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Reports

21 November 2017

Published

Central Agencies 2017

Finance

Premier and Cabinet

Asset valuation

Compliance

Financial reporting

Fraud

Information technology

Internal controls and governance

Project management

This report highlights the results of the financial audits of NSW Government central agencies. The report focuses on key observations and findings from the most recent financial statement audits of agencies in the Treasury, Premier and Cabinet, and Finance, Services and Innovation clusters.

The report includes a range of findings in respect to service delivery. One repeat finding is that while the Government regularly reports on the 12 Premier's priorities, there is no comprehensive reporting on the 18 State priorities.

1. Financial reporting and controls

Audit Opinions	Unqualified audit opinions were issued for all agencies' 30 June 2017 financial statements.
Early close	Early close procedures continue to facilitate the timely preparation of financial statements and completion of audits, but agencies can make further improvement.
Deficient user administration access	User access administration over financial systems remains an area of weakness. Agencies need to strengthen user access administration to critical systems.
Transitioning to outsourced service providers	Transitioning of services to outsourced service providers can be improved. Outsourcing services can lead to better outcomes, which may include lower transaction costs and improved services, but it also introduces new risks.

2. Service delivery

Premier and State Priorities	A comprehensive report of performance against the 18 State Priorities is yet to be published. While some measures are publicly reported through agency annual reports or other sources, a comprehensive report of performance against the 18 State Priorities would ensure all State Priorities are publicly reported, provide a single and easily accessible source of reference and improve transparency.
ICT and digital government	The Digital Government Strategy was released in May 2017. Targets will need to be set to assess and monitor progress against the Strategy.
Digital information security	Not all agencies are complying with the NSW Government's information security policy. This increases the risk of noncompliance with legislation, information security breaches and difficulty restoring data or maintaining business continuity in the event of a disaster or disruption.
Property and asset utilisation	Property NSW's performance reporting would be enhanced by developing and reporting on customer satisfaction, reporting against set targets and benchmarking cost of service to the private sector.

3. Government financial services

Prudential oversight of NSW Government superannuation funds	Prudential oversight of SAS Trustee Corporation Pooled Fund and Parliamentary Contributory Superannuation Fund has not been prescribed. Structured and comprehensive prudential oversight of these funds remains important as they operate in a specialised, complex and continuously changing investment market sector, have over 106,000 members and manage investments in excess of $42.4 billion.
Green slip scheme affordability	Currently, Green Slips in NSW are the most expensive in Australia. However, CTP reforms are expected to reduce the cost of Green Slips.

This report sets out the results of the 30 June 2017 financial statement audits of NSW Government's central agencies and their cluster agencies.

Central agencies play a key role in ensuring policy coordination, good administrative and people management practices and prudent fiscal management. The central agencies and their key responsibilities are set out below.

Confidence in public sector decision‑making and transparency is enhanced when financial reporting is accurate and timely. Appropriate financial controls help ensure the efficient and effective use of resources and administration of agency policies. This chapter outlines our audit observations, conclusions or recommendations related to financial reporting and controls of agencies for 2016–17.

Observation	Conclusion or recommendation
2.1 Quality of financial reporting
Unqualified audit opinions were issued for all agency financial statements.	The quality of financial reporting continues to remain strong across the clusters.
2.2 Timeliness of financial reporting
Most agencies complied with the statutory timeframes for completion of early close procedures and preparation and audit of financial statements.	Early close procedures continue to facilitate the timely preparation of financial statements and completion of audits, but agencies can make further improvement.
2.3 Financial performance and sustainability
We assessed the performance of agencies listed in Appendix six against some key financial sustainability indicators. This highlighted two agencies with negative operating margins of more than ten per cent and one agency with a liquidity ratio of less than 0.5.	These agencies have strategies in place to remain financially sustainability and manage their liquidity. Our analysis found that, overall, the agencies are not at high risk of sustainability concerns.
2.4 Internal Controls
User access administration over financial systems remains an area of weakness. Sixteen moderate risk and ten low risk issues related to user access administration across eight agencies were identified.	Recommendation: Agencies should review user access administration to critical systems to ensure: policies for user access creation, modification and deactivation are documented approval is being obtained to establish, modify or delete user accounts regular user access reviews are performed and highly privileged user account activity is logged and monitored evidence of review is maintained.
Transitioning of services to outsourced service providers can be improved. Our 2016–17 audits identified one high risk issue relating to Property NSW's outsourcing of property and facility management services to the private sector. While a high risk issue was identified in 2015–16 from the Department of Finance, Services and Innovation's outsourcing of transactional and information technology services to GovConnect there has been an improvement in GovConnect's internal control environment throughout 2016–17.	Outsourcing services can lead to better outcomes, which may include lower transaction costs and improved services, but it also introduces new risks. The transition needs to be carefully managed and requires thorough planning and effective project governance. This should be supported by oversight and direction from senior management and independent project assurance.
2.5 Human Resources
The percentage of full‑time equivalent staff with annual leave greater than 30 days in the Finance, Services and Innovation, Premier and Cabinet and the Treasury clusters is 7.9 per cent, 17.1 per cent and 18.4 per cent respectively.	Agencies have strategies in place to reduce annual leave balances that are greater than 30 days. The effectiveness of these strategies will need to be monitored to ensure they are helping to achieve the desired outcome.

This chapter outlines our audit observations, conclusions and recommendations relating to service delivery for 2016–17.

Observation	Conclusion or recommendation
3.1 Premier and State priorities
The Department of Premier and Cabinet monitors the achievement of targets and the implementation of initiatives to deliver the 12 Premier’s Priorities. Responsible ministers and agencies manage the 18 State Priorities. A comprehensive report of performance against the 18 State Priorities is yet to be published.	While some measures are publicly reported through agency annual reports or other sources, a comprehensive report of performance against the 18 State Priorities would ensure all State Priorities are publicly reported, provide a single and easily accessible source of reference and improve transparency. Where possible, independent sources are used to measure performance, however without independent assurance there is an increased risk that the target measures are inaccurate, not relevant or do not fairly represent actual performance.
Performance against the State Priority to make NSW the easiest state to start a business is not currently published. A key aspect of making NSW the easiest state to start a business is making regulatory obligations easier to understand and implement.	Initiatives, such as easy to do business and red tape reduction are in place to help achieve this priority. The regulatory policy framework is under review following an October 2016 performance audit on ‘Red tape reduction’ that found the regulatory burden of legislation had increased.
3.2 Financial management
Revenue NSW earned record crown revenue of $30.0 billion in 2016–17 to support the state's finances.	Record crown revenue has been driven by the sustained increase in duties revenue, which has increased by 93.7 per cent over the last five years. This is a consequence of the continued strength in the property market over this time and large one off NSW Government business asset sales and leases.
3.3 ICT and digital government
The Digital Government Strategy (the Strategy) was released in May 2017 to build on reforms set out in previous ICT strategies.	The Strategy’s priorities and enablers aim to support digital innovation. Targets and measures will need to be set to assess and monitor progress against the Strategy.
The Digital Information Security Policy (DISP) is a key tool that helps ensure a minimum set of information security controls are implemented across NSW Government agencies. A review of 2016 annual reports found 15 agencies (13 in 2015) did not attest to compliance with the DISP and of the agencies that attested to compliance, 34 reported issues associated with their compliance.	The Strategy’s priorities and enablers aim to support digital innovation. Targets and measures will need to be set to assess and monitor progress against the Strategy. Failure to comply with the DISP increases the risk of noncompliance with legislation, information security breaches and difficulty restoring data or maintaining business continuity in the event of a disaster or disruption.
3.4 Property and asset utilisation
Property NSW's performance reporting could be improved. M2012-20 'Government Property NSW and Government Property Principles' required Property NSW to set key performance indicators to measure property and asset utilisation performance.	Property NSW's performance reporting would be enhanced by developing and reporting on customer satisfaction, reporting against set targets and benchmarking cost of service to the private sector.

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

Observation	Conclusion or recommendation
4.1 Key issues
The SAS Trustee Corporation (STC) Pooled Fund and the Parliamentary Contributory Superannuation (PCS) Fund are not required to comply with the prudential and reporting standards issued by the Australian Prudential Regulation Authority (APRA). Amendments to relevant legislation allows the Minister for Finance, Services and Property to prescribe applicable prudential standards and audit requirements.	Structured and comprehensive prudential oversight of these funds remains important as they operate in a specialised, complex and continuously changing investment market sector, have over 106,000 members and manage investments of more than $42.4 billion. Recommendation: The Treasury should liaise with the respective Trustees to implement appropriate prudential standards and oversight arrangements for the exempt public sector superannuation funds.
Currently, Green Slips in NSW are the most expensive in Australia. Average premiums for Sydney Metropolitan vehicles increased by 10.4 per cent between 1 January 2016 and 31 December 2016.	CTP reforms are expected to reduce the cost of Green Slips. The State Insurance Regulatory Authority will need to ensure it has appropriate processes in place to track and report against the expected benefits.
4.2 Financial performance and sustainability
Net unfunded superannuation liabilities were $15.0 billion at 30 June 2017. Under the Fiscal Responsibility Act 2012, the NSW Government’s target is to eliminate unfunded superannuation liabilities by 2030.	The superannuation funds’ strategic asset allocation and investment strategies are monitored and adjusted to help achieve a fully funded position by 2030.
The Home Warranty Scheme commenced in 2011. Over this time total premiums collected have not been sufficient to cover expected claim costs.	Funding arrangements introduced during 2016–17 allow the Home Building Compensation Fund to apply to the Crown for reimbursement of unfunded realised losses from under-pricing of premiums. Other reforms are planned to address the long term sustainability of the home building compensation scheme.
4.3 Investment performance
The NSW Government’s main superannuation funds have maintained the management expense ratio (MER) at consistent levels over the past two years. The Parliamentary Contributory Superannuation (PCS) Fund does not set an MER target.	MER is an industry recognised ratio to measure the performance of funds and investment managers. Recommendation: The Fund Secretary for the PCS Fund, in conjunction with the Trustee, should consider establishing an appropriate management expense ratio target to measure performance.

Appendix one - List of 2017 recommendations

Appendix two - Status of 2016 recommendations

Appendix three - Agencies selected for this volume

Appendix four - Timeliness of financial reporting and audit reporting

Appendix five - Financial audit reporting

Appendix six - Financial analysis

21 March 2017

Published

Additional Entitlements for Members of Parliament 2016

Premier and Cabinet

Compliance

For the year ended 30 June 2016, the Members of NSW Parliament reviewed generally complied with requirements of the Parliamentary Remuneration Tribunal’s Determination when spending their additional entitlements.

The Auditor-General conducted an external review of whether Members of NSW Parliament complied with certain requirements outlined in the Parliamentary Remuneration Tribunal’s Determination for the year ended 30 June 2016.

The Auditor-General's review program is designed to cover all Members over the four-year Parliamentary term. The reviews performed are not designed to detect all instances of non-compliance. They provide Parliament with limited assurance about whether Members comply with the Tribunal’s Determination. This year's review covered a sample of 34 Members.

Results

Except for the findings noted below, the Members reviewed complied with the requirements of the Tribunal’s Determination for the year ended 30 June 2016.

Findings

The following instances of non-compliance were identified:

One Member claimed their Pay TV subscription, which included children's entertainment channels, from their Logistic Support Allocation. These channels do not aid the Member in performing their Parliamentary duties.
One Member returned their unsubstantiated Sydney Allowance to the Department of Parliamentary Services in the month following the 30 September 2016 deadline.
Two Members submitted their mid-year reconciliations for the Sydney Allowance in the month following the 31 January 2016 deadline.
Two Members submitted their year-end reconciliations for the Sydney Allowance in the month following the 31 July 2016 deadline.
One Member did not submit an annual declaration due by 30 June 2016 until November 2016. The declaration related to benefits accrued to the Member by way of loyalty/incentive schemes from using allowances and entitlements. Such benefits must only be used for Parliamentary duties and not for private purposes.
Two Members that resigned in May 2016 were required to submit declarations within 30 days of ceasing to be Members. The declarations were submitted in October 2016. The declarations related to benefits accrued to the Members by way of loyalty/incentive schemes from using allowances and entitlements. Such benefits must only be used for Parliamentary duties and not for private purposes

Last year’s Auditor-General’s Report to Parliament included one recommendation. The current status of the recommendation is shown below.

Recommendation	Current status
The Parliamentary Remuneration Tribunal should consider, as a part of the next Determination review process, requiring the Department of Parliamentary Services to regularly publish full details of Members' expenditure claims on its website in an accessible and searchable format. The Department should be given some time for consultation with Members and implementation of systems before any new requirements are effective.	The Tribunal is expected to address this recommendation in the 2017 Determination. The Department has examined the current reporting arrangements in other Parliaments within Australasia and some international jurisdictions. It is preparing briefing material for Parliament's Presiding Officers.

Recommendation

Current status

The Parliamentary Remuneration Tribunal should consider, as a part of the next Determination review process, requiring the Department of Parliamentary Services to regularly publish full details of Members' expenditure claims on its website in an accessible and searchable format. The Department should be given some time for consultation with Members and implementation of systems before any new requirements are effective.

The Tribunal is expected to address this recommendation in the 2017 Determination.

The Department has examined the current reporting arrangements in other Parliaments within Australasia and some international jurisdictions. It is preparing briefing material for Parliament's Presiding Officers.

Members’ Additional Entitlements Expenditure

Members claimed 3.5 per cent less expenditure in 2015–16 compared to 2014–15

Members’ additional entitlements expenditure was $21.4 million in 2015–16, 3.5 per cent lower than the previous year of $22.2 million.

Members' Additional Entitlements expenditure for					Increase/(decrease) between
year ended 30 June	2016	2015	2014	2013	2016 and 2015
	$	$	$	$	%
Electoral Allowance	7,377,483	7,180,587	7,054,210	6,887,335	2.7
Sydney Allowance	1,815,257	1,601,849	1,736,562	1,768,873	13.3
Logistic Support Allocation	4,175,894	5,597,161	3,807,404	3,769,676	(25.4)
Electorate Communication Allowance	5,535,204	5,336,400	5,164,282	5,447,837	3.7
Electorate to Sydney Travel	657,040	728,025	810,539	783,789	(9.8)
Committee Allowance	15,417	13,725	19,990	19,288	12.3
Electorate Charter Transport	94,917	48,065	48,656	44,075	97.5
Equipment Services and Facilities*	1,752,938	1,695,224	1,681,377	1,680,512	3.4
Travelling Allowance	--	--	--	--	--
Total	21,424,150	22,201,036	20,323,020	20,401,385	(3.5)

*The expenditure includes allowances paid for Additional Temporary Staff only. It does not include the cost of providing Members with a fitted out, equipped and maintained Office/Electoral Office.

Source: Department of Parliamentary Services (unaudited)

For the year ended 30 June 2016, Logistic Support Allocation expenditure decreased by 25.4 per cent. The Department advises last year's expenditure was significantly higher than usual due to additional spending by Members prior to the March 2015 State election. Unexpended Logistic Support Allocation is forfeited at the end of each parliamentary term.

The 2015–16 Sydney Allowance and Committee Allowance increased by 13.3 per cent and 12.3 per cent respectively, due to fewer sitting days and Committee activities in the prior year because of the State election. The Electorate Charter Transport Allocation almost doubled in 2015–16 due to the full year impact of electorate boundary re-distributions in 2015 and the $20,000 increase for the Barwon electorate.

Detailed findings

Sydney Allowance

One Member failed to return their unspent Sydney Allowance by the due date

For the year ended 30 June 2016, 16 Members spent less than the Sydney Allowance they received as an annual fixed amount and had to return around $93,100 by 30 September 2016 (18 Members and around $99,400 for the year ended 30 June 2015). One Member returned their unspent Sydney Allowance ($4,200) in the month following the 30 September 2016 deadline.

Some Members submitted their allowance reconciliations late

Members receiving the annual Sydney Allowance are required to submit reconciliations twice a year to the Department. Two Members submitted their mid-year reconciliations for Sydney Allowance in the month following the 31 January 2016 deadline and two Members submitted their year-end reconciliations in the month following the 31 July 2016 deadline.

The Sydney Allowance is provided to Members if their principal place of residence is at least seventy kilometres by road from Parliament House or they reside in an outer non-metropolitan electorate. It compensates Members for additional costs associated with staying in Sydney to attend sessions of Parliament, meetings of Parliamentary committees or other Parliamentary business. At the start of each financial year, a Member can choose to receive the Sydney Allowance as either an annual fixed amount or a daily rate when an overnight stay is needed.

If the actual expenses over the year are less than the amount of the allowance, the excess must be returned within three months of the end of the year.

As shown in the table below, almost half of the Members entitled to the Sydney Allowance elected to receive it as an annual fixed amount for the year ended 30 June 2016.

		Legislative Assembly				Legislative Council
Year ended 30 June	2015	2015 Post Election	2015 Pre Election	2014	2016	2016 Post Election	2015 Pre Election	2014
Members receiving entitlement on an annual basis	19	16	19	21	8	6	7	7
Members receiving entitlement on a daily rate	25	25	25	20	13	15	14	14

Source: Department of Parliamentary Services

Maximum allowable overnight stay*	Amount payable for overnight stay where accommodation costs are incurred*	Amount payable for transit to and from Sydney where no overnight stay is involved**
From 105 to 180 nights	$285	Actual reasonable expenses for meals and incidentals up to a maximum of $104 per day

* If a Member chooses to receive the daily rate allowance and exceeds the set number of overnight stays, they will be reimbursed actual costs, up to the daily maximum, on production of tax invoices/receipts for each occasion. The maximum depends on a Member’s Parliamentary office and location of principal place of residence.
** This rate is applicable when the Member is traveling to Sydney or travelling home from Sydney following an overnight stay. Members cannot claim the in-transit allowance if they exceed the set number of overnight stays.

Source: Tribunal's Determination 2015

Electorate Communication Allowance

Significantly higher use of Electorate Communication Allowance in June each year

While the average monthly spend (excluding June) from the Electorate Communication Allowance was $343,633 across the last three financial years, Members spent $1.9 million in June 2016, $1.0 million in June 2015 and $1.7 million in June 2014 on electorate communication.

The Department advises that Members spend more in June because the State budget is delivered in June each year. Many Legislative Assembly Members elect to issue a budget related newsletter at that time. Unused Electorate Communication Allowance funds at the end of each financial year are forfeited.

The graph below compares monthly Electorate Communication Allowance expenditure across the last three financial years.