What this report is about

NSW local councils provide a wide range of essential services and infrastructure to their communities and are increasingly reliant on digital technologies.

Councils need to manage cyber security risks to ensure their information, data and systems are appropriately safeguarded. Councils also need to be prepared to detect, respond and recover when a cyber security incident occurs.

The audit assessed how effectively three selected councils identified and managed cyber security risks.

The audit also included the Department of Planning, Housing and Infrastructure (Office of Local Government) and Department of Customer Service (Cyber Security NSW), due to their roles in providing guidance and support to local councils.

Audit findings

The audit found that the selected councils are not effectively identifying and managing cyber security risks. Each of the councils undertook activities to improve their cyber security during the audit period, but this audit found significant gaps in their cyber security risk management and cyber security processes.

Such gaps result in unmitigated risks to the security of information and assets which, if compromised, could impact their local communities, service delivery and public infrastructure.

Cyber Security NSW and the Office of Local Government recommend that councils adopt requirements in the Cyber Security Guidelines for Local Government, but could do more to monitor whether the Guidelines are enabling better cyber security risk management in the sector.

Audit recommendations

In summary, the councils should:

• integrate assessment and monitoring of cyber security risks into corporate governance processes
• self-assess their performance against Cyber Security NSW's guidelines for local government
• develop and implement a risk-based cyber security improvement plan and program of activities
• develop, implement and test a cyber incident response plan.

Cyber Security NSW and the Office of Local Government should regularly consult on cyber security risks facing local government, and review the effectiveness of guidelines and related resources for the sector.

While this report focuses on the performance of the selected councils, the findings and recommendations should be considered by all councils to better understand their risks and challenges relevant to managing cyber security risks.

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Parliamentary reference - Report number #392- released 26 March 2024

What this report is about

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

Findings

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

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

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

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

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

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

Recommendations

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

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

To improve internal controls, councils should:

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

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What this report is about

In this report, we present findings and recommendations relevant to regulation from selected reports between 2018 and 2024.

This analysis includes performance audits, compliance audits and the outcomes of financial audits.

Effective regulation is necessary to ensure compliance with the law as well as to promote positive social and economic outcomes and minimise risks with certain activities.

The report is a resource for public sector leaders. It provides insights into the challenges and opportunities for more effective regulation.

Audit findings

The analysis of findings and recommendations is structured around four key themes related to effective regulation:

• governance and accountability
• processes and procedures
• data and information management
• support and guidance.

The report draws from this analysis to present insights for agencies to promote effective regulation. It also includes relevant examples from recent audit reports.

In this report, we also draw out insights for agencies that provide a public sector stewardship role.

The report highlights the need for agencies to communicate a clear regulatory approach. It also emphasises the need to have a consistent regulatory approach, supported by robust information about risks and accompanied with timely and proportionate responses.

The report highlights the need to provide relevant support to regulated parties to facilitate compliance and the importance of transparency through reporting of meaningful regulatory information.

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What this report is about

Transport for NSW (TfNSW) uses the Driver vehicle System (DRIVES) to support its regulatory functions. The system covers over 6.2 million driver licences and over seven million vehicle registrations.

DRIVES first went live in 1991 and has been significantly extended and updated since, though is still based around the same core system. The system is at end of life but has become an important service for Service NSW and the NSW Police Force.

DRIVES now includes some services to other parts of government and non-government entities which have little or no connection to transport. There are 141 users of DRIVES in total, including commercial insurers, national regulators, and individual citizens.

This audit assessed whether TfNSW is effectively managing DRIVES and planning to transition it to a modernised system.

Audit findings

TfNSW has not effectively planned the replacement of DRIVES.

It is now working on its third business case for a replacement system but has failed to learn lessons from its past attempts.

In the meantime, TfNSW has not taken a strategic approach to managing DRIVES’ growth.

TfNSW has been slow to reduce the risk of misuse of personal information held in DRIVES. With its delivery partner Service NSW, TfNSW has also been slow to develop and implement automatic monitoring of access.

TfNSW uses recognised processes for managing most aspects of DRIVES, but has not kept the system consistently available for users. TfNSW has lacked accurate service availability information since June 2022, when it changed its technology support provider.

TfNSW needs to significantly prioritise cyber security improvements to DRIVES. TfNSW is seeking to lift DRIVES’ cyber defences, but it will not achieve its stated target safeguard level until December 2025.

Even then, one of the target safeguards will not be achieved in full until DRIVES is modernised.

Audit recommendations

TfNSW should:

• implement a service management framework including insight into the views of DRIVES users, and ensuring users can influence the service
• ensure it can accurately and cost effectively calculate when DRIVES is unavailable due to unplanned downtime
• ensure implementation of a capability to automatically detect anomalous patterns of access to DRIVES
• ensure that DRIVES has appropriate cyber security and resilience safeguards in place as a matter of priority
• develop a clear statement of the future role in whole of government service delivery for the system
• resolve key issues currently faced by the DRIVES replacement program including by:
  • clearly setting out a strategy and design for the replacement
  • preparing a specific business case for replacement.

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Parliamentary reference - Report number #388 - released 20 February 2024

This report is about

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

What we found

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

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

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

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

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

What we recommended

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

The key issues

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

What we recommended

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

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

Asset valuations

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

What we recommended

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

Integrity and completeness of asset source records

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

What we recommended

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

Cybersecurity

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

What we recommended

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

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

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

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

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

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

Margaret Crawford PSM

Auditor-General for New South Wales

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

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

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

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

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

Total number of findings reported in audit management letters decreased

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

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

Appendix two – Status of audits

Appendix three – Councils received qualified audit opinions

Appendix four – Common reasons for council extensions

Copyright notice

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

What the report is about

Cyber Security NSW is part of the Department of Customer Service, and aims to provide the NSW Government with an integrated approach to preventing and responding to cyber security threats.

This audit assessed the effectiveness of Cyber Security NSW's arrangements in contributing to the NSW Government's commitments under the NSW Cyber Security Strategy, in particular, increasing the NSW Government's cyber resiliency. The audit asked:

• Are internal planning and governance processes in place to support Cyber Security NSW meet its objectives? 
• Are Cyber Security NSW's roles and responsibilities defined and understood across the public sector?

What we found

Cyber Security NSW has a clear purpose that is in line with wider government policy and objectives. However, it does not clearly and consistently communicate its key objectives, with too few reliable and meaningful ways of measuring progress toward those objectives.

Cyber Security NSW does not provide adequate assurance of the cyber security maturity self assessments performed by NSW Government agencies. Department heads are accountable for ensuring their agency's compliance with NSW government policy.

Cyber Security NSW has a remit to assist local government to improve cyber resilience. However, it cannot mandate action and does not have a strategic approach guiding its efforts.

What we recommended

By 30 June 2023 the Department of Customer Service should:

1. implement an approach that provides reasonable assurance that NSW government agencies are assessing and reporting their compliance with the NSW Government Cyber Security Policy in a manner that is consistent and accurate
2. ensure that Cyber Security NSW has a strategic plan that clearly demonstrates how the functions and services provided by Cyber Security NSW contribute to meeting its purpose and achieving NSW government outcomes
3. ensure that Cyber Security NSW has a detailed, complete and accessible catalogue of services available to agencies and councils
4. develop a comprehensive engagement strategy and plan for the local government sector, including councils, government bodies, and other relevant stakeholders. 

The NSW Cyber Security Strategy details a vision for ‘…NSW to become a world leader in cyber security, protecting, growing, and advancing our digital economy’. Cyber Security NSW, located within the Department of Customer Service, has lead responsibility for one of the four commitments in the strategy: to increase the NSW Government’s cyber resilience.

Cyber Security NSW ‘aims to provide the NSW Government with an integrated approach to preventing and responding to cyber security threats’. It does not provide broader consumer-focused services.

In August 2020, the NSW Government approved a business case to enhance the funding and remit of Cyber Security NSW to include a broader range of services and functions. As a result, Cyber Security NSW is receiving $60 million in funding from 2020–21 to 2022–23, an increase from its previous funding of around $5 million per year (which had been sourced from contributions from each NSW Government department).

The objective of this performance audit was to assess the effectiveness of Cyber Security NSW’s arrangements in contributing to the NSW Government’s commitments under the NSW Cyber Security Strategy, in particular, to increase the NSW Government’s cyber resilience.

We assessed this objective through two lines of inquiry:

1. Are internal planning and governance processes in place to support Cyber Security NSW meet its objectives?
2. Are Cyber Security NSW roles and responsibilities defined and understood across the public sector?

The Audit Office of New South Wales has reported on the topic of cyber security previously. Most recently, the Internal Controls and Governance 2022 report included findings and recommendations relating to cyber security internal controls and governance at 25 of the largest agencies in the NSW public sector. While that report is multi-agency and sought to assess the level of cyber security attained in selected agencies, this current performance audit report focuses specifically on Cyber Security NSW and how well-equipped it is to meet its whole-of-government cyber security leadership and coordination roles.

Cyber security is an evolving landscape where the nature and scale of threats are increasing. The Australian Cyber Security Centre (ACSC), the Australian Government lead agency for cyber security, reported in its in 2020–21 annual report that it received over 67,500 cybercrime reports, equating to one report of a cyber attack every eight minutes, with no sector of the economy or type of government agency immune.

Citizens of NSW are increasingly accessing online government services in this context, providing different types of sensitive personal information. This reliance and transition to digital services has increased in recent times, particularly during the COVID-19 pandemic. The NSW Legislative Council’s Portfolio Committee (the Committee) noted in the March 2021 inquiry report into cyber security in NSW that ‘a failure to get cyber security right in New South Wales represents a significant risk to the State’s economy, business and community, and will affect public trust in government’.

The Committee noted that sound cyber security practices across NSW Government agencies, which Cyber Security NSW was established to drive, will enable the State and community to leverage opportunities from the digital world. Indeed, NSW aims to become a world leader in cyber security by protecting, growing and advancing the digital economy.

Establishment of Cyber Security NSW

Prior to the establishment of Cyber Security NSW, the Office of the Government Chief Information Security Officer was responsible for cyber security across the NSW government sector. This role was announced in March 2017 and was tasked with ‘identifying areas of high risk of attack, and working across NSW agencies to share intelligence, facilitate minimum security standards, and ultimately ensure that citizens can trust in the NSW Government’s delivery of digital transformation’. At the time of this appointment, the Minister for Customer Service and Digital Government stated that ‘cyber security and risk has emerged as one of the most high-profile, borderless and rapidly evolving risks facing government’.

The Office of the Government Chief Information Security Officer was renamed on 20 May 2019 to Cyber Security NSW. Governance updates at the time note that this was undertaken to ‘better reflect the leadership and coordination role required to uplift cyber security and decision-making across NSW Government’. The establishment of Cyber Security NSW was also partly in response to the Audit Office of New South Wales 2018 performance audit report on ‘Detecting and Responding to Cyber Security Incidents’. That audit found that there was no whole-of-government capability to detect and respond effectively to cyber security incidents. Cyber Security NSW is relatively new and is established as a branch within the Department of Customer Service (DCS).

The Office of the Government Chief Information Security Officer, and subsequently Cyber Security NSW, was initially funded through a levy imposed on clusters. Funding arrangements for Cyber Security NSW changed with the announcement in August 2020 of $240 million over three years for the stated purpose of bolstering the NSW Government’s cyber security capability and creating a world leading cyber industry. This funding included direct investment of $60 million from 2020–21 to 2022–23 for Cyber Security NSW to increase its capability and capacity, with the size of the team at the time expected to grow from 25 to 100 staff. In announcing this funding, the Minister for Customer Service and Digital Government stated that ‘…this is the biggest single cyber security investment in national history and will strengthen the government's capacity to detect and respond to the fast-moving cyber threat landscape’.

Cyber Security NSW is divided into two directorates, with one directorate having a focus on operations, and the other on policy and awareness. In turn, there are seven teams within the two directorates. As at March 2022, Cyber Security NSW had 76 ongoing positions filled, five contractors and 22 vacancies.

Cyber Security NSW states that its aim ‘…is to provide the NSW Government with an integrated approach to preventing and responding to cyber security threats. By building a stronger cyber resilience across whole-of-government, Cyber Security NSW is able to support the economic growth prosperity and efficiency of NSW’.

NSW Government Cyber Security Strategy

The NSW Government Cyber Security Strategy was released in September 2018 to ‘…guide and inform the safe management of government’s growing cyber footprint’. The 2018 Cyber Security Strategy also set out an action plan with success criteria against each of the six themes of the NSW cyber security framework. Based on a framework from the US National Institute of Standards and Technology (NIST), these themes are:

• lead
• prepare
• prevent
• detect 
• respond 
• recover.

The Strategy was revised in 2021 and combined with the Cyber Security Industry Development Strategy. The aim of this current strategy is to ‘…outline the key strategic objectives, guiding principles, and high-level focus areas that the NSW Government will use to align existing and future programs of work’. The strategy includes four NSW Government commitments to:

• increase NSW Government cyber resiliency
• help NSW cyber security businesses grow
• enhance cyber security skills and workforce 
• support cyber security research and innovation.

Cyber Security NSW has responsibility as ‘lead agency’ on the first commitment. This role requires it to set commitment objectives and focus areas for the strategy and provide central leadership and coordination of programs and initiatives.

NSW Government Cyber Security Policy

The NSW Government’s Cyber Security Policy was released in February 2019, replacing the former Digital Information Security Policy. All NSW Government agencies must comply with the Cyber Security Policy, and it was recommended for adoption by State Owned Corporations (SOC), local councils, and universities.

The current version of the Cyber Security Policy sets out a range of mandatory requirements for agencies, including: 

• annual reporting of their self-assessed levels of maturity against all the mandatory requirements of the Policy and the Australian Cyber Security Centre’s ‘Essential Eight’ requirements 
• that agencies must provide a list of their ‘crown jewels’ and high and extreme risks to their cluster Chief Information Security Officer (CISO).

The Policy sets out that Cyber Security NSW:

• may assist agencies with their implementation of the Policy with an FAQ document and guidelines on several cyber security topics
• will summarise the maturity reports provided by agencies and provide the results to the relevant governance bodies including the Cyber Security Steering Group, Secretaries’ Board, relevant committees of Cabinet, Cyber Security Senior Officers’ Group, and the ICT and Digital Leadership Group, as well as use these reports to identify common themes and areas for improvement across NSW Government.

As discussed further in Chapter 3, a mandatory guideline issued by the Secretary of the Department of Customer Service in 2020 established that departments and agencies will be subject to audits by Cyber Security NSW. This is to test compliance with the Cyber Security Policy and report these outcomes to the Secretaries’ Board.

This chapter considers whether the Department of Customer Service has a strategic plan for Cyber Security NSW that includes a consistent hierarchy of priorities, which are then reflected in workplans, and inform decisions about specific functions and activities. It also considers whether:

• there was a sound, evidence-based rationale for why Cyber Security NSW was established
• the specific services and functions Cyber Security NSW provides are adequately targeted to agency and council needs
•  there is adequate performance assessment of how the services and functions performed by Cyber Security NSW contribute to uplifting cyber maturity and increasing cyber resilience.

This chapter considers the distribution of responsibility for cyber security in the NSW public sector, as well as whether the responsibilities and roles of Cyber Security NSW are clear and understood by agencies and councils. It also considers whether Cyber Security NSW has sufficient authority and mandate to fulfill its responsibilities for both NSW Government agencies and the local government sector.

Appendix one – Response from agency

Appendix two – About the audit

Appendix three – Performance auditing

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.

Parliamentary reference - Report number #374 - released 8 February 2023

What the report is about

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

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

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

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

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

What we found

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

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

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

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

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

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

I am pleased to present the Audit Insights 2018–2022 report. This report describes key findings, trends and lessons learned from the last four years of audit. It seeks to inform the New South Wales Parliament of key risks identified and to provide insights and suggestions to the agencies we audit to improve performance across the public sector.

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

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

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

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

Margaret Crawford
Auditor-General for New South Wales

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

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

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

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

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

Appendix one – Included reports, 2018–2022

Appendix two – About this report

Copyright notice

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

What the report is about

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

What we found

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

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

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

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

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

What the key issues were

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

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

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

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

Rural firefighting equipment

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

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

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

What we recommended

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

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

Early financial reporting procedures

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

What we recommended

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

Asset valuations

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

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

What we recommended

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

Integrity/completeness of asset records

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

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

What we recommended

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

Cybersecurity

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

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

What we recommended

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

Councils should monitor the implementation of recommendations

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

What we recommended

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

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

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

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

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

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

Margaret Crawford
Auditor-General for New South Wales

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

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

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

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

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

Total number of findings reported in audit management letters decreased

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

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

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

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

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

Focus on integrity of systems, good governance and good advice

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

Focus on local councils' continued response to recent emergencies

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

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

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

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

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

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

Focus on the effectiveness of cybersecurity in local government

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

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

Our approach to auditing cybersecurity across in the sector involves:

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

Local government elections

Local government elections took place in 2021–22

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

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

New rate peg methodology to support growing councils

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

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

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

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

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

Appendix two – Status of previous recommendations

Appendix three – Status of audits

Copyright notice

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

What the report is about

This audit assessed how effectively Transport for NSW (TfNSW) and Sydney Trains identify and manage their cyber security risks.

The NSW Cyber Security Policy (CSP) sets out 25 mandatory requirements for agencies, including implementing the Australian Cyber Security Centre’s Essential 8 strategies to mitigate cyber security incidents, and identifying the agency’s most vital systems, their ‘crown jewels’. 

The audited agencies have requested that we do not disclose detail of the significant vulnerabilities detected during the audit, as these vulnerabilities are not yet remediated. We provided a detailed report to the agencies in December 2020 outlining significant issues identified in the audit. We have conceded to the agencies' request but it is disappointing that transparency to the Parliament and the public on issues that potentially directly affect them needs to be limited in this way.

What we found

TfNSW and Sydney Trains are not effectively managing their cyber security risks.

Both agencies have assessed their cyber security risks as unacceptably high and both agencies had not identified all of the risks we detected during this audit – some of which are significant.

Both agencies have cyber security plans in place that aim to address cyber security risks. TfNSW and Sydney Trains have combined this into the Transport Cyber Defence Rolling Program, part of the Cyber Defence Portfolio (CDP). 

However, neither agency has reached its target ratings for the CSP and the Essential 8 and maturity is low in relation to significant risks and vulnerabilities exposed.

Further, neither agency is fostering a culture where cyber security risk management is an important and valued aspect of decision-making.

TfNSW is not implementing cyber security training effectively across the cluster with only 7.2% of staff having completed basic cyber security training.

What we recommended

TfNSW and Sydney Trains should:

• develop and implement a plan to uplift the Essential 8 controls to the agency's target state
• as a matter of priority, address the vulnerabilities identified as part of this audit and previously described in a detailed Audit Office report provided to both agencies
• ensure cyber security risk reporting to executives and the Audit and Risk Committee
• collect supporting information for the CSP self assessments 
• classify all information and systems according to importance and integrate this with the crown jewels identification process
• require more rigorous analysis to re-prioritise CDP funding 
• increase uptake of cyber security training.

TfNSW should assess the appropriateness of its target rating for each of the CSP mandatory requirements.

Department of Customer Service should:

• clarify the requirement for the CSP reporting to apply to all systems
• require agencies to report the target level of maturity for each mandatory requirement.

Response to requests by audited agencies to remove information from this report

In preparing this audit report, I have considered how best to balance the need to support public accountability and transparency with the need to avoid revealing information that could pose additional risk to agencies’ systems. This has involved an assessment of the appropriate level of detail to include in the report about the cyber security vulnerabilities identified in this audit.

In making this assessment, the audit team consulted with Transport for NSW (TfNSW), Sydney Trains, and Cyber Security NSW to identify content which could potentially pose a threat to the agencies’ cyber security.

In December 2020, my office also provided TfNSW and Sydney Trains with a detailed report of many of the significant vulnerabilities identified in this audit, to enable the agencies to address the cyber security risks identified. The detailed report was produced as a result of a 'red team' exercise, which was conducted with both agencies' knowledge and consent. The scope of this exercise reflected the significant input provided by both agencies. More information on this exercise is at page 12 of this report.

TfNSW and Sydney Trains have advised that in the six months from December 2020 and at the time of tabling this audit report, they have not yet remediated all the vulnerabilities identified. As a result, they, along with Cyber Security NSW, have requested that we not disclose all information contained in this audit report to reduce the likelihood of an attack on their systems and resulting harm to the community. I have conceded to this request because the vulnerabilities identified have not yet been remediated and leave the agencies exposed to significant risk.

It should be stressed that the risks identified in the detailed report exist due to the continued presence of these previously identified vulnerabilities, rather than due to their potential publication. The audited agencies, alone, are accountable for remediating these vulnerabilities and addressing the risks they pose.

It is disappointing that transparency to the Parliament and the public on issues that potentially directly affect them needs to be limited in this way.

That said, the conclusions drawn in this report are significant in terms of risk and remain valid, and the recommendations should be acted upon with urgency.

Cyber security risk is an increasing area of concern for governments in Australia and around the world. In recent years, there have been a number of high-profile cyber security attacks on government entities in Australia, including in New South Wales. Malicious cyber activity in Australia is increasing in frequency, scale, and sophistication. The Audit Office of New South Wales is responding to these risks with a program of audits in this area, which aim to identify the effectiveness of particular agencies in managing cyber risks, as well as their compliance with relevant policy.

Cyber Security NSW, part of the Department of Customer Service (DCS) releases and manages the NSW Cyber Security Policy (CSP). The CSP sets out 25 mandatory requirements for agencies, including making it mandatory for agencies to implement the Australian Cyber Security Centre Essential 8 Strategies to Mitigate Cyber Security Incidents (the Essential 8). The Essential 8 are key controls which serve as a baseline set of protections which agencies can put in place to make it more difficult for adversaries to compromise a system. Agencies are required to self-assess their maturity against the CSP and the Essential 8, and report that assessment to Cyber Security NSW annually.

The CSP makes agencies responsible for identifying and managing their cyber security risks. The CSP sets out responsibilities and governance regarding risk identification, including making agencies responsible for identifying their 'crown jewels', the agency's most valuable and operationally vital systems. Once these risks are identified, agencies are responsible for developing a cyber security plan to mitigate those risks.

This audit focussed on two agencies: Transport for NSW (TfNSW) and Sydney Trains. TfNSW is the lead agency for the Transport cluster and provides a number of IT services to the entire cluster, including Sydney Trains. This audit focussed on the activities of TfNSW's Transport IT function, which is responsible for providing cyber security across the cluster, as well as directly overseeing four of TfNSW's crown jewels. Sydney Trains is one of the agencies in the Transport cluster. While it receives some services from TfNSW, it is also responsible for implementing its own IT controls, as well as controls to protect its Operational Technology (OT) environment. This OT environment includes systems which are necessary for the operation and safety of the train network.

To test the mitigations in place and the effectiveness of controls, this audit involved a 'red team' simulated exercise. A red team involves authorised attackers seeking to achieve certain objectives within the target's environment. The red team simulated a determined external cyber threat actor seeking to gain access to TfNSW's systems. The red team also sought to test the physical security of some Sydney Trains' sites relevant to the agency's cyber security. The red team exercise was conducted with the knowledge of TfNSW and Sydney Trains.

This audit included the Department of Customer Service as an auditee, as they have ownership of the CSP through Cyber Security NSW. This audit did not examine the management of cyber risk in the Department of Customer Service.

This audit assessed how effectively selected agencies identify and manage their cyber security risks. The audit assessed this with the following criteria:

• Are agencies effectively identifying and planning for their cyber security risks?
• Are agencies effectively managing their cyber security risks?

Following this in-depth portfolio assessment, the Auditor-General for NSW will also table a report on NSW agencies' compliance with the CSP in the first quarter of 2021–22.

Agencies have assessed their cyber risks as being above acceptable levels

An agency's risk tolerance is the amount of risk which the agency will accept or tolerate without developing further strategies to modify the level of risk. Risks that are within an agency's risk tolerance may not require further mitigation and may be deemed acceptable, while risks which are above the agency's risk tolerance likely require further mitigation before they become acceptable to the agency.

Both agencies have defined their risk tolerance and have identified risks which are above this level, indicating that they are unacceptable to the agency. TfNSW has defined 'very high' risks as generally intolerable and 'high' risks as undesirable. Its risk tolerance is 'medium'. Sydney Trains has four classifications of risk: A, B, C and D. A and B risks are deemed 'unacceptable' and 'undesirable' respectively, while C risks are considered 'tolerable'. This aligns with the TfNSW definition of a medium risk tolerance.

Transport IT reported five enterprise-level cyber security risks through its enterprise risk reporting tool in September 2020, all of which relate to cyber security or have causes relating to cyber security. These risks are in aggregate form, rather than relating to specific vulnerabilities. At the time of the audit, one of these risks was rated as very high and the other four rated as high. At this time, Transport IT had identified a further seven divisional-level risks which were above the agency’s risk tolerance.

Similarly, Sydney Trains has identified one main cyber security risk in its IT enterprise-level risk register and another with a potential cyber cause. Both of these IT risks are deemed to have a residual risk of ‘unacceptable’.

Similarly, two cyber-related OT risks have been determined to be above the agency's risk tolerance. One risk is rated as 'unacceptable'. Another risk, while not entirely cyber rated, is rated 'undesirable' and is deemed to have some causes which may stem from a cyber-attack.

Agencies have assessed their current cyber risk mitigations as requiring improvement

In addition to the risk ratings stated above, at the time of the audit neither agency believed that its controls were operating effectively. Transport IT had rated the control environments for its cyber security enterprise risks as 'requires improvement'. Mitigations were listed in the risk register for these risks but, in some cases, they were unlikely to reduce the risk to the target state or by the target date. For example, one risk had actions listed as 'under review' and no further treatment actions listed, but a due date of July 2021, while another risk was being treated by the CDP with a due date of July 2021. The CDP identified in May 2020 that while the average risk identified as part of that program will be reduced to a medium level by this date, ten high risks will still remain. Given the delays in the program, this number may be higher. As such, it seems unlikely that the enterprise risk will be reduced to below a 'high' level by July 2021.

Sydney Trains’ IT and OT risk registers cross-reference controls and mitigations against the causes and consequences. The IT cyber security risk identified in the register had causes with no mitigations designed for them. Further, some of these causes did not have future mitigations designed for them. This risk also had controls in place which are identified as partially effective. For the unacceptable OT risk noted above, while there was a control designed for each of the potential causes, Sydney Trains had identified all of the controls in place as either partially effective or ineffective. This indicates that Sydney Trains was not effectively mitigating the causes of its cyber risks and, even where it had designed controls or mitigations, these were not always implemented to fully mitigate the cause of the risk.

Additional information on gaps in cyber mitigations which were exposed in the course of this audit has been detailed to both agencies. The Foreword of this report provides information about why this detail is not included here.

Essential 8 maturity is low across TfNSW and Sydney Trains and little progress was made in 2020

CSP mandatory requirement 3.2 states that agencies must implement the ACSC Essential 8. Agencies must also rate themselves against each of the Essential 8 on a maturity scale from zero to three and report this to Cyber Security NSW. A full list of the Essential 8 can be found in Exhibit 1. Both agencies have a low level of maturity against the Essential 8 not just in comparison to the targets they have set, but also in relation to the risks and vulnerabilities exposed. Both agencies have set target maturity ratings for the Essential 8 but none of the Essential 8 ratings across either agency are currently implemented to this level. Having a low level of Essential 8 maturity exposes both agencies to significant risks and vulnerabilities. Little progress was made between the 2019 and 2020 attestation periods.

Transport IT has set a target rating of three across all of the Essential 8. Sydney Trains has set a target rating of three for its IT systems. Sydney Trains had an interim target of two for its OT systems in 2020 and advised that this has since increased to three. It should be noted that not all the Essential 8 are applicable to OT systems.

None of the Essential 8 ratings across either agency are currently implemented to the target levels. Given that the Essential 8 provide the controls which are most commonly able to deter cyber-attacks, having maturity at a low level potentially exposes agencies to a cyber security attack.

Some work is underway across both TfNSW and Sydney Trains to improve the Essential 8 control ratings. The CDP provided some resources to the Essential 8 over 2019–20, with uplift focusing on specific systems. The CDP work in 2019 and 2020 relevant to the Essential 8 largely focussed on determining the current state of the Essential 8 and creating a target state roadmap. As a result, there was little improvement between the 2019 and 2020 attestation periods. The CDP has a workstream for the Essential 8 in its FY 2020–21 funding allocation, however as noted above in Exhibit 6 this was delayed as resources were redeployed to Project La Brea. Regardless, work on some specific aspects of the Essential 8 remain part of the 2020–21 CDP allocation, with workstreams allocated to improving three of the Essential 8. In addition, some work from Project La Brea should lead to an improvement in the Essential 8.

Sydney Trains' Cyber Uplift Program included a workstream which had in scope the uplift in the Essential 8 in IT. There were also other workstreams which aimed to improve some of the Essential 8 for OT systems. Work is also ongoing as part of the CDP to uplift these scores in Sydney Trains.

TfNSW and Sydney Trains have not reached their target maturity across the CSP mandatory requirements and TfNSW has not evaluated its cluster-wide target to ensure it is appropriate

Cyber Security NSW allows each agency to determine its target level of maturity for the first 20 CSP mandatory requirements. Agencies can tailor their target levels to their risk profile. Not reaching the target rating of the CSP mandatory requirements risks information and systems being managed inconsistently or not in alignment with good governance principles.

Sydney Trains has set its target level of maturity for IT and OT. All of Sydney Trains' target maturity levels are at least a three (defined), with a target of four (quantitatively managed) for many of the mandatory requirements. While Cyber Security NSW does not currently mandate a minimum level of maturity, in 2019 there was a requirement for each agency to target a minimum level of three.

Sydney Trains has not met its target ratings across the mandatory requirements.

The Transport Cyber Defence Rolling Program has a program KPI to ensure that the entire cluster reaches a minimum maturity level of three against all the CSP requirements by 2023. TfNSW has not reviewed its CSP mandatory requirement targets to determine if a three is desirable for all requirements or if a higher target level may be more appropriate. It is important for senior management to set cyber security objectives as a demonstration of leadership and a commitment to cyber security.

TfNSW has not met its target ratings across the mandatory requirements for its Group IT ISMS, which was the focus of this audit.

Both agencies claimed progress in their implementation of the mandatory requirements between 2019 and 2020. The audit did not seek to verify the self-assessed results from either agency.

Both agencies operate ISMS in line with the CSP

CSP mandatory requirement 3.1 requires agencies to implement an Information Security Management System (ISMS) or Cyber Security Framework (CSF), with scope at least covering systems identified as the agency's ‘crown jewels’. The ISMS or CSF should be compliant with, or modelled on, one or more recognised IT or OT standard. As noted in the introduction, an ISMS ‘consists of the policies, procedures, guidelines, and associated resources and activities, collectively managed by an organisation, in the pursuit of protecting its information assets.’ Both agencies operate an ISMS compliant with the CSP requirement.

As noted in the introduction, TfNSW operates four ISMS. The Transport IT ISMS is certified against ISO27001, the most common standard for ISMS certification. Three of TfNSW’s six crown jewels are managed within this ISMS. The other ISMS are not certified to relevant standards, though TfNSW claims that they align with relevant controls. This is sufficient for the purposes of the CSP.

Sydney Trains operates two ISMS, one for IT and another for OT. Neither of these are certified to relevant ISMS Standards, however there have been conformance reviews of both IT and OT with relevant standards. These ISMS cover all crown jewels in the agency.

There are currently 11 ISMS in operation across the Transport cluster. TfNSW has proposed moving towards a holistic approach to these ISMS, with the CDP Board responsible for governing the available security controls and directing agency IT and OT teams to implement these.

Agencies are not routinely conducting audits of third-party suppliers to ensure compliance with contractual obligations

CSP mandatory requirement 1.5 makes agencies accountable for the cyber risks of their ICT service providers and ensuring that providers comply with the CSP and any other relevant agency security policies. The ACSC has provided advice on what organisations should do when managing third party suppliers of ICT. The ACSC advises that organisations should use contracts to define cyber security expectations and seek assurance to ensure that these contract expectations are being met. While both agencies usually include specific cyber security expectations in contracts, neither is routinely seeking assurance that these expectations are being met.

The NSW Government has mandated the use of the 'Core& One' contract template for low-value IT procurements and the Procure IT contract template for high-value IT procurements. Both of these contracts contain space for the procuring agency to include cyber security controls for the contractor to implement. The Procure IT contract template also includes a right-to-audit clause which allows agencies to receive assurance around the implementation of these controls. TfNSW and Sydney Trains used the mandated contracts for relevant contracts examined as part of this audit.

TfNSW included security controls in all the contracts examined as part of this audit. Compliance with ISO27001 was the most commonly stated security expectation. Of the contracts examined as part of this audit, only one contract did not have a right-to-audit clause. This contract was signed in October 2016. While these clauses are in place, TfNSW rarely conducted these audits on its third-party providers. Of the eight TfNSW contracts examined in detail, only two of these had been audited to confirm compliance with the stated security controls.

Sydney Trains included security controls in all but one of the contracts examined as part of this audit. Sydney Trains did not require contractors to be compliant with ISO27001, but only required compliance with whole-of-government policies. Sydney Trains does not routinely conduct audits of its third-party suppliers, however it did conduct deep-dive risk analyses of its top ten highest risk IT suppliers. This involved a detailed review of both the suppliers' security posture and also the contract underpinning the relationship with the supplier.

The CDP funding for 2020–21 includes a workstream for strategic third-party contract remediation. This funding is to conduct some foundational work which will allow the CDP to make further improvements in future years. While this funding will not address gaps in contract requirements or management across all contracts, this workstream aims to reduce the risks posed by strategic suppliers covering critical assets. Similarly, work is currently underway as part of the CDP to conduct OT risk assessments for key suppliers to Sydney Trains in a similar way to the work undertaken for IT suppliers.

Sydney Trains has risk assessed its third-party suppliers but TfNSW has not done so

It is important to conduct a risk assessment of suppliers to identify high-risk contractors. This allows agencies to identify those contractors who may require additional controls stated in the contract, those who require additional oversight, and also where auditing resources are best targeted.

Sydney Trains has risk assessed all its IT suppliers and, as noted above, has conducted a deep-dive risk analysis of its top ten highest risk suppliers. TfNSW has not undertaken similar analysis of its key suppliers, however it has identified risks attached to each of its strategic suppliers and has documented these. As a result of not risk assessing its suppliers, TfNSW cannot take a targeted approach to its contract management.

TfNSW demonstrated poor records handling relating to the contracts examined as part of this audit

TfNSW was not able to locate one of the contracts requested as part of the audit's sample. Other documentation, such as contract management plans, could not be located for many of the other contracts requested as part of this audit. These poor document handling practices limits TfNSW's ability to effectively oversee service providers and ensure that they are implementing agreed controls. It also limits public transparency on the effectiveness of these controls.

The Transport cluster is not effectively implementing cyber security awareness training

Agencies are responsible for implementing regular cyber security education for all employees and contractors under mandatory requirement 2.1 in the CSP. TfNSW is responsible for delivering this training to the whole Transport cluster, including Sydney Trains. The Transport cluster has basic cyber awareness training available for all staff. TfNSW also offers additional training provided by Cyber Security NSW targeted at executives and executive assistants. While TfNSW has training available to staff, it is not delivering this effectively. TfNSW does not make training mandatory for most staff nor does it require staff to repeat training regularly. Even among those staff who have been assigned the training, completion rates are low, meaning that delivery is not effectively monitored. Cyber security training is important for building and supporting a cyber security culture.

TfNSW is responsible for creating and rolling out all forms of training to agencies within the Transport cluster. Both TfNSW and Sydney Trains have the same mandatory cyber awareness training that is automatically assigned to new starters. At the time of the audit, this training was not mandatory for ongoing staff. TfNSW does make additional cyber security training available to staff who can choose to undertake the training themselves, or can be assigned the training by their manager. All TfNSW cyber security training is delivered via online modules and it is the responsibility of managers to ensure that it is completed.

Cyber security training completion rates for both TfNSW and Sydney Trains are low. Only 13.5 per cent of staff across the Transport cluster had been assigned the Cyber Safety for New Starters training as of January 2021. Although this course is mandatory for new starters, only 53 per cent of staff assigned the Cyber Safety for New Starters training module had completed the course by January 2021. As a result, only 7.2 per cent of staff across the entire Transport cluster had completed this training at that time. In Sydney Trains, less than one per cent of staff had completed this training as at January 2021 and a further 7.6 per cent of staff have completed the 'Cyber Security: Beyond the Basics' training. These low completion rates indicate that TfNSW is not effectively rolling out cyber security training across the cluster.

In October 2020, the Department of Customer Service released 'DCS-2020-05 Cyber Security NSW Directive - Practice Requirement for NSW Government', which made annual cyber security training mandatory for all staff from 2021. In line with this requirement, TfNSW has advised that it will be gradually implementing mandatory annual training from July 2021 for all staff.

The Transport cluster undertakes activities to build a cyber-aware culture in accordance with the CSP, but awareness remains low

Increasing staff awareness of cyber security risks and maintaining a cyber secure culture are both mandatory requirements of the CSP. While TfNSW does undertake some activities to build a cyber aware culture, awareness of cyber security risks remains low. This can be demonstrated by the low training rates outlined above, and the 'Spot the Scammer' exercise, described in Exhibit 7. TfNSW is responsible for delivering these awareness raising activities across the cluster.

TfNSW frequently communicates with staff across the Transport cluster about various cyber security risks through multiple avenues. Both agencies use the intranet, emails and other awareness raising activities to highlight the importance for staff to be aware of the seriousness of cyber risks. Advice given on the intranet includes tips for spotting scammers on mobile phones, promoting the cluster-wide training courses, as well as various advice that staff could use when dealing with cyber risks in the workplace.

In addition to these awareness raising activities, TfNSW has also undertaken a cluster-wide phishing email exercise called 'Spot the Scammer'. This is outlined in Exhibit 7. This exercise was carried out in 2019 and 2020 and allowed the Transport cluster to measure the degree to which staff were able to identify phishing emails. As can be seen in Exhibit 7, the results of this exercise indicate that staff awareness of phishing emails remains low.

Appendix one – Response from agencies

Appendix two – Cyber Security Policy mandatory requirements

Appendix three – About the audit

Appendix four – Performance auditing

© 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.

Parliamentary reference - Report number #353 - released (13 July 2021).

What the report is about

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

What we found

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

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

What the key issues were

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

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

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

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

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

Rural fire fighting equipment

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

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

What we recommended

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

Central Coast Council

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

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

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

What we recommended

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

Further information

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

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

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

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

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

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

Recent emergency events significantly impacted councils

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

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

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

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

Total number of findings reported in audit management letters decreased

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

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

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

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

Audit Office’s work plan for 2020–21 onwards

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

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

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

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

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

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

Planned financial audit focus areas in Local Government

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

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

Audit, risk and improvement committees

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

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

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

Local Government elections

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

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

Implementation of AASB 1059

Accounting standards implementation continue next year

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

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

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

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

Appendix two – NSW Crown Solicitor’s advice

Appendix three – Status of 2019 recommendations

Appendix four – Status of audits

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