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Published

Actions for Industry 2018

Industry 2018

Industry
Asset valuation
Cyber security
Financial reporting
Information technology
Internal controls and governance
Service delivery

The Auditor-General for New South Wales, Margaret Crawford, released her report today on the Industry cluster. The report focuses on key observations and findings from the most recent financial audits of agencies in the cluster. Cluster agencies received unqualified audit opinions for 41 out of the 47 financial statements presented for audit for 30 June 2018. Six audits remain incomplete. 'While it is pleasing to note that unqualified audit opinions have been issued, the timeliness of financial reporting needs to be improved through better oversight, prompt resolution of issues, and an increased focus on early close procedures', the Auditor-General said.

This report analyses the results of our audits of financial statements of the Industry cluster for the year ended 30 June 2018. The table below summarises our key observations.

This report provides parliament and other users of the Industry cluster agencies' financial statements with the results of our audits, including our observations, analysis, conclusions and recommendations in the following areas:

  • financial reporting
  • audit observations
  • service delivery.

The Department of Industry (the Department) is the lead agency in a cluster of 50 agencies. Other significant agencies in the cluster include Local Land Services, New South Wales Rural Assistance Authority, Technical and Further Education Commission (TAFE NSW), various sporting agencies, Forestry Corporation NSW and Water NSW.

The cluster:

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

This chapter outlines our audit observations related to the financial reporting of agencies in the Industry cluster for 2018.
 

Observation Conclusions and recommendations
2.1 Quality of financial reporting
Unqualified audit opinions were issued for 41 out of 47 financial statement audits. Six audits are continuing.

The number of misstatements identified in financial statements submitted for audit increased from 73 in 2016–17 to 92 in 2017–18.
Conclusion: Agencies continue to address financial reporting issues and ensure significant matters that may impact the audit opinion are appropriately dealt with. The increase in the number of misstatements indicates a renewed focus on quality is required.
2.2 Timeliness of financial reporting
Nineteen out of 37 audit opinions were issued within the statutory deadline. Delays occurred due to the time required to resolve issues identified during the audit, or to obtain appropriate evidence to support balances or disclosures in the financial statements. There were also delays in receiving the signed certification from the agency, required before we can issue an audit opinion.

We reviewed the conduct of early close procedures at 17 agencies. Fifteen of these agencies were assessed as not fully addressing mandatory early close procedures.
Recommendation: Timeliness of financial reporting should be improved through better oversight of the preparation of financial statements, prompt resolution of issues, and an increased focus on early close procedures.
2.3 Key financial reporting issues
Information system limitations continue at TAFE NSW. TAFE NSW implemented additional processes to verify the accuracy and completeness of revenue from student fees. Conclusion: Procedures to address system limitations are costly, causing delays in financial reporting and increased resource commitments for staff, contractors and audit.
Misstatements and internal control issues continue to be identified in accounting for Crown land. The information system used to record Crown land was not designed to facilitate efficient financial reporting. These limitations and other control weaknesses impacted the completeness and accuracy of the Department's financial statements.
Recommendation: The Department should address system limitations and control weaknesses to ensure complete and accurate reporting for Crown land.
Unprocessed Aboriginal land claims continue to increase. Recommendation (repeat issue): The Department should reduce unprocessed Aboriginal land claims.
2.4 Financial information and sustainability
Cluster agencies recorded a combined surplus of $58.0 million compared to a combined deficit of $86.0 million in the previous year.

 

We identified five agencies with potential sustainability issues such as low liquidity or negative net assets. Conclusion: Adequate arrangements are in place to mitigate potential sustainability issues. These arrangements include a commitment from the Department to provide financial support if required. 

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

This chapter outlines our observations and insights from:

  • our financial statement audits of agencies in the Industry cluster for 2018
  • the areas of focus identified in the Audit Office work program.

The Audit Office Annual Work Program provides a summary of all audits to be conducted within the proposed time period as well as detailed information on the areas of focus for each of the NSW Government clusters.

Observation Conclusions and recommendations
3.1 Internal control
Almost one in three internal control issues identified in 2017–18 were repeat issues. Recommendation (repeat issue): Recommendations to management to address internal control issues from prior years should be addressed promptly to reduce risks and improve processes.
3.2 Information technology controls
User access administration over financial systems remains an area of weakness. Two high risk and 18 moderate risk issues related to user access administration across nine agencies were identified. Recommendation (repeat issue): Agencies' controls over administration of user access to critical systems should:
  • retain documentation of approvals to create, modify and deactivate user access
  • allocate appropriate access rights
  • perform and document regular user access reviews
  • log and monitor privileged/super user account activity
  • deactivate terminated user access on a timely basis.
3.3 Annual work program
Errors continue to be identified in the Crown land database.

Instances were identified where Crown land was not recognised by the appropriate entity, or was recognised by more than one entity.
Recommendation: The Department should ensure the Crown land database is complete and accurate so state agencies and local government councils are better informed about the Crown land they control.
Approximately 700 managers of Crown land do not submit financial statements required by the Public Finance and Audit Act 1983. NSW Treasury and the Department are continuing work to clarify reporting arrangements for these entities.
3.4 Managing maintenance
Some cluster agencies do not monitor their backlog maintenance. Consequently, the total backlog maintenance in the Industry cluster is unknown. This impacts the reliability and consistency of information about assets and their condition. When backlog maintenance is unknown, it is difficult for agencies to develop an accurate and effective maintenance plan that focuses on areas of highest need. It also means agencies' maintenance plans are reactive rather than preventative.
Effective maintenance planning helps agencies to:
  • quantify and budget asset maintenance costs
  • support service delivery at the lowest possible long-term cost
  • reduce service disruptions and losses due to asset failure
  • identify and respond to risks posed by the age and condition of assets.
Recommendation: Cluster agencies should develop an asset maintenance plan and complete an assessment of the condition of their assets to identify any maintenance backlogs. 
Maintenance budgets in some cluster agencies are not set based on actual maintenance needs. Recommendation: Cluster agencies should set their maintenance budgets based on identified maintenance needs to more accurately budget and prioritise expenditure.

Agencies in the Industry cluster provide services across a wide variety of areas. This chapter outlines certain service delivery outcomes for 2017–18 for the Industry cluster. It provides important contextual information about the cluster's operation, but the data on activity levels and performance is provided by Cluster agencies. The Audit Office does not have a specific mandate to audit performance information. Accordingly, the information in this chapter is unaudited. 

In our recent performance audit, Progress and measurement of Premier's Priorities, we identified 12 limitations of performance measurement and performance data. We recommended that the Department of Premier and Cabinet ensure that processes to check and verify data are in place for all agency data sources.

Published

Actions for Central Agencies 2018

Central Agencies 2018

Treasury
Premier and Cabinet
Finance
Financial reporting
Internal controls and governance
Management and administration
Risk

The Auditor-General for New South Wales, Margaret Crawford, released her report today on the results of the financial audits of NSW Government central agencies. The report focuses on key observations and findings from the most recent financial statement audits of agencies in the Treasury, Premier and Cabinet, and Finance, Services and Innovation clusters. While clear audit opinions were issued on all agency financial statements, the report notes that some complex accounting requirements caused significant errors in agency financial statements submitted for audit, which were corrected before the financial statements were approved. 

This report analyses the results of our audits of the Treasury, Premier and Cabinet and Finance, Services and Innovation cluster agencies for the year ended 30 June 2018. The table below summarises our key observations.

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

  • financial reporting
  • audit observations
  • liquidity risk management
  • government financial services.

The central agencies and their key responsibilities are set out below.

Central agencies Key central agency responsibilities Cluster responsibilities
The Treasury
  • Financial and economic advisor to NSW Government
  • Manages the NSW Government’s financial resources.

The cluster:

  • provides investment and debt management services though TCorp
  • manages residual business arising from privatisation of government businesses
  • provides insurance and compensation cover, including workers compensation insurance
  • includes NSW Government superannuation funds.
Department of Premier and Cabinet
  • Drives NSW Government’s objectives and sets targets
  • Works with clusters to coordinate policy and achieve NSW Government priorities.

The cluster:

  • includes integrity agencies, such as the Independent Commission Against Corruption, Audit Office of NSW and Ombudsman’s Office
  • other agencies, such as Barangaroo Delivery Authority and Infrastructure NSW.
Department of Finance, Services and Innovation
  • Supports agency service delivery in relation to the key enabling functions of NSW Government, including procurement, property and asset management, ICT and digital innovation.

The cluster:

  • is responsible for state revenue and rental bond administration
  • regulates statutory insurance schemes, workplace safety and consumer protection
  • provides access to a range of NSW Government services via Service NSW
  • manages the NSW Government communications network.
Public Service Commission
  • Works to promote and maintain a strong ethical culture across the government sector and improve the capabilities, performance and configuration of the sector’s workforce to deliver better services to the public.
  • The Public Service Commission is an independent agency within the Premier and Cabinet cluster.

Note: The Audit Office of NSW is an independent agency included in the Premier and Cabinet cluster for administrative purposes, but not commented on in this report.


A full list of agencies that this report covers by relevant cluster is included in Appendix three.

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 Treasury, Premier and Cabinet and Finance, Services and Innovation clusters for 2018.

Observation Conclusions and recommendations
2.1 Quality of financial reporting
Unqualified opinions were issued for all agencies' financial statements submitted to the Audit Office.

Complex accounting requirements caused significant errors in some agency financial statements, which were corrected before the financial statements were approved.
Sufficient audit evidence was obtained to conclude the financial statements were free of material misstatement.
Recommendation: Agencies should respond to key accounting issues when they are identified by preparing accounting papers and engaging with Treasury, the Audit Office and their Audit and Risk Committee when these matters are identified.
2.2 Timeliness of financial reporting
Most agencies complied with the statutory timeframe for completion of early close procedures, 48 agencies in the Treasury cluster did not comply with the statutory requirement to prepare financial statements, and the audits of nine agencies in the Treasury cluster were not completed within the statutory timeframe.
All financial statement information of the 48 agencies that did not prepare financial statements has been captured in the consolidated financial statements of their parent entity, which was subject to audit.
Early close procedures allow financial reporting issues and risks to be addressed early in the audit process. The timeliness of financial reporting can be improved by performing more robust early close procedures.

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

This chapter outlines our observations and insights from:

  • our financial statement audits of agencies in the Treasury, Premier and Cabinet and Finance, Services and Innovation cluster for 2018
  • the areas of focus identified in the Audit Office work program.

The Audit Office work program provides a summary of all audits to be conducted within the proposed time period as well as detailed information on the areas of focus for each of the NSW Government clusters.

Observation Conclusions and recommendations
3.1 Internal controls
The 2017–18 audits found one high risk issue and 83 moderate risk issues across the agencies. Nineteen per cent of all issues were repeat issues. Agencies should focus on rectifying repeat issues.
The high risk issue at Service NSW related to several deficiencies in procurement and contract management processes. Service NSW may not be achieving value-for-money
from their procurement and contract management activities. The high risk issue should be rectified as a matter of priority. This includes updating and implementing its procurement, vendor and contract management frameworks and delivering training to key staff involved in procurement and contract management activities.
Property NSW has implemented several controls during the year to rectify the high risk issue identified last year related to its transition to a new property and facility management service provider. However, the service providers performance remains below expectations and there are further opportunities to improve oversight and lift performance. Property NSW can better define roles and accountabilities with the service provider and formalise policies and processes associated with its monitoring and oversight of the service provider.

Implementing relevant KPIs, receiving timely reports and providing timely review and feedback to the service provider may help to lift performance.
GovConnect received unqualified opinions from their service auditor on all business process controls, except for information technology controls provided by Unisys, where a qualified opinion was received from the service auditor. A qualified opinion was received because of several deficiencies in user access controls. These internal control deficiencies increase the risk of unauthorised access to key business systems, and increase audit effort and costs associated with addressing the risks arising from the deficiencies.
3.2 Audit Office annual work program

Remediation of the Barangaroo site is now estimated to cost the Barangaroo Delivery Authority in excess of net $400 million.
 
The increase in the estimate over the last five years is mainly due to the extent of remediation required, as more evidence of contamination has become known.

Measuring the remaining costs to remediate requires the use of estimation techniques and judgements, making the actual outcome inherently uncertain. We reviewed evidence to support the provision for remediation, including future costs estimates and this evidence supported management’s estimate.
The State Insurance Regulatory Authority have administered the refund of $138 million in Green slip refunds to policy holders through Service NSW during 2017–18. At 30 June 2018, $112 million in refunds are yet to be claimed.
 
We reviewed the systems and processes supporting the refund process. While we found that this supports the disbursement of refunds to policyholders there were some deficiencies in Service NSW’s project controls when the program was being developed.

 
Service NSW should apply the lessons learnt from this program to other programs it is delivering or will be delivering for agencies.
Revenue NSW recorded $30.4 billion from taxes, fines and fees in 2017–18 ($30.0 billion in 2016–17) to support the State’s finances. 
 
Crown revenue has steadily increased over the last five years predominately driven by rises in payroll tax and land tax and responsibility for collection of the Emergency Services Levy transferring to Revenue NSW under the Emergency Services Levy Act 2017 effective from July 2017. 
3.3 Managing maintenance
Place Management NSW manages significant commercial and retail leases and maintains public domain spaces and other assets around the harbour foreshore. It has consistently underspent its asset maintenance budget. In 2017–18, asset maintenance expenses were only 34 per cent of budgeted maintenance expense.

Currently, Place Management NSW does not use any ratios or benchmarks to determine the adequacy of its maintenance spend or to monitor whether it is achieving its budgeted maintenance program. 
This may be contributing to a high proportion of unplanned maintenance, which Place Management NSW reports was 38 per cent of total maintenance expense in 2017–18.

Place Management NSW is outsourcing its property and facilities management function from 1 December 2018 to an external service provider. 
 

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

Observation Conclusions and recommendation
5.1 Superannuation funds
The SAS Trustee Corporation (STC) Pooled Fund and the Parliamentary Contributory Superannuation (PCS) Fund are not required to comply with the prudential and reporting standards issued by the Australian Prudential Regulation Authority (APRA). 
However, legislation allows the responsible Minister to prescribe prudential standards, reporting and audit requirements. 
Structured and comprehensive prudential oversight of these Funds is important as they operate in a volatile financial sector, have 103,000 members and manage investments of $43.3 billion.
Recommendation: Treasury should consult with the Trustees of the STC Pooled Fund and PCS Fund to prescribe appropriate prudential standards and requirements, including oversight arrangements.
5.2 Insurance and compensation
Nominal Insurer and NSW Self Insurance Corporation investment performance marginally exceeded benchmark over the past five years. Investment returns can impact on the premiums required to maintain an adequate funding ratio in addition to other factors such as claims experience and discount rates.
The Workers Compensation Nominal Insurer (Nominal Insurer) and NSW Self Insurance Corporation's net collected premiums and contributions decreased over the past five years.  The insurance schemes' investment performance and stable claim payments have enabled less reliance on net collected premiums and contributions as a source of funding, over the past five years. 
Reforms were introduced to manage the Home Warranty Scheme's financial sustainability risks.  The Home Warranty Scheme has not collected sufficient premiums to fund expected claims costs, since commencing operations in 2011. In 2017–18, the Crown contributed $181 million for historical shortfalls. New reforms started on 1 January 2018 enabling the Scheme to price premiums based on risk. 

Published

Actions for Transport 2018

Transport 2018

Transport
Asset valuation
Compliance
Financial reporting
Infrastructure
Management and administration
Procurement
Risk
Service delivery
Workforce and capability

The Auditor-General for New South Wales, Margaret Crawford released her report today on key observations and findings from the 30 June 2018 financial statement audits of agencies in the Transport cluster. Unqualified audit opinions were issued for all agencies' financial statements. However, assessing the fair value of the broad range of transport related assets creates challenges.

This report analyses the results of our audits of financial statements of the Transport cluster for the year ended 30 June 2018. The table below summarises our key observations.

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

  • financial reporting
  • audit observations.

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

This chapter outlines our audit observations related to the financial reporting of agencies in the Transport cluster for 2018.

Observation Conclusions and recommendations
2.1 Quality of financial reporting
Unqualified audit opinions were issued for all agencies' financial statements Sufficient audit evidence was obtained to conclude the financial statements were free of material misstatement.
2.2 Key accounting issues
Valuation of assets continues to create challenges. Although agencies complied with the requirements of the accounting standards and Treasury policies on valuations, we identified some opportunities for improvements at RMS.

RMS incorporated data from its asset condition assessments for the first time in the valuation methodology which improved the valuation outcome. Overall, we were satisfied with the valuation methodology and key assumptions, but we noted some deficiencies in the asset data in relation to asset component unit rates and old condition data for some components of assets. 

Also, a bypass and tunnel were incorrectly excluded from RMS records and valuation process since 2013. This resulted in an increase for these assets’ value by $133 million.

The valuation inputs for Wetlands and Moorings were revised this year to better reflect the assets' characteristics resulting in a $98.0 million increase.

2.3 Timeliness of financial reporting
Residual Transport Corporation did not submit its financial statements by the statutory reporting deadline. Residual Transport Corporation remained a dormant entity with no transactions for the year ended 30 June 2018.
With the exception of Residual Transport Corporation, all agencies completed early close procedures and submitted financial statements within statutory timeframes. Early close procedures allow financial reporting issues and risks to be addressed early in the reporting and audit process.
2.4 Financial sustainability
NSW Trains and the Chief Investigator of the Office of Transport Safety Investigations reported negative net assets of $75.7 million and $89,000 respectively at 30 June 2018.  NSW Trains and the Chief Investigator of the Office of Transport Safety Investigations continue to require letters of financial support to confirm their ability to pay liabilities as they fall due. 
2.5 Passenger revenue and patronage
Transport agencies revenue growth increased at a higher rate than patronage. Public transport passenger revenue increased by $114 million (8.3 per cent) in 2017–18, and patronage increased by 37.1 million (5.1 per cent) across all modes of transport based on data provided by TfNSW. 
Negative balance Opal Cards resulted in $3.8 million in revenue not collected in 2017–18 and $7.8 million since the introduction of Opal. A total of 1.1 million Opal cards issued since its introduction have negative balances. Transport for NSW advised it is liaising with the ticketing vendor to implement system changes and are investigating other ways to reduce the occurrences.
2.6 Cost recovery from public transport users
Overall cost recovery from users has decreased. Overall cost recovery from public transport users (on rail and bus services by STA) decreased from 23.2 per cent to 22.4 per cent between 2016–17 and 2017–18. The main reason for the decrease is due to expenditure increasing at a faster rate than revenue in 2017–18.


 

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

This chapter outlines our observations and insights from:

  • our financial statement audits of agencies in the Transport cluster for 2018
  • the areas of focus identified in the Audit Office annual work program.

The Audit Office Annual Work Program provides a summary of all audits to be conducted within the proposed time period as well as detailed information on the areas of focus for each of the NSW Government clusters. 

Observation Conclusions and recommendations
3.1 Internal controls 
There was an increase in findings on internal controls across the Transport cluster. Key themes related to information technology, employee leave entitlements and asset management. Eighteen per cent of all issues were repeat issues.
3.2 Audit Office Annual work program
The Transport cluster wrote-off over $200 million of assets which were replaced by new assets or technology.

Majority of this write-off was recognised by RMS, with $199 million relating to the write-off of existing assets which have been replaced during the year. 

RailCorp is expected to convert to TAHE from 1 July 2019. Several working groups are considering different aspects of the TAHE transition including its status as a for-profit Public Trading Enterprise and which assets to transfer to TAHE. We will continue to monitor developments on TAHE for any impact to the financial statements.
RMS' estimated maintenance backlog at 30 June 2018 of $3.4 billion is lower than last year. Sydney Trains' estimated maintenance backlog at 30 June 2018 increased by 20.6 per cent to $434 million. TfNSW does not quantify its backlog maintenance. TfNSW advised it is liaising with Infrastructure NSW to develop a consistent definition of maintenance backlog across all transport service providers. 
Not all agencies monitor unplanned maintenance across the Transport cluster. Unplanned maintenance can be more expensive than planned maintenance. TfNSW should develop a consistent approach to define, monitor and track unplanned maintenance across the cluster.

This chapter outlines certain service delivery outcomes for 2017–18. The data on activity levels and performance is provided by Cluster agencies. The Audit Office does not have a specific mandate to audit performance information. Accordingly, the information in this chapter is unaudited. 

We report this information on service delivery to provide additional context to understand the operations of the Transport cluster and to collate and present service information for different modes of transport in one report. 

In our recent performance audit, Progress and measurement of Premier's Priorities, we identified 12 limitations of performance measurement and performance data. We recommended that the Department of Premier and Cabinet ensure that processes to check and verify data are in place for all agency data sources.

Published

Actions for Internal Controls and Governance 2018

Internal Controls and Governance 2018

Education
Community Services
Finance
Health
Industry
Justice
Planning
Premier and Cabinet
Transport
Treasury
Whole of Government
Environment
Compliance
Cyber security
Financial reporting
Fraud
Information technology
Internal controls and governance
Management and administration
Procurement
Project management

The Auditor-General for New South Wales Margaret Crawford found that as NSW state government agencies’ digital footprint increases they need to do more to address new and emerging information technology (IT) risks. This is one of the key findings to emerge from the second stand-alone report on internal controls and governance of the 40 largest NSW state government agencies.

This report analyses the internal controls and governance of the 40 largest agencies in the NSW public sector for the year ended 30 June 2018.

This report covers the findings and recommendations from our 2017–18 financial audits that relate to internal controls and governance at the 40 largest agencies (refer to Appendix three) in the NSW public sector.

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

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

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

Without strong governance systems and internal controls, agencies increase the risks associated with effectively managing their finances and delivering services to citizens. The way agencies deliver services increasingly relies on contracts and partnerships with the private sector. Many of these arrangements deliver front line services, but others provide less visible back office support. For example, an agency may rely on an IT service provider to manage a key system used to provide services to the community. The contract and service level agreements are only truly effective where they are actively managed to reduce risks to continuous quality service delivery, such as interruptions caused by system outages, cyber security attacks and data security breaches.

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

  1. Internal control trends
  2. Information technology (IT), including IT vendor management
  3. Transparency and performance reporting
  4. Management of purchasing cards and taxis
  5. Fraud and corruption control.

The findings in this report should not be used to draw conclusions on the effectiveness of individual agency control environments and governance arrangements. Specific financial reporting, controls and service delivery comments are included in the individual 2018 cluster financial audit reports, which will be tabled in Parliament from November to December 2018.

The focus of the report has changed since last year

Last year's report topics included asset management, ethics and conduct, and risk management. We are reporting on new topics this year. We plan to introduce new topics and re-visit our previous topics in subsequent reports on a cyclical basis. This will provide a baseline against which to measure the NSW public sectors’ progress in implementing appropriate internal controls and governance processes to mitigate existing, new and emerging risks in the public sector.

Agencies selected for the volume account for 95 per cent of the state's expenditure

While we have covered only 40 agencies in this report, those selected are a large enough group to identify common issues and insights. They represent about 95 per cent of total expenditure for all NSW public sector agencies.

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

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

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

Observation Conclusions and recommendations
2.1 High risk findings
We found six high risk findings (seven in 2016–17), one of which was repeated from both last year and 2015–16. Recommendation: Agencies should reduce risk by addressing high risk internal control deficiencies as a priority.
2.2 Common findings
We found several internal controls and governance findings common to multiple agencies. Conclusion: Central agencies or the lead agency in a cluster can play a lead role in helping ensure agency responses to common findings are consistent, timely, efficient and effective.
2.3 New and repeat findings
Although internal control deficiencies decreased over the last four years, this year has seen a 42 per cent increase in internal control deficiencies. The increase in new IT control deficiencies and repeat IT control deficiencies signifies an emerging risk for agencies.
IT control deficiencies feature in this increase, having risen by 63 per cent since last year. The number of repeat IT control deficiencies has doubled and is driven by the increasing digital footprint left by agencies as government prioritises on-line interfaces with citizens, and the number of transactions conducted through digital channels increases

Recommendation: Agencies should reduce IT risks by:

  • assigning ownership of recommendations to address IT control deficiencies, with timeframes and actions plans for implementation
  • ensuring audit and risk committees and agency management regularly monitor the implementation status of recommendations.

 

Government agencies’ financial reporting is now heavily reliant on information technology (IT). IT is also increasingly important to the delivery of agency services. These systems often provide the data to help monitor the efficiency and effectiveness of agency processes and services they deliver. Our audits reviewed whether agencies have effective controls in place to manage both key financial systems and IT service contracts.

Observation Conclusions and recommendations
3.1 Management of IT vendors
Contract management framework 
Although 87 per cent of agencies have a contract management policy to manage IT vendors, one fifth require review.
 

Conclusion: Agencies can more effectively manage IT vendor contracts by developing policies and procedures to ensure vendor management frameworks are kept up to date, plans are in place to manage vendor performance and risk, and compliance with the framework is monitored by:

  • internal audit focusing on key contracting activities
  • experienced officers who are independent of contract administration performing spot checks or peer reviews
  • targeted analysis of data in contract registers.
Contract risk management
Forty-one per cent of agencies are not using contract management plans and do not assess contract risks. Half of the agencies that did assess contract risks, had not updated the risk assessments since the commencement of the contract.
 
Conclusion: Instead of applying a 'set and forget' approach in relation to management of contract risks, agencies should assess risk regularly and develop a plan to actively manage identified risks throughout the contract lifecycle - from negotiation and commencement, to termination.

Performance management
Eighty-six per cent of agencies meet with vendors to discuss performance. 

Only 24 per cent of agencies sought assurance about the accuracy of vendor reporting against KPIs, yet sixty-seven per cent of the IT contracts allow agencies to determine performance based payments and/or penalise underperformance.

Conclusion: Agencies are monitoring IT vendor performance, but could improve outcomes and more effectively manage under-performance by:

  • a more active, rigorous approach to both risk and performance management
  • checking the accuracy of vendor reporting against those KPIs and where appropriate seeking assurance over their accuracy
  • invoking performance based payments clauses in contracts when performance falls below agreed standards.

Transitioning services
Forty-three per cent of the IT vendor contracts did not contain transitioning-out provisions.

Where IT vendor contracts do make provision for transitioning-out, only 28 per cent of agencies have developed a transitioning-out plan with their IT vendor.

Conclusion: Contract transition/phase out clauses and plans can mitigate risks to service disruption, ensure internal controls remain in place, avoid unnecessary costs and reduce the risk of 'vendor lock-in'.
Contract Registers
Eleven out of forty agencies did not have a contract register, or have registers that are not accurate and/or complete.

Conclusion: A contract register helps to manage an agency’s compliance obligations under the Government Information (Public Access) Act 2009 (the GIPA Act). However, it also helps agencies more effectively manage IT vendors by:

  • monitoring contract end dates and contract extensions, and commence new procurements through their central procurement teams in a timely manner
  • managing their contractual commitments, budgeting and cash flow requirements.

Recommendation: Agencies should ensure their contract registers are complete and accurate so they can more effectively govern contracts and manage compliance obligations.

3.2 IT general controls
Governance
Ninety-five per cent of agencies have established policies to manage key IT processes and functions within the agency, with ten per cent of those due for review.
 
Conclusion: Regular review of IT policies ensures risks are considered and appropriate strategies and procedures are implemented to manage these risks on a consistent basis. An absence of policies can lead to ad-hoc responses to risks, and failure to consider emerging IT risks and changes to agency IT environments. 

User access administration
Seventy-two deficiencies were identified related to user access administration, including:

  • thirty issues related to granting user access across 43 per cent of agencies
  • sixteen issues related to removing user access across 30 per cent of agencies
  • twenty-six issues related to periodic reviews of user access across 50 per cent of agencies.
Recommendation: Agencies should strengthen the administration of user access to prevent inappropriate access to key systems.
Privileged access
Forty per cent of agencies do not periodically review logs of the activities of privileged users to identify suspicious or unauthorised activities.

Recommendation: Agencies should:

  • review the number of, and access granted to privileged users, and assess and document the risks associated with their activities
  • monitor user access to address risks from unauthorised activity.
Password controls
Twenty-three per cent of agencies did not comply with their own policy on password parameters.
Recommendation: Agencies should ensure IT password settings comply with their password policies.
Program changes
Fifteen per cent of agencies had deficient IT program change controls mainly related to segregation of duties and authorisation and testing of IT program changes prior to deployment.
Recommendation: Agencies should maintain appropriate segregation of duties in their IT functions and test system changes before they are deployed.

 

This chapter outlines our audit observations, conclusions and recommendations from our review of how agencies reported their performance in their 2016–17 annual reports. The Annual Reports (Statutory Bodies) Regulation 2015 and Annual Reports (Departments) Regulation 2015 (annual reports regulation) currently prescribes the minimum requirements for agency annual reports.

Observation Conclusion or recommendation
4.1 Reporting on performance

Only 57 per cent of agencies linked reporting on performance to their strategic objectives.

The use of targets and reporting performance over time was limited and applied inconsistently.

Conclusion: There is significant disparity in the quality and consistency of how agencies report on their performance in their annual reports. This limits the reliability and transparency of reported performance information.

Agencies could improve performance reporting by clearly linking strategic objectives to reported outcomes, and reporting on performance against targets over time. NSW Treasury may need to provide more guidance to agencies to support consistent and high-quality performance reporting in annual reports.

There is no independent assurance that the performance metrics agencies report in their annual reports are accurate.

Prior performance audits have noted issues related to the collection of performance information. For example, our 2016 Report on Red Tape Reduction highlighted inaccuracies in how the dollar-value of red tape reduction had been reported.

Conclusion: The ability of Parliament and the public to rely on reported information as a relevant and accurate reflection of an agency's performance is limited.

The relevance and accuracy of performance information is enhanced when:

  • policies and guidance support the consistent and accurate collection of data
  • internal review processes and management oversight are effective
  • independent review processes are established to provide effective challenge to the assumptions, judgements and methodology used to collect the reported performance information.
4.2 Reporting on reports

Agency reporting on major projects does not meet the requirements of the annual reports regulation.

Forty-seven per cent of agencies did not report on costs to date and estimated completion dates for major works in progress. Of the 47 per cent of agencies that reported on major works, only one agency reported detail about significant cost overruns, delays, amendments, deferments or cancellations.

NSW Treasury produce an annual report checklist to help agencies comply with their annual report obligations.

Recommendation: Agencies should comply with the annual reports regulation and report on all mandatory fields, including significant cost overruns and delays, for their major works in progress.

The information the annual reports regulation requires agencies to report deals only with major works in progress. There is no requirement to report on completed works.

Sixteen of 30 agencies reported some information on completed major works.

Conclusion: Agencies could improve their transparency if they reported, or were required to report:

  • on both works in progress and projects completed during the year
  • actual costs and completion dates, and forecast completion dates for major works, against original and revised budgets and original expected completion dates
  • explanations for significant cost overruns, delays and key project performance metrics.

 

This chapter outlines our audit observations, conclusions and recommendations, arising from our review of agency preventative and detective controls over purchasing card and taxi use for 2017–18.

Observation Conclusion or recommendation
5.1 Management of purchasing cards
Volume of credit card spend
Purchasing card expenditure has increased by 76 per cent over the last four years in response to a government review into the cost savings possible from using purchasing cards for low value, high volume procurement.
 
Conclusion: The increasing use of purchasing cards highlights the importance of an effective framework for the use and management of purchasing cards.
Policy framework
We found all agencies that held purchasing cards had a policy in place, but 26 per cent of agencies have not reviewed their purchasing card policy by the scheduled date, or do not have a scheduled revision date stated within their policy.
Recommendation: Agencies should mitigate the risks associated with increased purchasing card use by ensuring policies and purchasing card frameworks remain current and compliant with the core requirements of TPP 17–09 'Use and Management of NSW Government Purchasing Cards'.
Preventative controls
We found that:
  • all agencies maintained purchasing card registers
  • seventy-six per cent provided training to cardholders prior to being issued with a card
  • eighty-nine per cent appointed a program administrator, but only half of these had clearly defined roles and responsibilities
  • thirty-two per cent of agencies place merchant blocks on purchasing cards
  • forty-seven per cent of agencies place geographic restrictions on purchasing cards.

Agencies have designed and implemented preventative controls aimed at deterring the potential misuse of purchasing cards.

Conclusion: Further opportunities exist for agencies to better control the use of purchasing cards, such as:

  • updating purchasing card registers to contain all mandatory fields required by TPP17–09
  • appointing a program administrator for the agency's purchasing card framework and defining their role and responsibility for the function
  • strengthening preventive controls to prevent misuse.

Detective controls
Ninety-two per cent of agencies have designed and implemented at least one control to monitor purchasing card activity.

Major reviews, such as data analytics (29 per cent of agencies) and independent spot checks (49 per cent of agencies) are not widely used.

Agencies have designed and implemented detective controls aimed at identifying potential misuse of purchasing cards.

Conclusion: More effective monitoring using purchasing card data can provide better visibility over spending activity and can be used to:

  • detect misuse and investigate exceptions
  • analyse trends to highlight cost saving opportunities.
5.2 Management of taxis
Policy framework
Thirteen per cent of agencies have not developed and implemented a policy to manage taxi use. In addition:
  • a further 41 per cent of agencies have not reviewed their policies by the scheduled revision date, or do not have a scheduled revision date
  • more than half of all agencies’ policies do not offer alternative travel options. For example, only 36 per cent of policies promoted the use of general Opal cards.
Conclusion: Agencies can promote savings and provide more options to staff where their taxi use policies:
  • limit the circumstances where taxi use is appropriate
  • offer alternate, lower cost options to using taxis, such as general Opal cards and rideshare.
Detective controls
All agencies approve taxi expenditure by expense reimbursement, purchasing card and Cabcharge, and have implemented controls around this approval process. However, beyond this there is minimal monitoring and review activity, such as data monitoring, independent spot checks or internal audit reviews.
Conclusion: Taxi spend at agencies is not significant in terms of its dollar value, but it is significant from a probity perspective. Agencies can better address the probity risk by incorporating taxi use into a broader purchasing card or fraud monitoring program.

 

Fraud and corruption control is one of the 17 key elements of our governance lighthouse. Recent reports from ICAC into state agencies and local government councils highlight the need for effective fraud control and ethical frameworks. Effective frameworks can help protect an agency from events that risk serious reputational damage and financial loss.

Our 2016 Fraud Survey found the NSW Government agencies we surveyed reported 1,077 frauds over the three year period to 30 June 2015. For those frauds where an estimate of losses was made, the reported value exceeded $10.0 million. The report also highlighted that the full extent of fraud in the NSW public sector could be higher than reported because:

  • unreported frauds in organisations can be almost three times the number of reported frauds
  • our 2015 survey did not include all NSW public sector agencies, nor did it include any NSW universities or local councils
  • fraud committed by citizens such as fare evasion and fraudulent state tax self-assessments was not within the scope of our 2015 survey
  • agencies did not estimate a value for 599 of the 1,077 (56 per cent) reported frauds.

Commissioning and outsourcing of services to the private sector and the advancement of digital technology are changing the fraud and corruption risks agencies face. Fraud risk assessments should be updated regularly and in particular where there are changes in agency business models. NSW Treasury Circular TC18-02 NSW Fraud and Corruption Control Policy now requires agencies develop, implement and maintain a fraud and corruption control framework, effective from 1 July 2018. 

Our Fraud Control Improvement Kit provides guidance and practical advice to help organisations implement an effective fraud control framework. The kit is divided into ten attributes. Three key attributes have been assessed below; prevention, detection and notification systems.

This chapter outlines our audit observations, conclusions and recommendations, arising from our review of agency fraud and corruption controls for 2017–18.

Observation Conclusion or recommendation
6.1 Prevention systems

Prevention systems
Ninety-two per cent of agencies have a fraud control plan in place, 81 per cent maintain a fraud database and 79 per cent report fraud and corruption matters as a standing item on audit and risk committee agendas.

Only 54 per cent of agencies have an employment screening policy and all agencies have IT security policies, but gaps in IT security controls could undermine their policies.

Conclusion: Most agencies have implemented fraud prevention systems to reduce the risk of fraud. However poor IT security along with other gaps in agency prevention systems, such as employment screening practices heightens the risk of fraud and inappropriate use of data.

Agencies can improve their fraud prevention systems by:

  • completing regular fraud risk assessments, embedding fraud risk assessment into their enterprise risk management process and reporting the results of the assessment to the audit and risk committee
  • maintaining a fraud database and reviewing it regularly for systemic issues and reporting a redacted version of the database on the agency's website to inform corruption prevention networks
  • developing policies and procedures for employee screening and benchmarking their current processes against ICAC's publication ‘Strengthening Employment Screening Practices in the NSW Public Sector’
  • developing and maintaining up to date IT security policies and monitoring compliance with the policy.
Twenty-three per cent of agencies were not performing fraud risk assessments and some agency fraud risk assessments may not be as robust as they could be.  Conclusion: Agencies' systems of internal controls may be less effective where new and emerging fraud risks have been overlooked, or known weaknesses have not been rectified.
6.2 Detection systems
Detection systems
Several agencies reported they were developing a data monitoring program, but only 38 per cent of agencies had already implemented a program.
 

Studies have shown data monitoring, whereby entire populations of transactional data are analysed for indicators of fraudulent activity, is one of the most effective methods of early detection. Early detection decreases the duration a fraud remains undetected thereby limiting the extent of losses.

Conclusion: Data monitoring is an effective tool for early detection of fraud and is more effective when informed by a comprehensive fraud risk assessment.

6.3 Notification systems
Notification system
All agencies have notification systems for reporting actual or suspected fraud and corruption. Most agencies provide multiple reporting lines, provide training and publicise options for staff to report actual or suspected fraud and corruption.
Conclusion: Training staff about their obligations and the use of fraud notification systems promotes a fraud-aware culture

 

Published

Actions for State Finances 2018

State Finances 2018

Education
Finance
Community Services
Health
Justice
Industry
Planning
Premier and Cabinet
Transport
Treasury
Whole of Government
Environment
Financial reporting

Pursuant to the Public Finance and Audit Act 1983, I present my Report on State Finances 2018.

I am pleased to once again report that I issued a clear audit opinion on the State’s consolidated financial statements. This demonstrates the Government’s focus on preparing high quality information on the State’s financial position and performance for use by stakeholders.

However, there are two key areas I would like to see addressed to further support the preparation of the State’s financial statements.
Firstly, some complex accounting matters are not being resolved until late in the financial reporting cycle. This has contributed to an increase in the number of errors in the financial statements key agencies are submitting for audit, particularly around assessing the value of physical assets. Better planning and earlier resolution of these matters would lead to more efficient processes.

Secondly, the State needs to implement five new accounting standards over the next two years. Agencies will need to devote significant resources and effort to collect the necessary information and assess the impact at the whole of government level. I will work with Treasury and relevant agencies to help them improve quality assurance controls over their financial reporting.

Throughout 2017-18 my office worked with Treasury on reforms to improve financial governance, budgeting and reporting arrangements across the sector.

The Government Sector Finance Bill 2018 passed both houses of Parliament in June 2018. However, the Legislative Council returned other proposed changes to the Public Finance and Audit Act 1983 to the Legislative Assembly for further consideration. Most of these changes relate to the Public Accounts Committee. At the time of writing, the cognate Bill had not been debated.

The budget result was a $4.2 billion surplus. The consolidated financial statements at 30 June 2018 do not reflect the sale of 51 per cent of the State’s investment in Sydney Motorway Corporation for which it received $9.3 billion. The sale was announced on 31 August 2018.

Finally, I would like to thank the staff of Treasury for the way they approached the audit. Our partnership is critical to ensuring the quality of financial management and reporting.

Margaret Crawford
Auditor-General
19 October 2018

 

The State's financial statements given a clear audit opinion


Timely and accurate financial reporting enables informed decision making, effective management of public funds and enhances public accountability.

Since the introduction of mandatory ‘early close procedures’ in 2011-12, the number of significant errors in financial statements of agencies had fallen largely due to identifying and resolving complex accounting issues early.

In 2016-17, Treasury narrowed the scope of mandatory procedures to focus on physical asset valuations and pro-forma financial statements. Despite being broadened for 2017-18, we have observed an increase in the number of errors in agency financial statements.

In 2017-18, twenty-three errors exceeding $20 million were found in agencies’ financial statements that make up the State’s consolidated financial statements. This compares to only five in 2015-16.

The errors identified this year were the result of:

  • incorrectly applying Australian Accounting Standards
  • deficiencies in assessing the value of physical assets
  • using inappropriate and inaccurate assumptions when measuring liabilities
  • inaccurately reflecting inter-agency payables and receivables.

Quality financial reporting would be enhanced by responding to key accounting issues as soon as they are identified, and preparing accounting position papers for consideration by Treasury, agency Audit and Risk Committees and the Audit Office.

Key accounting matters addressed by the State in 2017-18.


Restatement of some of the State’s previously reported asset and liability values.

The state corrected the previously reported values of some long-term liabilities ($2 billion).

Accounting standards require the State to measure its long-term liabilities at the best estimate of the expenditures required to settle the obligations. The affected liabilities include claims liabilities of the Lifetime Care and Support Authority of NSW and the NSW Self Insurance Corporation, and scheme liabilities of the Long Service Corporation. The liabilities are adjusted by what is referred to as the ‘discount rate’ to reflect the decreasing value of money over time.

In the past, agencies used a variety of rates to discount these liabilities. Some liabilities were discounted using the estimated long-term fair value of 10-year TCorp bond yields while others were discounted using the expected
return on investments. These discount rates did not comply with the requirements of Australian Accounting Standards and underestimated liabilities by $2.0 billion.

In 2017-18, the State assessed the discount rates previously used in the Sector. It determined the market yield on Commonwealth Bonds best met the Accounting Standard requirements and used this rate to discount similar liabilities in relevant agencies. This resulted in a $2.0 billion increase in the previously reported values of these liabilities and a similar decrease in retained earnings at 1 July 2016.

The State corrected previously reported values of certain Library assets ($1.1 billion).

The value of the Pictorial Collection of the Library Council of NSW (the Library) was reassessed at 31 January 2018. During the valuation process the Library identified three errors in the 2015 valuations which overstated the previously reported asset values. The errors included:

  • inconsistencies in the sampling technique ($583m)
  • double counting of some assets ($376m)
  • errors in population sizes ($164m).

This resulted in a $1.1 billion decrease in previously reported asset values and a corresponding decrease in the asset revaluation reserve at 1 July 2016.

 

Information system limitations continue at TAFE NSW.

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

TAFE NSW has again implemented additional processes to verify the accuracy and completeness of revenue from student fees.

TAFE NSW expects to spend up to $89 million on a new information system to address these issues. Modules of the new student enrolment system are planned to be in place by May 2019

Risks to the quality and timeliness of financial reporting.


Challenges associated with valuing the State's physical assets.

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

The valuation of the State’s physical assets is one such area. Fair value estimates are inherently complex and sensitive to assumptions and judgements. In the public sector, this may be exacerbated by the unique nature of its assets, such as land under roads, preserved plant specimens, cultural collections and other heritage assets.

In 2017-18, valuations of physical assets added $24.5 billion to the value of the State’s balance sheet. These assets are now valued at $339.2 billion. Our audits of these valuations identified:

The Library Council of NSW had three errors in the methodology previously used to value their pictorial assets ($1.1 billion error).
The Royal Botanic Gardens and Domain Trust did not previously recognise a value for their Herbarium assets ($284 million error).
Some revaluations within the Ministry of Health did not meet the requirements of Australian Accounting Standards or Treasury requirements ($159 million error).
The Department of Justice used an incorrect valuation
methodology ($83 million error).

Some important matters agencies should consider when planning/conducting asset valuations include:


STARTING OUT

  • Planning is important
  • Most effective revaluations include early engagement with all stakeholders, including auditors.
  • Determine who needs to be involved and advised of progress with the revaluation – e.g. finance, internal audit, audit and risk committee.
  • Ensure asset registers are complete and there is evidence to demonstrate the agency controls the assets.
  • The effective date of the valuation can be any date after the financial year commences, but well before year end.

MANAGEMENT'S ROLE

  • For large mass valuations consider using a suitable project management methodology to ensure the process remains ‘on track’ with sufficient oversight.
  • Consider engaging an expert to perform the valuation, but maintain responsibility for the outcomes. Ensure the outcomes are reasonable and quality review the results, including the appropriateness of inputs and key assumptions.
  • Compare pre and post valuation results on an individual asset basis. Where changes are significant and/or unexpected, document explanations from the valuer.
  • Start revaluations early so they are completed by early close (around March). The timetable must allow time for a quality review of results and for the results to be recorded in the financial records.
  • Revaluation workpapers must include the revaluation source data provided to the valuer and a reconciliation of the source data to the general ledger.

USING EXPERTS

  • The terms of engagement should be documented in an engagement letter, which clearly details the proposed valuation methodology. It’s important the valuer knows what is required from a policy perspective and clearly understands the accounting framework used to prepare the financial statements.
  • Valuation reports should detail the key assumptions used, explain why the valuation approach was adopted and how the use of relevant observable input was maximised.
  • Valuation reports should clearly differentiate between assets revalued using a cost approach and those using an income or market approach. They should explain why the approach used was the most relevant for the asset type.
  • Consider using representative/statistical sampling for mass valuations and determine the extent of physical inspections that may be required.
  • If a sampling technique is used, it should provide sufficient confidence that the sample is representative of the population.
  • Significant judgements should be supported by relevant benchmark data or other analysis and observations. A common example in the public sector is to discount asset values to reflect restrictions on use.
  • Ensure the valuer has considered the age and condition of the assets, and heritage/cultural aspects and/or other special factors.

WHAT ABOUT INTERVENING YEARS?

  • Perform revaluations with sufficient regularity to ensure asset carrying values in the financial statements reflect fair value.
  • Indexation alone is not normally a substitute for a full revaluation. A full revaluation may be needed to accurately establish fair values if asset values move significantly when indices are applied to them.
  • Where indexation is used between full revaluations, the indices should be appropriate for the type of asset being assessed.
  • Indexing can be unreliable in assessing whether the fair value of assets has moved over time. For example, some assets are valued based on re- collection cost estimates, which may fall over time due to improved re-collection methods and technology.

COMMUNICATION

  • For mass or complex valuations, key stakeholders, including auditors, should be involved at the scoping stage and invited to planning meetings with valuers.
  • Management should meet with the auditors regularly to discuss progress and outcomes.
  • When issues are identified, management should consult with and seek advice from Treasury.

 

The state will need to implement five new accounting standards over the next two years.

The State has started developing processes it considers necessary to effectively implement the requirements of five new accounting standards. The changes are significant and will impact the financial position and results of agencies and the State.

The new requirements increase the risk of errors in the financial statements. To minimise this risk, agencies will need to devote resources and effort to collect the necessary information and assess the impact of the accounting changes at the whole of government level.

Treasury is liaising with and obtaining information from agencies to assess the impact of the new standards at the whole of government level. Treasury is also liaising with other Treasuries throughout Australia on common implementation issues. To help agencies implement the new standards, Treasury is developing guidance, preparing position papers on proposed accounting treatments, and mandating options within the new standards that agencies need to adopt on transition.


 

A $4.2 billion surplus, $1.5 billion more than was budgeted


The Total State Sector comprises 304 entities controlled by NSW Government

The General Government Sector, which comprises 212 entities, generally provides goods and services funded centrally by the State.

The non-General Government Sector, which comprises 92 Government businesses, generally provides goods and services, such as water, electricity and financial services that consumers pay for directly.

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

WHAT CHANGED FROM 2017 TO 2018?

$4.2b

2017-18 General Government Budget Result

Changes in revenues compared to 2016-17

   
Financial_performance_red_10x10cm_0.pngDividends and distributions

 

Due to: 

  • Increases in dividends from Sydney Water ($255 million), Water NSW ($60 million) and the Port Authority of NSW ($195 million).
  • An increase in the dividend from Landcom ($200 million) as profits retained in prior years to fund certain projects were not spent.
  • Returns from investments in managed funds increased by $649 million as the State increased the value of its investment using proceeds from the lease of Ausgrid and Endeavour Energy assets
2016-2017 Change 2017-2018

2.4b

+1.3b

3.7b

 

   
Financial_performance_red_10x10cm_0.pngTaxation

 

Due to: 

  • Increases in land tax ($564 million) driven by land valuations used to calculate land tax assessments.
  • Increases in payroll tax ($553 million) and other taxes ($419 million).
  • Stamp duty receipts were $1.0 billion lower largely due to additional duty in the prior year of $718 million relating to the lease of Ausgrid and Endeavour Energy assets.
2016-2017 Change 2017-2018

30.8b

+537m

31.3b

 

   
Greek pantheon style front of building Grants & Subsidies

 

 Due to:

  • Increase in the receipt of general purpose grants relating to GST collected by the Australian Government ($753 million).
  • Decreases in national partnerships and specific purpose payments received from the Australian Government ($305 million), mainly due to the timing of major road projects.
  • An increase in Commonwealth Health Reform funding ($338 million).
  • An increase in grants associated with the National Education Reform Agreement for Education ($233 million).
2016-2017 Change 2017-2018

31.4b

+509m

31.9b

 

   
red shopping tagsSale of Goods and services

 

Includes: 

  • Increases in education revenue ($133 million).
  • Higher fees for services in transport to produce property plant and equipment ($89 million).
2016-2017 Change 2017-2018

8.2b

+349m

8.5b

5.5b

-185m

5.3b

Other revenues

Changes to expenses compared to 2016-17

   
institution_red_10x10cm_0.pngRecurrent Grants & Subsidies

 

Due to: 

  • A $613 million increase in grants for the delivery of aging, disability (including NDIS), homecare, community and public housing services.
  • Increase in grants paid to local government sector ($342 million).
2016-2017 Change 2017-2018

12.6b

+1.3b

13.9b

 

   
group_red_10x10cm_0.pngEmployee costs

 

Due to: 

  • Wage inflation increases ($701 million).
  • Increased workers' compensation and long service leave costs ($337 million). 
2016-2017 Change 2017-2018

34.9b

+1.2b

36.1b

 

   
red cogs with a dollar sign in the middleOther operating expenses

 

Includes: 

  • Increased expenditure by Transport for NSW ($283 million) for major rail projects and the new rail timetable.
  • Increased expenditure by the Department of Education ($165 million) to address the maintenance backlog, and higher school operating expenses.
2016-2017 Change 2017-2018

18.3b

+1.4b

19.7b

6.8b

+103m

6.9b

Other expenses

 

$5.7b

2016-17 General Government Budget Result

The State maintained its AAA credit rating.


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

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

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

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

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

THE FISCAL TARGETS FOR ACHIEVING THIS OBJECTIVE ARE:

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

General Government expenditure grew by 5.4 per cent in 2017-18. This was lower than the long-term revenue growth rate of 5.6 per cent.

Eliminating unfunded superannuation liabilities by 2030.

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

The State’s funding plan is to contribute amounts escalated by five per cent each year so the schemes will be fully funded by 2030. In 2017-18, the State made employer contributions of $1.7 billion, which is largely consistent with contributions over the past five years. Treasury expects superannuation liabilities will be fully funded by 2030 based on the funding program at the last triennial review (December 2015).

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

Using this method, the State’s unfunded superannuation liability was $14.0 billion at 30 June 2018 ($15.0 billion at 30 June 2017). The unfunded liability is $3.4 billion less than it was when the Act was introduced.


 

Revenues increased by $3.2 billion to $86.7 billion in 2017-18.


Revenues were underpinned by growth in taxation and Australian Government grant revenues, but stamp duties fell.

Tax revenue for the Total State Sector increased by $746 million, or 2.5 per cent compared to 2016-17, primarily due to a:

  • $582 million increase in land tax from growth in land values
  • $562 million increase in payroll tax from NSW employment and wages growth
  • $1 billion decrease in stamp duty due to lower than expected growth in property market transactions, volumes and prices. In 2016-17, stamp duty included $718 million from the leases of Ausgrid and Endeavour Energy assets.

The State expects total stamp duties will fall to $9.5 billion in 2018-19, a decrease of almost $2.0 billion from 2016-17.

The State received Australian Government grants and subsidies of $30.9 billion in 2017-18.
The State received $444 million more in grants and subsidies from the Australian Government than it did in 2016-17. This was due to increases in GST revenues ($753 million) and special purpose payments ($683 million).
There was a decrease in National Partnership payments ($992 million), mainly due to the timing of major road projects including the Pacific Highway (Woolgoolga to Ballina), WestConnex and Western Sydney Infrastructure Program.

In 2017-18, sales of goods and services were $1.1 billion higher than in 2016-17. This reflected increased transaction revenue at Sydney Water ($139 million), the Department of Education ($133 million), WestConnex ($145 million), Department of Finance, Services and Innovation ($111 million) and Sydney Trains ($83 million).

Other dividends and distributions were $803 million higher than in 2016-17 mainly reflecting higher investment returns on TCorp investments.

$

83.5b

+3.9%

86.7b

Total Revenue

Key revenues include:

  2016-2017 Change% 2017-2018  
red gavel

35.4b

+2.8

36.3b

Taxation, Fees, Fines, and other
institution_red_10x10cm_0.png

31.4b

+1.6

31.9b

Grants & Subsidies
tags_red_10x10_0.png

14.1b

+8.1

15.2b

Sale of Goods and Services

Expenses increased $4.9 billion to $84.2 billion in 2017-18


Overall expenses increased 6.1 per cent compared to 2016-17. Most of the increase was due to higher employee and operating costs.

$

79.3b

+6.1%

84.2b

Total Expenses

Salaries and wages increased by 3.6 per cent compared to 2016-17.

Salaries and wages increased to $31.1 billion from $30 billion. This was due to inflation linked salary and wage increases and a reported increase in front line staff.

The Government wages policy aims to limit growth in employee remuneration and other employee related costs to no more than 2.5 per cent per annum.

Operating expenses increased by 7.8 per cent from 2016-17.

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

  • increased costs of major rail projects, WestConnex, B-Line bus program and a new rail timetable
  • addressing the maintenance backlog and higher school operating expenses of the Department of Education.

Key expenses include:

  2016-2017 Change% 2017-2018  
group_red_10x10cm_0.png

32.8b

+3.8

34.1b

Employee Expenses
Financial_controls_red_10x10cm_0.png

21.6b

+7.8

23.3b

Operating Costs
institution_red_10x10cm_0.png

9.7b

+12.7

10.9b

Grants & Subsidies
down arrow red

7.2b

+6.6

7.6b

Depreciation
red briefcase

4.6b

+2.8

4.7b

Superannuation Expense

Health costs remain the highest expense of the State.

The Australian Bureau of Statistics introduced a revised Classification of the Function of Government Australia Framework (COFOG-A) effective 1 July 2017. This resulted in some re-classification of expenditure between purposes and now shows State expenses are highest in:

  • Health (25.5 per cent)
  • General Public Services (25.0 per cent)
  • Education (19.6 per cent).

General Public Services includes the executive and legislative branches, financial affairs, public debt transactions and general public service transactions.

The graph highlights the annual expenditure by function and the value of assets to deliver those services.

Assets grew by $35.6 billion to $443 billion in 2017-18


Valuing the State’s physical assets.

The State had physical assets with a fair value of $339 billion at 30 June 2018. This includes land and buildings ($161.6b) and Infrastructure ($160.2b).

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

Net movements between years include additions, disposals, depreciation and valuations. This year, revaluations of physical assets added $24.5 billion to the value of the State’s assets. This was mainly attributable to the following agencies:

  • Department of Education - $8.5 billion
  • Roads and Maritime Services - $7.4 billion.

The State’s financial assets increased by $308 million in 2017-18 ($27.5 billion in 2016-17).

In 2016-17, the significant increase in financial assets was primarily from the sale or lease of the following government assets and businesses:

  • In June 2017, the Government leased 50.4 per cent of Endeavour Energy assets, which followed the long-term lease 50.4 per cent of Ausgrid’s assets in December 2016. The Government received proceeds of $24.0 billion from these transactions.
  • A 35-year concession for providing titling and registry services, effective 30 June 2017, was granted to a private sector operator. The Government received $2.6 billion cash for the concession.

The Government implemented reforms relating to the use the State’s financial assets.

In 2017-18, the Asset and Liability Committee, which advises the Government on balance sheet management, recommended the following policy actions and frameworks to help manage the State’s financial risks and opportunities:

  • expanding the scope of cash management reforms to give the State a whole-of-government view on the use of surplus funds. Treasury advises these reforms have centralised funds management of approximately $3.0 billion
  • endorsing a new whole-of-government Foreign Exchange (FX) Risk Policy (effective 1 July 2018) to effectively manage the State’s FX risk
  • expanding management of the State’s debt portfolio to minimise interest rate risks, reduce interest costs where possible, and extend the average weighted life of the General Government’s debt portfolio towards eight years
  • endorsing establishment of a ‘sustainability bond’ program to further diversify and expand the State’s bond investor base and raise awareness of the Government’s social and environmental initiatives.

The State has established the NSW Generations Fund to maintain debt at sustainable levels.

The State established the NSW Generations Funds (NGF) in June 2018 to support debt retirement and to fund community-focused initiatives. The Government has indicated it will initially capitalise the NGF with $3.0 billion from its reserves.

The NSW Generations Funds Act 2018 requires an audit of each NSW Generations Fund by the Auditor- General (including a report by the Auditor-General on whether payments from the Funds have been made in accordance with the Act). The first audit of the fund will be for the period up to 30 June 2019.
 

$

407b

+8.7%

443b

Total Assets

Key assets include: 

  2016-2017 Change% 2017-2018  
Physical Assets      
road_red_10x10_0.png

147.0b

+9.0

160.2b

Infrastructure
factory red

143.4b

+12.7

161.6b

Land and Buildings
Financial Assets      
scales of justice red

27.7b

- 4.6

26.4b

Equity investments
Financial_performance_red_10x10cm_0.png

20.6b

- 5.2

19.5b

Cash and Recievables
red pillar building - partheon

40.5b

+6.5

41.3b

Investments and Placements

Liabilities increased $5.1 billion to $189 billion in 2017-18


Valuing the State’s liabilities relies on actuarial assessments.

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

Valuing these obligations involves complex estimation techniques and significant judgements. Small changes in assumptions can materially impact the values and the financial statements.

The State’s superannuation obligations fell $2.2 billion in 2017-18.

The State’s $56.4 billion unfunded superannuation liability represents obligations to past and present employees less the value of assets set aside to meet those obligations. The unfunded superannuation liability fell from $58.6 billion to $56.4 billion in 2017-18.

The State’s borrowings at 30 June 2018 were $700 million higher than they were at 30 June 2017.

The State’s borrowings totalled $71.3 billion at 30 June 2018.

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

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

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

$

184b

+2.8%

189b

Total Liabilities

Key liabilities include: 

  2016-2017 Change% 2017-2018  
briefcase_red_10x10cm_0.png

58.6b

- 3.7

56.4b

Unfunded Superannuation
group_red_10x10cm_0.png

18.3b

+4.7

19.1b

Other Employee Benefits
institution red - pantheon style building

70.6b

+1.0

71.3b

Borrowings

Published

Actions for Mobile speed cameras

Mobile speed cameras

Transport
Compliance
Financial reporting
Information technology
Internal controls and governance
Management and administration
Regulation
Service delivery

Key aspects of the state’s mobile speed camera program need to be improved to maximise road safety benefits, according to a report released today by the Auditor-General for New South Wales, Margaret Crawford. Mobile speed cameras are deployed in a limited number of locations with a small number of these being used frequently. This, along with decisions to limit the hours that mobile speed cameras operate, and to use multiple warning signs, have reduced the broad deterrence of speeding across the general network - the main policy objective of the mobile speed camera program.

The primary goal of speed cameras is to reduce speeding and make the roads safer. Our 2011 performance audit on speed cameras found that, in general, speed cameras change driver behaviour and have a positive impact on road safety.

Transport for NSW published the NSW Speed Camera Strategy in June 2012 in response to our audit. According to the Strategy, the main purpose of mobile speed cameras is to reduce speeding across the road network by providing a general deterrence through anywhere, anytime enforcement and by creating a perceived risk of detection across the road network. Fixed and red-light speed cameras aim to reduce speeding at specific locations.

Roads and Maritime Services and Transport for NSW deploy mobile speed cameras (MSCs) in consultation with NSW Police. The cameras are operated by contractors authorised by Roads and Maritime Services. MSC locations are stretches of road that can be more than 20 kilometres long. MSC sites are specific places within these locations that meet the requirements for a MSC vehicle to be able to operate there.

This audit assessed whether the mobile speed camera program is effectively managed to maximise road safety benefits across the NSW road network.

Conclusion

The mobile speed camera program requires improvements to key aspects of its management to maximise road safety benefits. While camera locations have been selected based on crash history, the limited number of locations restricts network coverage. It also makes enforcement more predictable, reducing the ability to provide a general deterrence. Implementation of the program has been consistent with government decisions to limit its hours of operation and use multiple warning signs. These factors limit the ability of the mobile speed camera program to effectively deliver a broad general network deterrence from speeding.

Many locations are needed to enable network-wide coverage and ensure MSC sessions are randomised and not predictable. However, there are insufficient locations available to operate MSCs that meet strict criteria for crash history, operator safety, signage and technical requirements. MSC performance would be improved if there were more locations.

A scheduling system is meant to randomise MSC location visits to ensure they are not predictable. However, a relatively small number of locations have been visited many times making their deployment more predictable in these places. The allocation of MSCs across the time of day, day of week and across regions is prioritised based on crash history but the frequency of location visits does not correspond with the crash risk for each location.

There is evidence of a reduction in fatal and serious crashes at the 30 best-performing MSC locations. However, there is limited evidence that the current MSC program in NSW has led to a behavioural change in drivers by creating a general network deterrence. While the overall reduction in serious injuries on roads has continued, fatalities have started to climb again. Compliance with speed limits has improved at the sites and locations that MSCs operate, but the results of overall network speed surveys vary, with recent improvements in some speed zones but not others.
There is no supporting justification for the number of hours of operation for the program. The rate of MSC enforcement (hours per capita) in NSW is less than Queensland and Victoria. The government decision to use multiple warning signs has made it harder to identify and maintain suitable MSC locations, and impeded their use for enforcement in both traffic directions and in school zones. 

Appendix one - Response from agency

Appendix two - About the audit

Appendix three - Performance auditing

 

Parliamentary reference - Report number #308 - released 18 October 2018

Published

Actions for Procurement and reporting of consultancy services

Procurement and reporting of consultancy services

Finance
Education
Community Services
Industry
Justice
Planning
Premier and Cabinet
Health
Treasury
Transport
Environment
Information technology

Agencies need to improve their compliance with requirements governing the procurement of consultancy services. These requirements help agencies access procurement savings. Also, some agencies have under-reported consultancy fees in their annual reports for the 2016-17 financial year, according to a report released today by the Auditor-General for New South Wales, Margaret Crawford. The report examined twelve agencies' compliance with procurement and reporting obligations for consultancy services. It notes that it is difficult to quantify total government expenditure on consultants as agencies define ‘consultants’ differently.

NSW Government agencies engage consultants to provide professional advice to inform their decision‑making. The spend on consultants is measured and reported in different ways for different purposes and the absence of a consistently applied definition makes quantification difficult.

The NSW Government’s procurement principles aim to help agencies obtain value for money and be fair, ethical and transparent in their procurement activities. All NSW Government agencies, with the exception of State Owned Corporations, must comply with the NSW Procurement Board’s Direction when engaging suppliers of business advisory services. Business advisory services include consultancy services. NSW Government agencies must disclose certain information about their use of consultants in their annual reports. The table below illustrates the detailed procurement and reporting requirements.

  Relevant guidance Requirements
Procurement of consultancy services PBD 2015 04 Engagement of major suppliers of consultancy and other services (the Direction) including the Standard Commercial Framework
(revised on 31 January 2018, shortly before it was superseded by 'PBD 2018 01')
 
Required agencies to seek the Agency Head or Chief Financial Officer's approval for engagements over $50,000 and report the engagements in the Major Suppliers' Portal (the Portal). 
  PBD 2018 01 Engagement of professional services suppliers
(replaced 'PBD 2015 04' in May 2018)
Requires agencies to seek the Agency Head or Chief Financial Officer's approval for engagements that depart from the Standard Commercial Framework and report the engagements in the Portal. Exhibit 3 in the report includes the key requirements of these three Directions.
 
Reporting of consultancy expenditure Annual Reports (Departments) Regulation 2015 and Annual Reports (Statutory Bodies) Regulation 2015 Requires agencies to disclose, in their annual reports, details of consultants engaged in a reporting year.
  Premier's Memorandum 
'M2002 07 Engagement and Use of Consultants'
 
Outlines additional reporting requirements for agencies to describe the nature and purpose of consultancies in their annual reports.

We examined how 12 agencies complied with their procurement and reporting obligations for consultancy services between 1 July 2016 and 31 March 2018. Participating agencies are listed in Appendix two. We also examined how NSW Procurement supports the functions of the NSW Procurement Board within the Department of Finance, Services and Innovation.

This audit assessed:

  • agency compliance with relevant procurement requirements for their use of consultants
  • agency compliance with disclosure requirements about consultancy expenditure in their annual reports 
  • the effectiveness of the NSW Procurement Board (the Board) in fulfilling its functions to oversee and support agency procurement of consultancy services. 
Conclusion
No participating agency materially complied with procurement requirements when engaging consultancy services. Eight participating agencies under reported consultant fees in their annual reports. The NSW Procurement Board is not fully effective in overseeing and supporting agencies' procurement of consultancy services.
All 12 agencies that we examined did not materially comply with the NSW Procurement Board Direction for the use of consultants between 1 July 2016 and 31 March 2018. 
Eight agencies did not comply with annual reporting requirements in the 2016–17 financial reporting year. Three agencies did not report expenditure on consultants that had been capitalised as part of asset costs, and one agency did not disclose consultancy fees incurred by its subsidiaries. Agencies also defined ‘consultants’ inconsistently.
The NSW Procurement Board's Direction was revised in January 2018, and mandates the use of the Standard Commercial Framework. The Direction aims to drive value for money, reduce administrative costs and simplify the procurement process. In practice, agencies found the Framework challenging to use. To better achieve the Direction’s intent, the Board needs to simplify procurement and compliance processes. 
The Board is yet to publish any statistics or analysis of agencies’ procurement of business advisory services due to issues with the quality of data and systems limitations. Also, the Board’s oversight of agency and supplier compliance with the Framework is limited as it relies on self reporting, and the information provided is insufficient to properly monitor compliance. NSW Procurement is yet to develop an effective procurement and business intelligence system for use by government agencies. Better procurement support, benefit realisation monitoring and reporting by NSW Procurement will help promote value for money in the engagement of consultants.