilege user access.

What we recommended

Local Land Services should prioritise completing all mandatory early close procedures.

Portfolio agencies should:

• ensure any changes to employee entitlements are assessed for their potential financial statements impact under the relevant Australian Accounting Standards
• prioritise and address internal control deficiencies identified in audit management letters.

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

• financial reporting
• audit observations.

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

This chapter outlines our audit observations related to the financial reporting of agencies in the Regional NSW portfolio of agencies (the portfolio) for 2023.

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

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

Appendix one – Misstatements in financial statements submitted for audit

Appendix two – Early close procedures

Appendix three – Timeliness of financial reporting

Appendix four – Financial data

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

What this report is about

Results of the Premier and Cabinet portfolio of agencies' financial statement audits for the year ended 30 June 2023.

What we found

Unqualified audit opinions were issued for all Premier and Cabinet portfolio agencies.

What the key issues were

The Administrative Arrangements Orders, effective 1 July 2023, changed the name of the Department of Premier and Cabinet to the Premier's Department and transferred parts of Department of Premier and Cabinet to The Cabinet Office.

The number of monetary misstatements identified in our audits decreased from 15 in 2021–22 to 12 in 2022–23.

The total number of management letter findings across the portfolio of agencies increased from ten in 2021–22 to 20 in 2022–23.

Thirty per cent of all issues were repeat issues. The most common repeat issues related to deficiencies in controls over financial reporting.

What we recommended

Portfolio agencies should:

• ensure any changes to employee entitlements are assessed for their potential financial statements impact under the relevant Australian Accounting Standards
• prioritise and address internal control deficiencies identified in Audit Office management letters.

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

• financial reporting
• audit observations.

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

This chapter outlines our audit observations related to the financial reporting of agencies in the Premier and Cabinet portfolio of agencies (the portfolio) for 2023.

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

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

Appendix one – Early close procedures

© 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 is about

Results of the local government sector financial statement audits for the year ended 30 June 2022.

What we found

Unqualified audit opinions were issued for 83 councils, 11 joint organisations and nine county councils' financial statements.

The financial audits for two councils and two joint organisations are in progress due to accounting issues.

Fifty-seven councils and joint organisations (2021: 41) required extensions to submit their financial statements to the Office of Local Government (OLG), within the Department of Planning and Environment (the department).

The audit opinion on Kiama Municipal Council's 30 June 2021 financial statements was disclaimed due to deficient books and records.

Qualified audit opinions were issued on 43 councils' financial statements due to non-recognition of rural firefighting equipment vested under section 119 (2) of the Rural Fires Act 1997. Forty-seven councils appropriately recognised this equipment.

What we recommended

Consistent with the NSW Government's accounting position and the department's role of assessing councils' compliance with legislative responsibilities, standards or guidelines, the department should intervene where councils do not recognise vested rural firefighting equipment.

The key issues

There were 1,045 audit findings reported to councils in audit management letters, with 52% being unresolved from prior years.

What we recommended

Councils need to track progress of implementing audit recommendations, giving priority to high-risk and repeat issues.

Ninety-three high-risk matters were identified across the sector mainly relating to asset management, information technology, financial accounting and council governance procedures.

Asset valuations

Audit management letters reported 267 findings relating to asset management. Fifty-three councils had deficiencies in processes that ensure assets are fairly stated.

What we recommended

Councils need to complete timely asset valuations (repeat recommendation).

Integrity and completeness of asset source records

Fifty-two councils had weak processes over the integrity of fixed asset registers.

What we recommended

Councils need to improve controls that ensure integrity of asset records (repeat recommendation).

Cybersecurity

Our audits found that 47% of councils did not have a cyber security plan.

What we recommended

All councils need to prioritise creation of a cyber security plan to ensure data and assets are safeguarded.

Pursuant to the Local Government Act 1993 I am pleased to present my Auditor-General's report on Local Government 2022. My report provides the results of the 2021–22 financial audits of 126 councils, 11 joint organisations and nine county councils. The audits for two councils and two joint organisations are in progress due to significant accounting issues.

Unqualified audit opinions were issued for 83 councils, 11 joint organisations and nine county councils' 2021–22 financial statements. The statements for 43 councils were qualified due to non-recognition of rural firefighting equipment vested under section 119 (2) of the Rural Fires Act 1997. And the audit opinion on Kiama Municipal Council's 30 June 2021 financial statements was disclaimed due to deficiencies in books and records.

This year has again been challenging for many New South Wales local councils still recovering from the impact of emergency events and facing cost and resourcing pressures. We appreciate the efforts of council staff and management in meeting their financial reporting obligations. We share a mutual interest in raising the standard of financial management in this sector, and the importance of accurate and transparent reporting.

Disappointingly, accounting for the value of rural firefighting equipment vested in councils continued to be an unnecessary distraction and resulted in 43 councils having their financial statements qualified. We continue to recommend that the Office of Local Government should intervene where councils fail to comply with Australian Accounting Standards by not recognising assets vested to them under section 119(2) of the Rural Fires Act 1997.

Sound financial management is critical to councils' ability to instil trust and properly serve their communities. The recommendations in this report are intended to further improve their financial management and reporting capability, and encourage sound governance arrangements and cyber resilience. I am committed to continuing this work with councils in the 2022–23 year and beyond.

Margaret Crawford PSM

Auditor-General for New South Wales

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

This chapter outlines audit observations related to the financial reporting audit results of councils and joint organisations.

A strong system of internal controls enables councils to operate effectively and efficiently, produce reliable financial reports, comply with laws and regulations, and support ethical government.

This chapter outlines the overall trends in governance and internal controls across councils and joint organisations in 2021–22.

Financial audits focus on key governance matters and internal controls supporting the preparation of councils’ financial statements. Breakdowns and weaknesses in internal controls increase the risk of fraud and error. Deficiencies in internal controls, matters of governance interest and unresolved issues are reported to management and those charged with governance through audit management letters. These letters include our observations, related implications, recommendations and risk ratings.

Total number of findings reported in audit management letters decreased

The following shows the overall findings of the 2021–22 audits reported in management letters compared with the previous year.

Appendix one – Response from the Office of Local Government within the Department of Planning and Environment

Appendix two – Status of audits

Appendix three – Councils received qualified audit opinions

Appendix four – Common reasons for council extensions

Copyright notice

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

What the report is about

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.

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.

Appendix one – Misstatements in financial statements submitted for audit

Appendix two – Early close procedures

Appendix three – Timeliness of financial reporting

Appendix four – 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.

What the report is about

Result of the Premier and Cabinet cluster financial statement audits for the year ended 30 June 2022. 

What we found

Unmodified audit opinions were issued for all Premier and Cabinet cluster agencies.

The machinery of government changes within the Premier and Cabinet cluster resulted in the transfer of net assets of $1 billion from the Department of Premier and Cabinet.

The Department of Premier and Cabinet, Public Service Commission and Parliamentary Counsel's Office accepted changes to their office leasing arrangements managed by Property NSW. These changes resulted in the collective de-recognition of $167.3 million of right-of-use assets, $225.1 million in lease liabilities and recognition of $47.8 million of other gains/losses. 

What the key issues were

The number of issues we reported to management decreased. 

Forty per cent of issues were repeated from the prior year.

Four moderate risk issues were reported in the management letters for Department of Premier and Cabinet and New South Wales Electoral Commission. Three out of the four moderate risk issues were repeat issues. 

The repeat issues related to internal control deficiencies in agencies' including lack of updated procurement policies and procedures and information technology general controls.

This report provides Parliament and other users of the Premier and Cabinet’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 Premier and Cabinet cluster for 2022.

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

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

Appendix one – Early close procedures

Copyright notice

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

What the report is about

Results of the local government sector council financial statement audits for the year ended 30 June 2021.

What we found

Unqualified audit opinions were issued for 126 councils, 13 joint organisation audits and nine county councils in 2020–21. 

A qualified audit opinion was issued for Central Coast Council who was unable to provide evidence to support the carrying value of $5.5 billion of roads, bridges, footpaths, bulk earthworks, stormwater drainage, water supply and sewerage network assets.

The audit of Kiama Municipal Council is still in progress as at the date of this report due to significant accounting issues not resolved resulting in corrections to the financial statements and prior period errors.

Forty-one councils and joint organisations (2020: 16) received extensions to submit audited financial statements to the Office of Local Government (OLG). 

Councils were impacted by recent emergency events, including bushfires, floods and the COVID-19 pandemic. The financial implications from these events varied across councils. Councils adapted systems, processes and controls to enable staff to work flexibly.

What the key issues were

There were 1,277 audit findings reported to councils in audit management letters.

Ninety-two high-risk matters were identified across the sector:

• 69 high-risk matters relating to asset management (see page 30)
• six high-risk matters relating to information technology (see page 39)
• six high-risk matters relating to financial reporting (see page 26)
• six high-risk matters to council governance procedures (see page 22)
• five high-risk matters relating to financial accounting (see page 28).

More needs to be done to reduce the number of errors identified in financial reports. Twenty-nine councils required material adjustments to correct errors in previous audited financial statements.

Rural firefighting equipment

Sixty-eight councils did not record rural firefighting equipment estimated to be $145 million in their financial statements.

The financial statements of the NSW Total State Sector and the NSW Rural Fire Service do not include these assets, as the State is of the view that rural firefighting equipment that has been vested to councils under the Rural Fires Act 1997 is not controlled by the State. In reaching this conclusion, the State argued that on balance it would appear the councils control rural firefighting equipment that has been vested to them.

The continued non-recording of rural firefighting equipment in financial management systems of some councils increases the risk that these assets are not properly maintained and managed.

What we recommended

Councils should perform a full asset stocktake of rural firefighting equipment, including a condition assessment for 30 June 2022 financial reporting purposes and recognise this equipment as assets in their financial statements. 

Consistent with OLG’s role to assess council’s compliance with legislative responsibilities, standards or guidelines, OLG should intervene where councils do not recognise rural firefighting equipment.

Early financial reporting procedures

Fifty-nine per cent of councils performed some early financial reporting procedures, less than the prior year.

What we recommended

OLG should require early financial reporting procedures across the local government sector by April 2023. Policy requirements should be discussed with key stakeholders to ensure benefits of the procedures are realised.

Asset valuations

Audit management letters reported 288 findings relating to asset management. Fifty-eight councils had deficiencies in their processes to revalue infrastructure assets.

Thirty-five councils corrected errors relating to revaluations amounting to $1 billion and 13 councils had prior period errors relating to asset revaluations that amounted to $253 million.

What we recommended

Councils should have all asset revaluations completed by April of the financial year subject to audit.

Integrity/completeness of asset records

Sixty-seven councils had weak processes over maintenance, completeness and security of fixed asset registers.

Thirty-five councils corrected errors to the financial statements relating to poor record keeping of asset data that amounted to $102.1 million. Nineteen councils had 27 prior period financial statement errors that amounted to $417.1 million relating to the quality of asset records such as found and duplicate assets.

What we recommended

Councils need to improve controls and processes to ensure integrity and completeness of asset source records.

Cybersecurity

Our audits found that cybersecurity frameworks and related controls were not in place at 65 councils.

These councils have yet to implement basic governance and internal controls to manage cybersecurity such as having a cybersecurity framework, policy and procedure, register of cyber incidents, system penetrations testing and training.

What we recommended

OLG needs to develop a cybersecurity policy to be applied by councils as a matter of high priority in order to ensure cybersecurity risks over key data and IT assets are appropriately managed across councils and key data is safeguarded.

Councils should monitor the implementation of recommendations

Fifty-three per cent of total findings reported in 2020–21 audit management letters were repeat or partial repeat findings from prior years.

What we recommended

Councils and those charged with governance should track the progress of implementing recommendations from financial audits, performance audits and public inquiries.

Pursuant to the Local Government Act 1993 I present my report Local Government 2021. My report provides the results of the 2020–21 financial audits of 127 councils, 13 joint organisations and nine county councils.

Unqualified audit opinions were issued for 126 councils, 13 joint organisation and nine county councils in 2020–21. My independent auditor’s opinion was qualified for Central Coast Council who was unable to provide evidence to support the carrying value of $5.5 billion of roads, bridges, footpaths, bulk earthworks, stormwater drainage, water supply and sewerage network assets.

The 2020–21 year was challenging from many perspectives, not least being the continuing impact of and response to the recent emergency events, including bushfires, floods and the COVID-19 pandemic. We appreciate the efforts of council staff and management right across local government and they must be congratulated for their responsiveness and resilience in meeting their financial reporting obligations in such challenging circumstances.

This report makes a number of recommendations to councils and to the regulator, the Office of Local Government within the Department of Planning and Environment. These are intended to support councils to further improve the timeliness, accuracy and strength of financial reporting and their governance arrangements. Arguably, when faced with challenges, it is even more important to prioritise and invest in systems and processes to protect the integrity of councils' operations and promote accurate and transparent reporting.

I look forward to continuing engagement and constructive dialogue with councils in 2022–23 and beyond.

Margaret Crawford
Auditor-General for New South Wales

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

This chapter outlines audit observations related to the financial reporting of councils and joint organisations.

A strong system of internal controls enables councils to operate effectively and efficiently, produce reliable financial reports, comply with laws and regulations, and support ethical government.

This chapter outlines the overall trends in governance and internal control findings across councils, county councils and joint organisations in 2020–21.

Financial audits focus on key governance matters and internal controls supporting the preparation of councils' financial statements. Audit findings are reported to management and those charged with governance through audit management letters.

Total number of findings reported in audit management letters decreased

In 2020–21, 1,277 audit findings were reported in audit management letters (2019–20: 1,435 findings). No extreme audit risk findings were identified this year. The extreme risk relating to Central Coast Council's use of externally restricted funds in 2019–20 was partially addressed by management and has been rated as a high-risk for 2020–21. The total number of high-risk findings increased to 92 (2019–20: 53 high-risk findings).

Findings are classified as new, repeat or ongoing, based on:

• new findings were first reported in 2020–21 audits
• repeat findings were first reported in prior year audits, but remain unresolved in 2020–21
• ongoing findings were first reported in prior year audits, but the action due dates to address the findings are after 2020–21.

Findings are categorised as governance, financial reporting, financial accounting, asset management, purchases and payables, payroll, cash and banking, revenue and receivables, or information technology. The high-risk and common audit findings across these areas are explored further in this chapter.

Audit Office’s annual work program for 2021–22 onwards

Focus on integrity of systems, good governance and good advice

We have a fundamental role in helping the Parliament hold government accountable for the use of public resources. In doing so, we examine whether councils' systems and processes are effective in supporting integrity, accountability and transparency. Key aspects of integrity that we expect to through conduct of our financial and performance audits over the next three years include the integrity of systems, good governance and good advice. These focus areas have arisen from the collation of key findings and recommendations from our past reports.

Focus on local councils' continued response to recent emergencies

The COVID-19 pandemic continues to have a significant impact on the people and the public sector of New South Wales. Local councils are continuing to assist communities in their recovery from the 2019–20 bushfires and subsequent and recent flooding. The full extent of some of these events remain unclear and will likely continue to have an impact into the future.

The Office of Local Government within the Department of Planning and Environment continues to work with other state agencies to assist local councils and their communities to recover from these unprecedented events.

The increasing and changing risk environment presented by these events has meant that we have recalibrated and focused our efforts on providing assurance on how effectively aspects of responses to these emergencies have been delivered.

This includes financial and governance risks arising from the scale and complexity of government responses to these events.

We will take a phased approach to ensure our financial and performance audits address the following elements of the emergencies and the Local Government's responses:

• local councils' planning and preparedness for emergencies
• local councils' initial responses to support people and communities impacted by COVID-19 and the 2019–20 bushfires and recent floods
• governance and oversight risks that arise from the need for quick decision-making and responsiveness to emergencies
• effectiveness and robustness of processes to direct resources toward recovery efforts and ensure good governance and transparency in doing so
• the mid to long-term impact of government responses to the natural disasters and COVID-19
• whether government investment has achieved desired outcomes.

Focus on the effectiveness of cybersecurity in local government

The increasing global interconnectivity between computer networks has dramatically increased the risk of cybersecurity incidents. Such incidents can harm local government service delivery and may include theft of information, denial of access to critical technology, or even hijacking of systems for profit or malicious intent.

Outdated IT systems and capability present risks to government cybersecurity. Local councils need to be alert to the need to update and replace legacy systems, and regularly train and upskill staff in their use. To add to this, cybersecurity risks have been exacerbated by recent emergencies, which have resulted in greater and more diverse use of digital technology.

Our approach to auditing cybersecurity across in the sector involves:

• considering how local councils are responding to the risks associated with cybersecurity across our financial audits
• examining the effectiveness of cybersecurity planning and governance arrangements within local councils
• conducting deep-dive performance audits of the effectiveness of cybersecurity measures in selected councils.

Local government elections

Local government elections took place in 2021–22

The local government elections were deferred for one year due to the COVID-19 pandemic and were held on 4 December 2021.

As part of our audits, we will consider the impact of any significant change on key decisions and activities for councils, county councils and joint organisations following the local government elections.

New rate peg methodology to support growing councils

The Independent Pricing and Regulatory Tribunal (IPART) has completed its review of the local government rate peg methodology to include population growth.

On 10 September 2021, IPART provided the final report on this review to the Minister for Local Government.

The minister has endorsed the new rate peg methodology and has asked IPART to give effect to it in setting the rate peg from the 2022–23 financial year.

As part of our audits, we will consider the impact of these changes on the financial statements and on key decisions and activities for councils, county councils and joint organisations.

Appendix one – Response from the Office of Local Government within the Department of Planning and Environment

Appendix two – Status of previous recommendations

Appendix three – Status of audits

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 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.

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.

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.

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.

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:

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

Appendix two – Early close procedures

Appendix three – Timeliness of financial reporting

Appendix four – 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.

What the report is about

Results of the local government sector council financial statement audits for the year ended 30 June 2020.

What we found

Unqualified audit opinions were issued for 127 councils, 9 county councils and 13 joint organisation audits in 2019–20. A qualified audit opinion was issued for Central Coast Council.

Councils were impacted by recent emergency events, including bushfires and the COVID-19 pandemic. The financial implications from these events varied across councils. Councils adapted systems, processes and controls to enable staff to work flexibly.

What the key issues were

There were 1,435 findings reported to councils in audit management letters.

One extreme risk finding was identified related to Central Coast Council’s use of restricted funds for general purposes.

Fifty-three high risk matters were identified across the sector:

• 21 high risk matters relating to asset management
• 14 high risk matters relating to information technology
• 7 high risk matters relating to financial reporting
• 4 high risk matters to council governance procedures
• 3 high risk matters relating to financial accounting
• 3 high risk matters relating to purchasing and payables
• 1 high risk matter relating to cash and banking.

More can be done to reduce the number of errors identified in financial reports. 61 councils required material adjustments to correct errors in previous audited financial statements.

Rural fire fighting equipment

Sixty-eight councils did not record rural fire fighting equipment worth $119 million in their financial statements.

The NSW Government has confirmed these assets are not controlled by the NSW Rural Fire Service and are not recognised in the financial records of the NSW Government.

What we recommended

The Office of Local Government should communicate the State's view that rural firefighting equipment is controlled by councils in the local government sector, and therefore this equipment should be properly recorded in their financial statements.

Central Coast Council

A qualified opinion was issued for Central Coast Council (the Council) relating to two matters.

Council did not conduct the required revaluation to support the valuation of roads.

Council also disclosed a prior period error relating to restrictions of monies collected for their water, sewer, and drainage operations, which, based on the NSW Crown Solicitor’s advice, should be considered a change in accounting policy.

What we recommended

The Office of Local Government should clarify the legal framework relating to restrictions of water, sewerage and drainage funds (restricted reserves) by either seeking an amendment to the relevant legislation or by issuing a policy instrument to remove ambiguity from the current framework.

Further information

Please contact Ian Goodwin, Deputy Auditor-General on 9275 7347 or by email.

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

This chapter outlines audit observations related to the financial reporting of councils and joint organisations.

Recent emergency events, including drought, bushfires, floods and the COVID-19 pandemic have impacted councils.

This chapter will provide insights into how these events have impacted councils, including:

• financial implications of the emergency events
• changes to councils' operating models, processes and controls
• accessibility to technology and the maturity of councils' systems and controls to prevent unauthorised and fraudulent access to data
• receipt and delivery of stimulus packages or programs at short notice.

Recent emergency events significantly impacted councils

Recent emergencies, including drought, bushfires, floods and the COVID-19 pandemic have brought particular challenges for councils and their communities.

A strong system of internal controls enables councils to operate effectively and efficiently, produce reliable financial reports, comply with laws and regulations and support ethical government.

This chapter outlines the overall trends in governance and internal control findings across councils, county councils and joint organisations in 2019–20. It also includes the findings reported in the 2018–19 audits of Hilltops, MidCoast and Murrumbidgee councils as these audits were finalised after the Report on Local Government 2019 was published.

Financial audits focus on key governance matters and internal controls supporting the preparation of councils' financial statements. Audit findings are reported to management and those charged with governance through audit management letters.

Total number of findings reported in audit management letters decreased

In 2019–20, 1,435 findings were reported in audit management letters (2018–19: 1,985 findings). An extreme risk finding was also identified this year related to Central Coast Council's use of restricted funds. The total number of high-risk findings decreased to 53 (2018–19: 82 high-risk findings).

Findings are classified as new, repeat or ongoing findings, based on:

• new findings were first reported in 2019–20 audits
• repeat findings were first reported in prior year audits, but remain unresolved in 2019–20
• ongoing findings were first reported in prior year audits, but the action due dates to address the findings are after 2019–20.

Findings are categorised as governance, financial reporting, financial accounting, asset management, purchases and payables, payroll, cash and banking, revenue and receivables, or information technology. The high-risk and common findings across these areas are explored further in this chapter.

Audit Office’s work plan for 2020–21 onwards

Focus on local council's response and recovery from recent emergencies

Local councils and their communities will continue to experience the effects of recent emergency events, including the bushfires, floods and the COVID 19 pandemic for some time. The full extent of some of these events remain unclear and will continue to have an impact into the future. The recovery is likely to take many years.

The Office of Local Government (OLG) within the Department of Planning, Industry and Environment is working with other state agencies to assist local councils and their communities to recover from these unprecedented events.

These events have created additional risks and challenges, and changed the way that councils deliver their services.

We will take a phased approach to ensure our financial and performance audits address the following elements of the emergencies and the Local Government's responses:

• local councils' preparedness for emergencies
• its initial responses to support people and communities impacted by the 2019–20 bushfires and floods, and COVID-19
• the governance and oversight risks that arise from the need for quick decision making and responsiveness to emergencies
• the effectiveness and robustness of processes to direct resources toward recovery efforts and ensure good governance and transparency in doing so
• the mid to long-term impact of government responses to the natural disasters and COVID-19
• whether government investment has achieved desired outcomes.

Planned financial audit focus areas in Local Government

During 2020–21, the financial audits will focus on the following key areas:

• cybersecurity, including:
  • cybersecurity framework, policies and procedures
  • assessing the controls management has to address the risk of cybersecurity incidents
  • whether cybersecurity risks represent a risk of material misstatement to council's financial statements
• budget management
• financial sustainability
• quality and timeliness of financial reporting
• infrastructure, property, plant and equipment
• information technology general controls.

Audit, risk and improvement committees

All councils are required to have an audit, risk and improvement committee by March 2022

The requirement for all councils to establish an audit, risk and improvement committee was deferred by 12 months to March 2022 due to the COVID 19 pandemic.

Audit, risk and improvement committees are an important contributor to good governance. They help councils to understand strategic risks and how they can mitigate them. An effective committee helps councils to build community confidence, meet legislative and other requirements and meet standards of probity, accountability and transparency.

Local Government elections

Local Government elections were postponed for one year due to the COVID 19 pandemic

The Local Government elections were deferred for one year due to the COVID 19 pandemic and will now be held on 4 September 2021. As the statutory deadline for the 2020–21 financial statements is 30 October 2021, some of the newly elected councillors will be required to endorse them.

Implementation of AASB 1059

Accounting standards implementation continue next year

AASB 1059 is effective for councils for the 2020–21 financial year.

A service concession arrangement typically involves a private sector operator that is involved with designing, constructing or upgrading assets used to provide public services. They then operate and maintain those assets for a specified period of time and is compensated by the public sector entity in return. Examples of potential service concession arrangements impacting councils include roads, community housing, childcare services and nursing homes.

AASB 1059 may result in councils recognising more service concession assets and liabilities in their financial statements.

Appendix one – Response from the Department of Planning, Industry and Environment

Appendix two – NSW Crown Solicitor’s advice

Appendix three – Status of 2019 recommendations

Appendix four – Status of audits

© 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 for New South Wales, Margaret Crawford today released her report on the findings and recommendations from the 2019–20 financial audits that relate to internal controls and governance at 40 of the largest agencies in the NSW public sector.

The bushfire and flood emergencies and the COVID‑19 pandemic continue to have a significant impact on the people and public sector of New South Wales. The scale of the government response to these events has been significant. The report focuses on the effectiveness of internal controls and governance processes, including relevant agencies’ response to the emergencies. In particular, the report focuses on:

• financial and information technology controls
• business continuity and disaster recovery planning arrangements
• procurement, including emergency procurement
• delegations that support timely and effective decision-making.

Due to the ongoing impact of COVID‑19 agencies have not yet returned to a business‑as‑usual environment. ‘Agencies will need to assess their response to the recent emergencies and update their business continuity, disaster recovery and other business resilience frameworks to reflect the lessons learnt from these events’ the Auditor-General said.

The report noted that special procurement provisions were put in place to allow agencies to better respond to the COVID-19 pandemic. The Auditor-General recommended agencies update their procurement policies to reflect the current requirements of the NSW Procurement Framework and the emergency procurement requirements.

Read the PDF report

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 2020. These 40 agencies constitute an estimated 85 per cent of total expenditure for all NSW public sector agencies.

1. Internal control trends

2. Information technology controls

3. Business continuity and disaster recovery planning

4. Procurement, including emergency procurement

5. Delegations

6. Status of 2019 recommendations

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 business continuity and disaster recovery planning arrangements.

This chapter outlines our audit observations, conclusions and recommendations, arising from our review of procurement agency procurement policies and procurement activity.

This chapter outlines our audit observations, conclusions and recommendations, arising from our review of agency compliance with financial and human resources delegations.

Appendix one – List of 2020 recommendations 

Appendix two – Status of 2019 recommendations

Appendix three – Cluster agencies

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.