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

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

The department is also using outdated technology and could improve its delivery of technical support to courts.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Exhibit 12: The Department's measurement of quantifiable benefits

Key

Measuring

Not measuring economic benefit

Not measuring

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

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

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

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

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

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

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

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

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

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

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

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

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

Appendix three – Performance auditing 

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

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

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

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

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

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

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

Download the PDF version of report

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

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

• financial reporting
• audit observations.

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

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

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

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

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

This chapter outlines our audit observations relating to the financial reporting of agencies in the Stronger Communities cluster for 2019.

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

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

Appendix one – Timeliness of financial reporting by agency

Appendix two – Management letter findings by agency

Appendix three – List of 2019 recommendations 

Appendix four – Status of 2018 recommendations 

Appendix five – Cluster agencies 

Appendix six – Financial data 

Copyright notice

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

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

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

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

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

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

1. Internal control trends

2. Information technology controls

3. Gifts and benefits

4. Internal audit

5. Managing contingent labour

6. Managing sensitive data

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Appendix one – List of 2019 recommendations 

Appendix two – Status of 2018 recommendations

Appendix three – In-scope agencies

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

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

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

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

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

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

Download PDF of State Finances 2019 report

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

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

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

The number of errors in agencies’ 2018–19 financial statements fell to six compared to the 23 recorded in 2017–18. This reflects Treasury’s focus on early close and the resolution of complex accounting matters before submission. Agency finance teams need to be consulted on major business decisions and commercial transactions to assess their accounting impacts at the time of their execution, rather than at the end of a financial year. This would improve the quality of financial reporting and avoid the need for extensions for agencies to submit their financial statements for audit.

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

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

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

Margaret Crawford
Auditor-General, 10 October 2019

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

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

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

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

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

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

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

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

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

Correction of prior year’s reported values    

Correction of earthwork assets ($2.1 billion)

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

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

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

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

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

Correction of museum collection assets ($27 million)

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

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

Correction of lease liability ($46.2 million)

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

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

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

Abuse Claims remain a significant contingent liability of the State

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

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

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

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

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

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

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

TAFE update

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

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

Light Rail settlement

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

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

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

Sydney Metro Northwest project commissioning

The Sydney Metro North West officially opened in May 2019.

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

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

Financial Reporting by Crown Land Reserve Trusts

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

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

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

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

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

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

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

Derecognition of investment in City West Housing

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

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

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

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

Cluster changes

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

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

The key MoG changes included:

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

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

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

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

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

Cluster expenses

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

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

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

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

What changed from 2018 to 2019?

The State maintained its AAA credit rating.

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

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

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

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

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

The fiscal targets for achieving this objective are:

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

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

Eliminating unfunded superannuation liabilities by 2030.

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

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

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

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

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

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

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

Taxation revenue remained relatively stable

Taxation revenue only grew slightly, mainly due to:

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

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

Australian Government grants and subsidies

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

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

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

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

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

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

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

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

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

Operating expenses increased 6.1 per cent from 2017–18.

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

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

Health costs remain the highest expense of the State.

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

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

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

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

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

This was mainly due to:

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

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

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

Valuing the State's physical assets

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

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

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

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

Movement in the State's physical assets

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

The State relies on actuarial assessments to value its liabilities

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

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

Superannuation obligations rose by $14.3 billion.

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

Borrowings totalled $79.9 billion at 30 June 2019.

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

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

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

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

Implementing the requirements of new accounting standards will be challenging

Risks to the quality and timeliness of financial reporting

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

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

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

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

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

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

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

Key dates

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

The Department of Justice has relied heavily on temporary responses to accommodate growing prisoner numbers according to a report released today by the Acting Auditor-General for New South Wales, Ian Goodwin.

At the time of this audit, the NSW Department of Justice (DOJ) was responsible for delivering custodial corrections services in New South Wales through its Corrective Services NSW division (Corrective Services NSW). From 1 July 2019, the Department of Family and Community Services and Justice will be responsible for these functions. 

Within DOJ, Corrective Services NSW is responsible for administering sentences and legal orders through custodial and community-based management of adult offenders. Its key priorities are:

• providing safe, secure and humane management of prisoners
• reducing reoffending
• improving community safety and confidence in the justice system. 

The prison population in New South Wales grew by around 40 per cent between 2012 to 2018, from 9,602 to 13,630 inmates. This rate of growth was higher than experienced prior to 2012. DOJ forecasts growth to continue over the short and longer-term. 

DOJ has responded to inmate population growth by doubling-up and tripling-up the number of prison beds in cells, reactivating previously closed prisons, and a $3.8 billion program of new prison capacity. DOJ has also developed a long-term prison infrastructure strategy that projects long-term needs and recommended investments to meet these needs. 

This audit assessed how efficiently and effectively DOJ is responding to growth in the NSW prison population. In this report, we have not analysed the sources of demand or recommended ways that custody may be avoided. These are largely government policy issues. 

The Productivity Commission’s Report on Government Services outlines the performance indicator framework for corrective services in Australia (Appendix three). We have used measures from this framework to assess the efficiency and effectiveness of DOJ’s responses to prison bed capacity needs. 

In this section, we analyse system-wide indicators as DOJ has not consistently published or reported data for individual correctional centres over the period of review.
 

Appendix one - Response from agency

Appendix two - Managing women in custody

Appendix three - Corrective services performance indicator framework

Appendix four - About the audit

Appendix five – Performance auditing

Parliamentary Reference: Report number #319 - released 24 May 2019

There are gaps in how the Firearms Registry administers the firearms licencing and registration scheme for existing licence holders, according to a report released today by the Auditor-General for New South Wales, Margaret Crawford. These gaps reduce the Registry’s effectiveness in regulating firearms use and ownership. 

While the Firearms Registry has systems to promptly update details in the firearms register for changes in firearm ownership and for criminal or anti-social behaviour of licence holders, some key information, including addresses, is not accurate or up-to date. 'This exposes a critical gap in the Registry’s data on the location of licence holders and their firearms,' Ms Crawford said. 

The Firearms Registry may also be making unsound or inconsistent administrative decisions due to a lack of clear internal policies and guidance. These decisions include licence suspensions or revocations, assessing reasons for the acquisition of firearms, and initiating enforcement actions for breaches by licence holders. Ms Crawford noted that 'these gaps mean the Registry cannot be confident it conducts aspects of its licencing activities effectively.'

The report’s recommendations aim to improve the integrity of the data in the register and ensure that the Firearms Registry is making sound and consistent decisions in regulating firearms use and ownership.

Firearms used by the general public in NSW are regulated through the Firearms Act 1996 (NSW) (the Act) and the Firearms Regulation 2017 (NSW) (Regulation). In October 2018, there were over 237,500 firearm licence holders and just over one million registered firearms in NSW.

The Act and Regulation reflect the National Firearms Agreement reached by all Australian jurisdictions in 1996 and confirmed in 2017. This Agreement sets out the minimum requirements for regulating firearms. The Act recognises that possessing and using firearms are privileges conditional on the overriding need to ensure public safety.

The NSW Police Force (NSW Police), which includes the Firearms Registry (the Registry), is responsible for administering the Act and Regulation, and for operating the NSW firearms licensing and registration scheme. Relevant third parties such as approved clubs, firearms dealers and shooting ranges also carry some administrative and oversight responsibilities under the Act and Regulation.

The role of the Registry includes administering the following requirements under the Act and Regulation that are relevant to this audit:

• licence conditions
• licence suspensions and revocations
• initiating seizure of firearms
• assessing permits to acquire firearms
• administering the good reason test
• maintaining the register of firearms
• approving alternative safe storage arrangements.

The Registry's other activities identified in this report support its regulatory responsibilities under the NSW Government framework for better regulation.

This audit assessed how well the Registry administers the requirements of the Act and Regulation for existing firearms licence holders. To effectively administer these requirements, the Registry should have:

• a reliable database that supports the firearms licensing and registration scheme
• appropriate risk-based policies and procedures for the Registry’s operation that are consistent with the Act and Regulation.

We did not assess the Registry’s processes in assessing and issuing firearms licences to new applicants or renewing licences of existing licence holders. We also did not examine the administrative actions conducted by police officers who are not part of the Registry.

See Section 1 for details on the role of the Registry. See Appendix six for details of the audit.

To effectively administer the requirements of the Act and Regulation, the register that supports the firearms licensing and registration scheme should have readily accessible, accurate and up-to-date information regarding the status of licence holders and registered firearms.

Appendix one - Response from agency 

Appendix two - Reasons for firearms licences to be suspended or revoked

Appendix three - Licence holder obligations

Appendix four - Firearms licence categories

Appendix five - Firearms distribution

Appendix six - About the audit

Appendix seven - Performance auditing 

Parliamentary reference - Report number #315 - released 28 February 2019

The Hon. Troy Grant MP, Minister for Police and Minister for Emergency Services requested an audit under section 27B(3)(c) of the Public Finance and Audit Act 1983, to determine whether expenditure on overseas travel by the Law Enforcement Conduct Commission (the Commission) complied with section 12A of the Public Finance and Audit Act 1983.

On 9 November 2018, the Hon. Troy Grant MP, Minister for Police and Minister for Emergency Services (the Minister), requested an audit under s. 27B(3)(c) of the Public Finance and Audit Act 1983 (the PF&A Act) to determine whether the expenditure of $8,074.66 on overseas travel by the Law Enforcement Conduct Commission (the LECC) complied with s. 12A of the PF&A Act.

In forming my audit conclusion, I have reviewed documentation provided by the Minister and the LECC, made enquiries of LECC staff, and sought independent legal advice on key aspects of the PF&A Act and the Law Enforcement Conduct Commission Act 2016 (the LECC Act) and their interface.
 

In my opinion, the LECC did not comply with s. 12A of the PF&A Act because the Minister:

• had not delegated his authority to approve expenditure for overseas travel to an officer in the LECC
• had specifically declined approving a request from the LECC to incur expenditure on the travel in question.

Despite this, the LECC incurred the expenditure.

In my view, the LECC required the Minister’s approval to incur the overseas travel expenditure before it could legally spend funds for this purpose from its appropriation.

The LECC is an independent investigative body, funded by appropriation, to oversight NSW Police and the Crime Commission 

The Bill to establish the LECC was introduced to parliament following a review of the police oversight system.¹ The establishment of the LECC drew together functions previously undertaken by the Police Integrity Commission, the Ombudsman and the Inspector of the Crime Commission. It aimed to ‘remove overlapping responsibilities, inefficiencies and failures’ and ‘create a single civilian law enforcement oversight body’.² 

Part 4 of the LECC Act sets out the functions of the Commission as an independent investigative body. The objects of the LECC Act are summarised in Appendix one. The LECC Act provides that the Minister cannot direct the LECC on how to perform its functions. 

Notably, s. 22 of the LECC Act states:

The Commission and Commissioners are not subject to the control or direction of the Minister in the exercise of their functions.

For the financial year ended 30 June 2018, under s. 22 of the Appropriation Act 2017 (NSW), $21,195,000 was appropriated to the Minister for the LECC’s services. This provided the statutory basis for the sum in question to be drawn from the Consolidated Fund, but only in accordance with the PF&A Act.

The PF&A Act is the legislation that governs the administration of public finances

The PF&A Act determines how expenditure is to occur and sets out the conditions under which such expenditure can occur in NSW public sector agencies.The LECC is an agency within the NSW public sector.

Section 12A of the PF&A Act stipulates that:

A Minister to whom a sum of money is appropriated out of the Consolidated Fund for a use or purpose (whether by an annual Appropriation Act or other Act) may delegate to another Minister or to an officer of any authority, or authorise another Minister to delegate to an officer of any authority, the committing or incurring of expenditure from the sum so appropriated.

Section 12 of the PF&A Act also stipulates that:

Expenditure shall be committed or incurred by an officer of an authority only within the limits of a delegation in writing conferred on the officer by a person entitled to make the delegation.

The relevant ‘authority’ in this case was the Office of the Law Enforcement Conduct Commission (Office of the LECC) - a body which, under the Government Sector Employment Act 2013 (the GSE Act)³ employs the staff of the LECC.

Prima facie, as the LECC is funded by appropriation and is subject to the PF&A Act, its officers can only commit or incur expenditure with a delegation from the Minister.

The Minister did not delegate his right to approve expenditure on overseas travel

In April 2017, the Minister approved the LECC’s financial delegations under the authority vested in him by s. 12A of the PF&A Act. However, he reserved his right to approve any expenditure on overseas travel. This effectively required the LECC to obtain his approval for each instance of such expenditure.⁴ 

The Minister declined approval of a LECC request for an officer to travel overseas 

In August 2017, the Chief Commissioner sought the Minister’s approval to incur overseas travel expenditure. The Minister exercised his right under the PF&A Act to decline the request and confirmed this in writing:

Establishment of LECC being in its infancy, travel is not supported at this time. Operating priorities should be the focus at this time.

The LECC paid the overseas travel expenses without a delegation or Ministerial approval

In October 2017, despite the absence of a delegation or approval from the Minister to incur expenditure on overseas travel, the Chief Commissioner approved a total of $8,074.66 for the LECC’s Director of Covert Services to travel to, and attend an international conference.
 
The LECC booked and paid for the travel in four payments between October and December 2017. Over the same period the Chief Commissioner reimbursed the agency for these expenses from his personal funds. On 13 October 2017, the Chief Commissioner wrote to the Minister asking him to reconsider his decision. On 12 January 2018, in the absence of a response from the Minister, the Chief Commissioner directed the LECC’s finance officer to ‘repay the relevant costs to my account’.⁵ On 16 January 2018, the LECC’s Chief Executive Officer approved the reimbursement to the Chief Commissioner, which occurred on 17 January 2018. Appendix three provides further detail on the series of payments. 

The Chief Commissioner first disclosed he had been reimbursed for the expenses, without Ministerial approval, in March 2018. In August 2018, the Chief Commissioner made a further disclosure about the expenditure at Budget Estimates.⁶

The Chief Commissioner argues the overseas travel expenditure was properly incurred

The Chief Commissioner argues the LECC’s overseas travel expenditure was properly incurred because:

• the travel was undertaken in pursuit of the detective and investigative functions specified in s. 26(b)(i) of Part 4 of the LECC Act⁷  
• a specific reservation in public policy cannot be qualified by general rules of public policy.⁸ The Chief Commissioner argues s. 22 of the LECC Act is a specific provision that conflicts with the general provisions in ss. 12 and 12A of the PF&A Act. In his view, the conflict is resolved by applying the principle that a specific later provision effectively repeals an earlier general provision. In his view, the LECC Act contains a specific provision that the Minister cannot direct the LECC in exercising its functions, whereas the PF&A Act contains general provisions which deal with the spending of public money.

The Chief Commissioner believes the Minister’s decision⁷:

• was not made in the bona fide exercise of the power conferred on him by the PF&A Act as it interfered with the management of the LECC’s operating priorities
• and his failure to enquire into the operational situation of the LECC were not decisions a rational decision maker could have made
• was made for an improper purpose and was biased, in that the Minister had approved expenditure for a member of NSW Police to travel to the conference, but denied the same to a member of the LECC, which oversights NSW Police
• breached s. 22 of the LECC Act, because it directed the LECC Commissioners in the exercise of their functions.

The Crown Solicitor and Solicitor General advised the expenditure breached the PF&A Act

On 7 September 2017, the Crown Solicitor advised the Office of Police (part of the Department of Justice) that:

The Minister’s authority to determine whether or not to approve a particular expenditure from the amount appropriated from the Consolidated Fund for the purpose of the Commission under the Constitution Act 1902 and the PF&A Act is not affected by s.22 of the LECC Act. These have different spheres of operation. It is not unusual for otherwise independent bodies to be subject to restrictions with respect to the use of public moneys.⁹

Subsequently, the Crown Solicitor asked the Solicitor General to review the matter of her previous advice. On 14 December 2017, the Solicitor General concurred with the Crown Solicitor’s advice. He concluded that:

Although LECC has a high degree of independence under its legislation, it is a body operating in the public sector and within the context of the broad policies of the government of the day in relation to public administration... it is not a function of LECC or its Commissioners to deal directly with money appropriated to the Minister out of the Consolidated Fund.¹⁰

The Secretary of the Department of Justice forwarded the Crown Solicitor’s and the Solicitor General’s advice to the Chief Commissioner.¹¹ The Chief Commissioner continues to contest the Crown Solicitor’s and the Solicitor General’s advice.¹²

The Minister referred the matter to the Inspector of the LECC

In August 2018, the Minister referred the Chief Commissioner’s disclosure in Budget Estimates¹³ that he had been personally reimbursed for an expense concerning overseas travel by an officer of the LECC, to the Inspector of the LECC (the Inspector).¹⁴ The Inspector is the person, under s. 122 of the LECC Act, responsible for 'auditing the operation of the Commission for the purpose of monitoring compliance with the law of the State'. On 4 September 2018, the Inspector recused himself from investigating the Minister’s complaint.¹⁵ In his letter to the Premier dated 19 September 2018, he wrote ‘I informed the Minister for Police that I had acquired information in my capacity as Inspector of LECC (and in the discharge of my statutory functions) prior to receiving his letter of complaint…’. He further suggested to the Minister and the Premier that an Assistant Inspector be appointed to investigate the complaint under s. 121(1) of the LECC Act to give ‘proper and independent’ consideration to the Minister’s complaint.¹⁶ 

The Minister asks the Auditor General to audit the transaction’s compliance with the PF&A Act

An Assistant Inspector appointed under section 121 of the LECC Act can exercise any function of the Inspector, including ‘auditing the operations of the Commission’. The reasons why an Assistant Inspector was not appointed to investigate the matter are not apparent. Instead, on 9 November 2018, the Minister requested the Auditor General to conduct an audit of whether the expenditure complied with s. 12A of the PF&A Act.¹⁷

In forming my adverse conclusion, I considered the Chief Commissioner’s argument that s. 22 of the LECC Act prevailed over those sections of the PF&A Act that deal with spending public money, and:

• the principles of statutory interpretation that might apply when a potential conflict between a general provision in one Act and specific provisions in another exists
• whether an apparent conflict exists
• whether the Chief Commissioner was entitled to incur the expenditure without Ministerial approval
• whether the Minister was lawfully entitled to withhold approval for the expenditure from the Chief Commissioner.

The principles of statutory interpretation apply where potential conflicts exist between Acts

A basic principle of statutory interpretation is that all legislation be given its full scope and effect. Courts, and thereby other interpreters, are not at liberty to consider any word or meaning as superfluous. The starting point is that all words must be given some meaning and effect.¹⁸ If there is an apparent conflict between two Acts, the pieces of legislation should be read in such a way as to avoid that conflict by giving the words the construction that produces the greatest harmony and the least inconsistency.¹⁹

One way conflict can be avoided is to apply the approach that a later general provision does not override an earlier specific provision.²⁰ However, this approach is rebuttable, as a later general Act might also be said to qualify an earlier specific Act.²¹ The reverse can also apply, in that a later specific Act can be claimed to qualify or supersede an earlier general provision. In such a case, it is said that the later Act impliedly repeals the earlier. This is an easier case to make out because it is apparent the parliament has dealt with the specific instance and it would be reasonable to expect that it had considered any contrary general legislation. However, here again, the courts have qualified this approach by suggesting it should be presumed unlikely that a parliament would intend to contradict itself. If the specific Act was intended to qualify an earlier general Act, then the legislation would have spelt this out.

One must therefore always start from the premise that all words are to be given meaning and effect, and that meaning should enable both pieces of legislation to operate. It is only where the point is reached that it is not possible for both pieces of legislation to operate to their full extent that the approaches to resolving conflicts can be usefully invoked. The approaches may then be useful to determine which is the primary provision and which provision must give way to the requirements set out in that primary provision.

Is there an apparent conflict between the LECC Act and the PF&A Act that needs to be resolved?

No. The LECC Act deals specifically with the operational functions of the LECC, while the PF&A Act deals with the specific issue of expenditure by a delegate of the Minister. 

The Chief Commissioner argues that s. 22 of the LECC Act is a specific provision and should take precedence over general delegation provisions in the PF&A Act, namely ss. 12 and 12A. He argues this because s. 22 deals specifically with the operation of the LECC and prohibits the Minister from directing the LECC in the performance of its functions. In his view, this includes the administrative and financial functions impliedly invested in the LECC for it to perform the specific functions referred to in the LECC Act.

However, it can also be readily argued that s. 22 of the LECC Act deals with the general issue of Minister's directions to the LECC and the PF&A deals with the specific issue of expenditure by a delegate of the Minister. While the expenditure of funds may be essential for the LECC to perform its functions, that expenditure is controlled by the PF&A Act, as it controls all expenditure from the Consolidated Fund. The PF&A Act is the specific legislation that relates to expenditure.

The issues that have arisen can be resolved by looking at the effect of the two Acts in their application to the facts. In my view, the PF&A Act and the LECC Act can be applied to the facts under consideration as they deal with different issues and are thereby capable of separate operation. 

Was the LECC able to incur expenditure without Ministerial approval?

No. The PF&A Act applies to the LECC in the same way it applies to all NSW Government agencies. While the Minister had approved the LECC’s financial delegations under the authority vested in him by s. 12A of the PF&A Act, he reserved his right to approve all expenditure on overseas travel. This effectively required the LECC to obtain his approval for each instance of such expenditure. As the Minister did not approve the overseas travel request, the Chief Commissioner was not legally able to authorise the expenditure.

The PF&A Act determines how expenditure is to occur and sets out the conditions under which such expenditure can occur in New South Wales public sector agencies. Expenditure can ‘only be committed or incurred by an officer of an authority within the limits of a delegation in writing conferred on the officer by a person entitled to make the delegation’.²²

Was the Minister lawfully entitled to withhold approval of the overseas travel expenditure?

Yes. If one accepts the premise that the PF&A Act determines the basis on which public money can be spent, it follows that the Minister could exercise the discretion reserved to him by financial delegation and withhold approval of the overseas travel expenditure for the LECC officer.

Section 22 of the LECC Act prevents the Minister from directing the LECC to send (or not to send) an officer to a conference. However, the Minister did not direct the LECC as to whether the person should or should not attend the conference. Rather, he exercised the responsibility given to him to determine how public funds were to be spent.

The appropriation to the LECC provided funding to the delegate of the Minister to support the performance of the agency’s functions. However, the expenditure of money for overseas travel was governed by ss. 12 and 12A of the PF&A Act. This gave the Minister discretion to approve or refuse to approve expenditure for overseas travel on a case by case basis. It follows from this that the Chief Commissioner was not entitled to spend money for overseas travel, even though in the Commissioner’s view it was beneficial to the performance of the LECC’s functions.

It may be suggested that the Minister’s refusal to provide funding for a particular function may have the same effect as directing an agency not to perform that function. NSW’s constitutional structure of government establishes that public money can only be spent in accordance with legislation and if expenditure requires a Minister’s approval, that approval establishes the ability of an agency to spend that money. That said, in reserving approval for certain types of expenditures, care should be exercised not to unduly interfere with the legitimate functions of independent agencies.

This assurance audit is a ‘direct engagement’ whereby the Auditor‑General provides the Minister and parliament with reasonable assurance about whether $8,074.66 spent on overseas travel by the LECC complied, in all material respects with s. 12A of the PF&A Act.

My audit was conducted in accordance with applicable Standards on Assurance Engagements (ASAE 3100 ‘Compliance Engagements’).

In conducting my audit, I have complied with:

• the independence requirements of Australian Auditing and Assurance Standards
• ASQC 1 ‘Quality Control for firms that Perform Audits and Reviews of Financial Reports and Other Financial Information, Other Assurance Engagements and Related Service Engagements’
• relevant ethical pronouncements.

Parliament promotes independence by ensuring the Auditor‑General and the Audit Office of New South Wales are not compromised in their roles by:

• providing that only parliament, and not the executive government, can remove an Auditor‑General
• mandating the Auditor‑General as auditor of public sector agencies
• precluding the Auditor‑General from providing non‑audit services.

I have reviewed documentation provided by the Minister and the LECC, gained an understanding of the LECC’s controls and processes for approving and making expenditure and made enquiries of LECC staff. I have also:

• gained an understanding of the relevant pieces of legislation and case law
• reviewed the advice of the Crown Solicitor and the Solicitor‑General
• sought independent legal advice on key aspects of the PF&A Act and the Law Enforcement Conduct Commission Act 2016 (the LECC Act) from an acknowledged expert in statutory interpretation
• conducted interviews with key persons
• reviewed the documentation listed in Appendix four.

Appendix one - Legislated functions of the LECC

Appendix two - Timeline of events

Appendix three - The transactions

Appendix four - Interviews and key documents