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Reports

29 November 2018

Published

Central Agencies 2018

Treasury

Premier and Cabinet

Finance

Financial reporting

Internal controls and governance

Management and administration

Risk

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

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

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

financial reporting
audit observations
liquidity risk management
government financial services.

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

Central agencies	Key central agency responsibilities	Cluster responsibilities
The Treasury	Financial and economic advisor to NSW Government Manages the NSW Government’s financial resources.	The cluster: provides investment and debt management services though TCorp manages residual business arising from privatisation of government businesses provides insurance and compensation cover, including workers compensation insurance includes NSW Government superannuation funds.
Department of Premier and Cabinet	Drives NSW Government’s objectives and sets targets Works with clusters to coordinate policy and achieve NSW Government priorities.	The cluster: includes integrity agencies, such as the Independent Commission Against Corruption, Audit Office of NSW and Ombudsman’s Office other agencies, such as Barangaroo Delivery Authority and Infrastructure NSW.
Department of Finance, Services and Innovation	Supports agency service delivery in relation to the key enabling functions of NSW Government, including procurement, property and asset management, ICT and digital innovation.	The cluster: is responsible for state revenue and rental bond administration regulates statutory insurance schemes, workplace safety and consumer protection provides access to a range of NSW Government services via Service NSW manages the NSW Government communications network.
Public Service Commission	Works to promote and maintain a strong ethical culture across the government sector and improve the capabilities, performance and configuration of the sector’s workforce to deliver better services to the public.	The Public Service Commission is an independent agency within the Premier and Cabinet cluster.

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

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

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

This chapter outlines our audit observations related to the financial reporting of agencies in the Treasury, Premier and Cabinet and Finance, Services and Innovation clusters for 2018.

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

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

This chapter outlines our observations and insights from:

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

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

Observation	Conclusions and recommendations
3.1 Internal controls
The 2017–18 audits found one high risk issue and 83 moderate risk issues across the agencies. Nineteen per cent of all issues were repeat issues.	Agencies should focus on rectifying repeat issues.
The high risk issue at Service NSW related to several deficiencies in procurement and contract management processes.	Service NSW may not be achieving value-for-money from their procurement and contract management activities. The high risk issue should be rectified as a matter of priority. This includes updating and implementing its procurement, vendor and contract management frameworks and delivering training to key staff involved in procurement and contract management activities.
Property NSW has implemented several controls during the year to rectify the high risk issue identified last year related to its transition to a new property and facility management service provider. However, the service providers performance remains below expectations and there are further opportunities to improve oversight and lift performance.	Property NSW can better define roles and accountabilities with the service provider and formalise policies and processes associated with its monitoring and oversight of the service provider. Implementing relevant KPIs, receiving timely reports and providing timely review and feedback to the service provider may help to lift performance.
GovConnect received unqualified opinions from their service auditor on all business process controls, except for information technology controls provided by Unisys, where a qualified opinion was received from the service auditor. A qualified opinion was received because of several deficiencies in user access controls.	These internal control deficiencies increase the risk of unauthorised access to key business systems, and increase audit effort and costs associated with addressing the risks arising from the deficiencies.
3.2 Audit Office annual work program
Remediation of the Barangaroo site is now estimated to cost the Barangaroo Delivery Authority in excess of net $400 million. The increase in the estimate over the last five years is mainly due to the extent of remediation required, as more evidence of contamination has become known.	Measuring the remaining costs to remediate requires the use of estimation techniques and judgements, making the actual outcome inherently uncertain. We reviewed evidence to support the provision for remediation, including future costs estimates and this evidence supported management’s estimate.
The State Insurance Regulatory Authority have administered the refund of $138 million in Green slip refunds to policy holders through Service NSW during 2017–18. At 30 June 2018, $112 million in refunds are yet to be claimed. We reviewed the systems and processes supporting the refund process. While we found that this supports the disbursement of refunds to policyholders there were some deficiencies in Service NSW’s project controls when the program was being developed.	Service NSW should apply the lessons learnt from this program to other programs it is delivering or will be delivering for agencies.
Revenue NSW recorded $30.4 billion from taxes, fines and fees in 2017–18 ($30.0 billion in 2016–17) to support the State’s finances.	Crown revenue has steadily increased over the last five years predominately driven by rises in payroll tax and land tax and responsibility for collection of the Emergency Services Levy transferring to Revenue NSW under the Emergency Services Levy Act 2017 effective from July 2017.
3.3 Managing maintenance
Place Management NSW manages significant commercial and retail leases and maintains public domain spaces and other assets around the harbour foreshore. It has consistently underspent its asset maintenance budget. In 2017–18, asset maintenance expenses were only 34 per cent of budgeted maintenance expense. Currently, Place Management NSW does not use any ratios or benchmarks to determine the adequacy of its maintenance spend or to monitor whether it is achieving its budgeted maintenance program.	This may be contributing to a high proportion of unplanned maintenance, which Place Management NSW reports was 38 per cent of total maintenance expense in 2017–18. Place Management NSW is outsourcing its property and facilities management function from 1 December 2018 to an external service provider.

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

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

Appendix one - List of 2018 recommendations

Appendix two - Status of 2017 recommendations

Appendix three - Cluster agencies

Appendix four - Timeliness of financial reporting and audit reporting

Appendix five - Management letter findings by risk rating

Appendix six – Financial data

30 October 2018

Published

Internal Controls and Governance 2018

Education

Community Services

Finance

Health

Industry

Justice

Planning

Premier and Cabinet

Transport

Treasury

Whole of Government

Environment

Compliance

Cyber security

Financial reporting

Fraud

Information technology

Internal controls and governance

Management and administration

Procurement

Project management

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

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

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

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

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

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

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

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

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

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

The focus of the report has changed since last year

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

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

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

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

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

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

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

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

Observation	Conclusions and recommendations
3.1 Management of IT vendors
Contract management framework Although 87 per cent of agencies have a contract management policy to manage IT vendors, one fifth require review.	Conclusion: Agencies can more effectively manage IT vendor contracts by developing policies and procedures to ensure vendor management frameworks are kept up to date, plans are in place to manage vendor performance and risk, and compliance with the framework is monitored by: internal audit focusing on key contracting activities experienced officers who are independent of contract administration performing spot checks or peer reviews targeted analysis of data in contract registers.
Contract risk management Forty-one per cent of agencies are not using contract management plans and do not assess contract risks. Half of the agencies that did assess contract risks, had not updated the risk assessments since the commencement of the contract.	Conclusion: Instead of applying a 'set and forget' approach in relation to management of contract risks, agencies should assess risk regularly and develop a plan to actively manage identified risks throughout the contract lifecycle - from negotiation and commencement, to termination.
Performance management Eighty-six per cent of agencies meet with vendors to discuss performance. Only 24 per cent of agencies sought assurance about the accuracy of vendor reporting against KPIs, yet sixty-seven per cent of the IT contracts allow agencies to determine performance based payments and/or penalise underperformance.	Conclusion: Agencies are monitoring IT vendor performance, but could improve outcomes and more effectively manage under-performance by: a more active, rigorous approach to both risk and performance management checking the accuracy of vendor reporting against those KPIs and where appropriate seeking assurance over their accuracy invoking performance based payments clauses in contracts when performance falls below agreed standards.
Transitioning services Forty-three per cent of the IT vendor contracts did not contain transitioning-out provisions. Where IT vendor contracts do make provision for transitioning-out, only 28 per cent of agencies have developed a transitioning-out plan with their IT vendor.	Conclusion: Contract transition/phase out clauses and plans can mitigate risks to service disruption, ensure internal controls remain in place, avoid unnecessary costs and reduce the risk of 'vendor lock-in'.
Contract Registers Eleven out of forty agencies did not have a contract register, or have registers that are not accurate and/or complete.	Conclusion: A contract register helps to manage an agency’s compliance obligations under the Government Information (Public Access) Act 2009 (the GIPA Act). However, it also helps agencies more effectively manage IT vendors by: monitoring contract end dates and contract extensions, and commence new procurements through their central procurement teams in a timely manner managing their contractual commitments, budgeting and cash flow requirements. Recommendation: Agencies should ensure their contract registers are complete and accurate so they can more effectively govern contracts and manage compliance obligations.
3.2 IT general controls
Governance Ninety-five per cent of agencies have established policies to manage key IT processes and functions within the agency, with ten per cent of those due for review.	Conclusion: Regular review of IT policies ensures risks are considered and appropriate strategies and procedures are implemented to manage these risks on a consistent basis. An absence of policies can lead to ad-hoc responses to risks, and failure to consider emerging IT risks and changes to agency IT environments.
User access administration Seventy-two deficiencies were identified related to user access administration, including: thirty issues related to granting user access across 43 per cent of agencies sixteen issues related to removing user access across 30 per cent of agencies twenty-six issues related to periodic reviews of user access across 50 per cent of agencies.	Recommendation: Agencies should strengthen the administration of user access to prevent inappropriate access to key systems.
Privileged access Forty per cent of agencies do not periodically review logs of the activities of privileged users to identify suspicious or unauthorised activities.	Recommendation: Agencies should: review the number of, and access granted to privileged users, and assess and document the risks associated with their activities monitor user access to address risks from unauthorised activity.
Password controls Twenty-three per cent of agencies did not comply with their own policy on password parameters.	Recommendation: Agencies should ensure IT password settings comply with their password policies.
Program changes Fifteen per cent of agencies had deficient IT program change controls mainly related to segregation of duties and authorisation and testing of IT program changes prior to deployment.	Recommendation: Agencies should maintain appropriate segregation of duties in their IT functions and test system changes before they are deployed.

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

Observation

Conclusion or recommendation

4.1 Reporting on performance

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

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

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

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

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

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

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

The relevance and accuracy of performance information is enhanced when:

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

4.2 Reporting on reports

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

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

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

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

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

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

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

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

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

Observation	Conclusion or recommendation
5.1 Management of purchasing cards
Volume of credit card spend Purchasing card expenditure has increased by 76 per cent over the last four years in response to a government review into the cost savings possible from using purchasing cards for low value, high volume procurement.	Conclusion: The increasing use of purchasing cards highlights the importance of an effective framework for the use and management of purchasing cards.
Policy framework We found all agencies that held purchasing cards had a policy in place, but 26 per cent of agencies have not reviewed their purchasing card policy by the scheduled date, or do not have a scheduled revision date stated within their policy.	Recommendation: Agencies should mitigate the risks associated with increased purchasing card use by ensuring policies and purchasing card frameworks remain current and compliant with the core requirements of TPP 17–09 'Use and Management of NSW Government Purchasing Cards'.
Preventative controls We found that: all agencies maintained purchasing card registers seventy-six per cent provided training to cardholders prior to being issued with a card eighty-nine per cent appointed a program administrator, but only half of these had clearly defined roles and responsibilities thirty-two per cent of agencies place merchant blocks on purchasing cards forty-seven per cent of agencies place geographic restrictions on purchasing cards.	Agencies have designed and implemented preventative controls aimed at deterring the potential misuse of purchasing cards. Conclusion: Further opportunities exist for agencies to better control the use of purchasing cards, such as: updating purchasing card registers to contain all mandatory fields required by TPP17–09 appointing a program administrator for the agency's purchasing card framework and defining their role and responsibility for the function strengthening preventive controls to prevent misuse.
Detective controls Ninety-two per cent of agencies have designed and implemented at least one control to monitor purchasing card activity. Major reviews, such as data analytics (29 per cent of agencies) and independent spot checks (49 per cent of agencies) are not widely used.	Agencies have designed and implemented detective controls aimed at identifying potential misuse of purchasing cards. Conclusion: More effective monitoring using purchasing card data can provide better visibility over spending activity and can be used to: detect misuse and investigate exceptions analyse trends to highlight cost saving opportunities.
5.2 Management of taxis
Policy framework Thirteen per cent of agencies have not developed and implemented a policy to manage taxi use. In addition: a further 41 per cent of agencies have not reviewed their policies by the scheduled revision date, or do not have a scheduled revision date more than half of all agencies’ policies do not offer alternative travel options. For example, only 36 per cent of policies promoted the use of general Opal cards.	Conclusion: Agencies can promote savings and provide more options to staff where their taxi use policies: limit the circumstances where taxi use is appropriate offer alternate, lower cost options to using taxis, such as general Opal cards and rideshare.
Detective controls All agencies approve taxi expenditure by expense reimbursement, purchasing card and Cabcharge, and have implemented controls around this approval process. However, beyond this there is minimal monitoring and review activity, such as data monitoring, independent spot checks or internal audit reviews.	Conclusion: Taxi spend at agencies is not significant in terms of its dollar value, but it is significant from a probity perspective. Agencies can better address the probity risk by incorporating taxi use into a broader purchasing card or fraud monitoring program.

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

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

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

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

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

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

Observation	Conclusion or recommendation
6.1 Prevention systems
Prevention systems Ninety-two per cent of agencies have a fraud control plan in place, 81 per cent maintain a fraud database and 79 per cent report fraud and corruption matters as a standing item on audit and risk committee agendas. Only 54 per cent of agencies have an employment screening policy and all agencies have IT security policies, but gaps in IT security controls could undermine their policies.	Conclusion: Most agencies have implemented fraud prevention systems to reduce the risk of fraud. However poor IT security along with other gaps in agency prevention systems, such as employment screening practices heightens the risk of fraud and inappropriate use of data. Agencies can improve their fraud prevention systems by: completing regular fraud risk assessments, embedding fraud risk assessment into their enterprise risk management process and reporting the results of the assessment to the audit and risk committee maintaining a fraud database and reviewing it regularly for systemic issues and reporting a redacted version of the database on the agency's website to inform corruption prevention networks developing policies and procedures for employee screening and benchmarking their current processes against ICAC's publication ‘Strengthening Employment Screening Practices in the NSW Public Sector’ developing and maintaining up to date IT security policies and monitoring compliance with the policy.
Twenty-three per cent of agencies were not performing fraud risk assessments and some agency fraud risk assessments may not be as robust as they could be.	Conclusion: Agencies' systems of internal controls may be less effective where new and emerging fraud risks have been overlooked, or known weaknesses have not been rectified.
6.2 Detection systems
Detection systems Several agencies reported they were developing a data monitoring program, but only 38 per cent of agencies had already implemented a program.	Studies have shown data monitoring, whereby entire populations of transactional data are analysed for indicators of fraudulent activity, is one of the most effective methods of early detection. Early detection decreases the duration a fraud remains undetected thereby limiting the extent of losses. Conclusion: Data monitoring is an effective tool for early detection of fraud and is more effective when informed by a comprehensive fraud risk assessment.
6.3 Notification systems
Notification system All agencies have notification systems for reporting actual or suspected fraud and corruption. Most agencies provide multiple reporting lines, provide training and publicise options for staff to report actual or suspected fraud and corruption.	Conclusion: Training staff about their obligations and the use of fraud notification systems promotes a fraud-aware culture

Appendix one - List of 2018 recommendations

Appendix two - Status of 2017 recommendations

Appendix three - Cluster agencies

28 June 2018

Published

Regulation of water pollution in drinking water catchments and illegal disposal of solid waste

Environment

Compliance

Internal controls and governance

Management and administration

Regulation

Risk

There are important gaps in how the Environmental Protection Authority (EPA) implements its regulatory framework for water pollution in drinking water catchments and illegal solid waste disposal. This limits the effectiveness of its regulatory responses, according to a report released today by the Auditor-General for New South Wales, Margaret Crawford.

The NSW Environment Protection Authority (the EPA) is the State’s primary environmental regulator. The EPA regulates waste and water pollution under the Protection of the Environment Operations Act 1997 (the Act) through its licensing, monitoring, regulation and enforcement activities. The community should be able to rely on the effectiveness of this regulation to protect the environment and human health. The EPA has regulatory responsibility for more significant and specific activities which can potentially harm the environment.

Activities regulated by the EPA include manufacturing, chemical production, electricity generation, mining, waste management, livestock processing, mineral processing, sewerage treatment, and road construction. For these activities, the operator must have an EPA issued environment protection licence (licence). Licences have conditions attached which may limit the amount and concentrations of substances the activity may produce and discharge into the environment. Conditions also require the licensee to report on its licensed activities.

This audit assessed the effectiveness of the EPA’s regulatory response to water pollution in drinking water catchments and illegal solid waste disposal. The findings and recommendations of this review can be reasonably applied to the EPA’s other regulatory functions, as the areas we examined were indicative of how the EPA regulates all pollution types and incidents.

Conclusion

There are important gaps in how the EPA implements its regulatory framework for water pollution in drinking water catchments and illegal solid waste disposal which limit the effectiveness of its regulatory response. The EPA uses a risk-based regulatory framework that has elements consistent with the NSW Government Guidance for regulators to implement outcomes and risk-based regulation. However, the EPA did not demonstrate that it has established reliable practices to accurately and consistently detect the risk of non compliances by licensees, and apply consistent regulatory actions. This may expose the risk of harm to the environment and human health.

The EPA also could not demonstrate that it has effective governance and oversight of its regulatory operations. The EPA operates in a complex regulatory environment where its regional offices have broad discretions for how they operate. The EPA has not balanced this devolved structure with an effective governance approach that includes appropriate internal controls to monitor the consistency or quality of its regulatory activities. It also does not have an effective performance framework that sets relevant performance expectations and outcome-based key performance indicators (KPIs) for its regional offices.

These deficiencies mean that the EPA cannot be confident that it conducts compliance and enforcement activities consistently across the State and that licensees are complying with their licence conditions or the Act.

The EPA's reporting on environmental and regulatory outcomes is limited and most of the data it uses is self reported by industry. It has not set outcome-based key result areas to assess performance and trends over time.

The EPA uses a risk-based regulatory framework for water pollution and illegal solid waste disposal but there are important gaps in implementation that reduce its effectiveness.

Elements of the EPA’s risk-based regulatory framework for water pollution and illegal solid waste disposal are consistent with the NSW Government Guidance for regulators to implement outcomes and risk-based regulation. There are important gaps in how the EPA implements its risk-based approach that limit the effectiveness of its regulatory response. The EPA could not demonstrate that it effectively regulates licensees because it has not established reliable practices that accurately and consistently detect licence non compliances or breaches of the Act and enforce regulatory actions.

The EPA lacks effective governance arrangements to support its devolved regional structure. The EPA's performance framework has limited and inconclusive reporting on regional performance to the EPA’s Chief Executive Officer or to the EPA Board. The EPA cannot assure that it is conducting its regulatory responsibilities effectively and efficiently.

The EPA does not consistently evaluate its regulatory approach to ensure it is effective and efficient. For example, there are no set requirements for how EPA officers conduct mandatory site inspections, which means that there is a risk that officers are not detecting all breaches or non-compliances. The inconsistent approach also means that the EPA cannot rely on the data it collects from these site inspections to understand whether its regulatory response is effective and efficient. In addition, where the EPA identifies instances of non compliance or breaches, it does not apply all available regulatory actions to encourage compliance.

The EPA also does not have a systematic approach to validate self-reported information in licensees’ annual returns, despite the data being used to assess administrative fees payable to the EPA and its regulatory response to non-compliances.

The EPA does not use performance frameworks to monitor the consistency or quality of work conducted across the State. The EPA has also failed to provide effective guidance for its staff. Many of its policies and procedures are out-dated, inconsistent, hard to access, or not mandated.

Recommendations

By 31 December 2018, to improve governance and oversight, the EPA should:
1.	implement a more effective performance framework with regular reports to the Chief Executive Officer and to the EPA Board on outcomes-based key result areas that assess its environmental and regulatory performance and trends over time
By 30 June 2019, to improve consistency in its practices, the EPA should:
2.	progressively update and make accessible its policies and procedures for regulatory operations, and mandate procedures where necessary to ensure consistent application
3.	implement internal controls to monitor the consistency and quality of its regulatory operations.

The EPA does not apply a consistent approach to setting licence conditions for discharges to water.

The requirements for setting licence conditions for water pollution are complex and require technical and scientific expertise. In August 2016, the EPA approved guidance developed by its technical experts in the Water Technical Advisory Unit to assist its regional staff. However, the EPA did not mandate the use of the guidance until mid-April 2018. Up until then, the EPA had left discretion to regional offices to decide what guidance their staff use. This meant that practices have differed across the organisation. The EPA is yet to conduct training for staff to ensure they consistently apply the 2016 guidance.

The EPA has not implemented any appropriate internal controls or quality assurance process to monitor the consistency or quality of licence conditions set by its officers across the State. This is not consistent with good regulatory practice.

The triennial 2016 audit of the Sydney drinking water catchment report highlighted that Lake Burragorang has experienced worsening water quality over the past 20 years from increased salinity levels. The salinity levels were nearly twice as high as in other storages in the Sydney drinking water catchment. The report recommended that the source and implication of the increased salinity levels be investigated. The report did not propose which public authority should carry out such an investigation.

To date, no NSW Government agency has addressed the report's recommendation. There are three public authorities, the EPA, DPE and WaterNSW that are responsible for regulating activities that impact on water quality in the Sydney drinking water catchment, which includes Lake Burragorang.

Recommendation

By 30 June 2019, to address worsening water quality in Lake Burragorang, the EPA should:
4.	(a) review the impact of its licensed activities on water quality in Lake Burragorang, and
	(b) develop strategies relating to its licensed activities (in consultation with other relevant NSW Government agencies) to improve and maintain the lake's water quality.

The EPA’s risk-based approach to monitoring compliance of licensees has limited effectiveness.

The EPA tailors its compliance monitoring approach based on the performance of licensees. This means that licensees that perform better have a lower administrative fee and fewer mandatory site inspections.

However, this approach relies on information that is not complete or accurate. Sources of information include licensees’ annual returns, EPA site inspections and compliance audits, and pollution reports from the public.

Licensees report annually to the EPA on their performance, including compliance against their licence conditions. The Act contains significant financial penalties if licensees provide false and misleading information in their annual returns. However, the EPA does not systematically or consistently validate information self-reported by licensees, or consistently apply regulatory actions if it discovers non-compliance.

Self-reported compliance data is used in part to assess a licensed premises’ overall environmental risk level, which underpins the calculation of the administrative fee, the EPA’s site inspection frequency, and the licensee’s exposure to regulatory actions. It is also used to assess the load-based licence fee that the licensee pays.

The EPA has set minimum mandatory site inspection frequencies for licensed premises based on its assessed overall risk level. This is a key tool to detect non-compliance or breaches of the Act. However, the EPA has not issued a policy or procedures that define what these mandatory inspections should cover and how they are to be conducted. We found variations in how the EPA officers in the offices we visited conducted these inspections. The inconsistent approach means that the EPA does not have complete and accurate information of licensees’ compliance. The inconsistent approach also means that the EPA is not effectively identifying all non-compliances for it to consider applying appropriate regulatory actions.

The EPA also receives reports of pollution incidents from the public that may indicate non-compliance. However, the EPA has not set expected time frames within which it expects its officers to investigate pollution incidents. The EPA regional offices decide what to investigate and timeframes. The EPA does not measure regional performance regarding timeframes.

The few compliance audits the EPA conducts annually are effective in identifying licence non-compliances and breaches of the Act. However, the EPA does not have a policy or required procedures for its regulatory officers to consistently apply appropriate regulatory actions in response to compliance audit findings.

The EPA has not implemented any effective internal controls or quality assurance process to check the consistency or quality of how its regulatory officers monitor compliance across the State. This is not consistent with good regulatory practice.

Recommendations

To improve compliance monitoring, the EPA should implement procedures to:
5.	by 30 June 2019, validate self-reported information, eliminate hardcopy submissions and require licensees to report on their breaches of the Act and associated regulations in their annual returns
6.	by 31 December 2018, conduct mandatory site inspections under the risk-based licensing scheme to assess compliance with all regulatory requirements and licence conditions.

The EPA cannot assure that its regulatory enforcement approach is fully effective.

The EPA’s compliance policy and prosecution guidelines have a large number of available regulatory actions and factors which should be taken into account when selecting an appropriate regulatory response. The extensive legislation determining the EPA’s regulatory activities, and the devolved regional structure the EPA has adopted in delivering its compliance and regulatory functions, increases the risk of inconsistent compliance decisions and regulatory responses. A good regulatory framework needs a consistent approach to enforcement to incentivise compliance.

The EPA has not balanced this devolved regional structure with appropriate governance arrangements to give it assurance that its regulatory officers apply a consistent approach to enforcement.

The EPA has not issued standard procedures to ensure consistent non-court enforcement action for breaches of the Act or non-compliance with licence conditions. Given our finding that the EPA does not effectively detect breaches and non-compliances, there is a risk that it is not applying appropriate regulatory actions for many breaches and non-compliances.

A recent EPA compliance audit identified significant non-compliances with incident management plan requirements. However, the EPA has not applied regulatory actions for making false statements on annual returns for those licensees that certified their plans complied with such requirements. The EPA also has not applied available regulatory actions for the non-compliances which led to the false or misleading statements.

Recommendation

By 31 December 2018 to improve enforcement, the EPA should:
7.	Implement procedures to systematically assess non-compliances with licence conditions and breaches of the Act and to implement appropriate and consistent regulatory actions.

The EPA has implemented the actions listed in the NSW Illegal Dumping Strategy 2014–16. To date, the EPA has also implemented four of the six recommendations made by the ICAC on EPA's oversight of Regional Illegal Dumping Squads.

The EPA did not achieve the NSW Illegal Dumping Strategy 2014–16 target of a 30 per cent reduction in instances of large scale illegal dumping in Sydney, the Illawarra, Hunter and Central Coast from 2011 levels.

In the reporting period, the incidences of large scale illegal dumping more than doubled. The EPA advised that this increase may be the result of greater public awareness and reporting rather than increased illegal dumping activity.

By June 2018, the EPA is due to implement one outstanding recommendation made by the ICAC but has not set a time for the other outstanding recommendation.

Appendix one – Response from agency

Appendix two – List of enforcement tools

Appendix three – The EPA's organisational structure

Appendix four – The EPA's regions and branches

Appendix five – About the audit

Appendix six – Performance auditing

Parliamentary reference - Report number #304 - released 28 June 2018

23 April 2018

Published

Managing risks in the NSW public sector: risk culture and capability

Finance

Health

Justice

Treasury

Internal controls and governance

Management and administration

Risk

Workforce and capability

The Ministry of Health, NSW Fair Trading, NSW Police Force, and NSW Treasury Corporation are taking steps to strengthen their risk culture, according to a report released today by the Auditor-General, Margaret Crawford. 'Senior management communicates the importance of managing risk to their staff, and there are many examples of risk management being integrated into daily activities', the Auditor-General said.

We did find that three of the agencies we examined could strengthen their culture so that all employees feel comfortable speaking openly about risks. To support innovation, senior management could also do better at communicating to their staff the levels of risk they are willing to accept.

Effective risk management is essential to good governance, and supports staff at all levels to make informed judgements and decisions. At a time when government is encouraging innovation and exploring new service delivery models, effective risk management is about seizing opportunities as well as managing threats.

Over the past decade, governments and regulators around the world have increasingly turned their attention to risk culture. It is now widely accepted that organisational culture is a key element of risk management because it influences how people recognise and engage with risk. Neglecting this ‘soft’ side of risk management can prevent institutions from managing risks that threaten their success and lead to missed opportunities for change, improvement or innovation.

This audit assessed how effectively NSW Government agencies are building risk management capabilities and embedding a sound risk culture throughout their organisations. To do this we examined whether:

agencies can demonstrate that senior management is committed to risk management
information about risk is communicated effectively throughout agencies
agencies are building risk management capabilities.

The audit examined four agencies: the Ministry of Health, the NSW Fair Trading function within the Department of Finance, Services and Innovation, NSW Police Force and NSW Treasury Corporation (TCorp). NSW Treasury was also included as the agency responsible for the NSW Government's risk management framework.

Conclusion

All four agencies examined in the audit are taking steps to strengthen their risk culture. In these agencies, senior management communicates the importance of managing risk to their staff. They have risk management policies and funded central functions to oversee risk management. We also found many examples of risk management being integrated into daily activities.

That said, three of the four case study agencies could do more to understand their existing risk culture. As good practice, agencies should monitor their employees’ attitude to risk. Without a clear understanding of how employees identify and engage with risk, it is difficult to tell whether the 'tone' set by the executive and management is aligned with employee behaviours.

Our survey of risk culture found that three agencies could strengthen a culture of open communication, so that all employees feel comfortable speaking openly about risks. To support innovation, senior management could also do better at communicating to their staff the levels of risk they are willing to accept.

Some agencies are performing better than others in building their risk capabilities. Three case study agencies have reviewed the risk-related skills and knowledge of their workforce, but only one agency has addressed the gaps the review identified. In three agencies, staff also need more practical guidance on how to manage risks that are relevant to their day-to-day responsibilities.

NSW Treasury provides agencies with direction and guidance on risk management through policy and guidelines. Its principles-based approach to risk management is consistent with better practice. Nevertheless, there is scope for NSW Treasury to develop additional practical guidance and tools to support a better risk culture in the NSW public sector. NSW Treasury should encourage agency heads to form a view on the current risk culture in their agencies, identify desirable changes to that risk culture, and take steps to address those changes.

In assessing an agency’s risk culture, we focused on four key areas:

Executive sponsorship (tone at the top)

In the four agencies we reviewed, senior management is communicating the importance of managing risk. They have endorsed risk management frameworks and funded central functions tasked with overseeing risk management within their agencies.

That said, we found that three case study agencies do not measure their existing risk culture. Without clear measures of how employees identify and engage with risk, it is difficult for agencies to tell whether employee's behaviours are aligned with the 'tone' set by the executive and management.

For example, in some agencies we examined we found a disconnect between risk tolerances espoused by senior management and how these concepts were understood by staff.

Employee perceptions of risk management

Our survey of staff indicated that while senior leaders have communicated the importance of managing risk, more could be done to strengthen a culture of open communication so that all employees feel comfortable speaking openly about risks. We found that senior management could better communicate to their staff the levels of risk they should be willing to accept.

Integration of risk management into daily activities and links to decision-making

We found examples of risk management being integrated into daily activities. On the other hand, we also identified areas where risk management deviated from good practice. For example, we found that corporate risk registers are not consistently used as a tool to support decision-making.

Support and guidance to help staff manage risks

Most case study agencies are monitoring risk-related skills and knowledge of their workforce, but only one agency has addressed the gaps it identified. While agencies are providing risk management training, surveyed staff in three case study agencies reported that risk management training is not adequate.

NSW Treasury provides agencies with direction and guidance on risk management through policy and guidelines. In line with better practice, NSW Treasury's principles-based policy acknowledges that individual agencies are in a better position to understand their own risks and design risk management frameworks that address those risks. Nevertheless, there is scope for NSW Treasury to refine its guidance material to support a better risk culture in the NSW public sector.

Recommendation

By May 2019, NSW Treasury should:

Review the scope of its risk management guidance, and identify additional guidance, training or activities to improve risk culture across the NSW public sector. This should focus on encouraging agency heads to form a view on the current risk culture in their agencies, identify desirable changes to that risk culture, and take steps to address those changes.

Appendix one - Response from agencies

Appendix two - Survey results

Appendix three - About the audit

Appendix four - Performance auditing

Parliamentary reference - Report number #298 - released 23 April 2018