The Treasury extended the statutory deadline for the submission of the 2019–20 financial statements. For agencies subject to Treasurer's Directions, Treasury required agencies to submit their 30 June 2020 financial statements by 5 August 2020. For other agencies, the deadline was extended to 31 October 2020. All agencies in the cluster met the revised statutory deadlines.

Cluster agencies substantially completed the mandatory early close procedures set by NSW Treasury. However, nine agencies including the Department of Communities and Justice (the department) did not complete one or more mandatory requirements, such as assessing the impact of new and updated accounting standards.

Emergency events significantly impacted cluster agencies in 2019–20. Our review of seven cluster agencies most affected highlighted some had incurred additional expenditure because of the bushfires and floods. Others lost revenue due to the COVID-19 pandemic.

During the year these agencies collectively received additional funding of $1.1 billion from the State to respond to:

• increased demand for homeless people seeking temporary accommodation
• additional cleaning requirements
• bushfire recovery efforts
• emergency support for eligible small businesses.

The Sydney Cricket Ground Trust, Venues NSW and Office of Sport lodged insurance claims of $51.3 million with the Treasury Managed Fund with respect to lost revenues from the pandemic. The losses were mainly due to event cancellations and covered various periods ranging from mid-March to 31 December 2020.

The change in economic conditions caused by the COVID-19 pandemic resulted in the NSW Government cancelling the refurbishment of Stadium Australia it had previously approved in August 2019. Venues NSW wrote off $16.8 million of redevelopment costs during 2019–20.

The department continues to address significant data quality issues resulting from its implementation of the VS Connect system (the System) in 2019. The issues relate to the completeness and accuracy of the data transferred from the legacy system. The System is used by the department to manage its Victims Support Services (VSS) and for financial reporting purposes.

An independent actuary helps the department estimate its liability for VSS claims. The actuary's valuation at 30 June 2020 was again impacted by the data quality issues. Consequently, the actuary adopted a revised valuation methodology compared to previous years.

Recommendation (repeat issue):

The department should resolve the data quality issues in the VS Connect System before 31 March 2021.

Cluster agencies implemented three new accounting standards for the first time in 2019–20. Adoption of AASB 16 'Leases' resulted in cluster agencies collectively recognising right-of-use assets and lease liabilities of $1.7 billion and $1.1 billion respectively on 1 July 2019.

Significant misstatements in how lease related balances had been calculated were found in 17 of the 29 cluster agencies. The cluster outsources the management of most of its owned and leased property portfolio to Property NSW, but cluster agencies remain responsible for any deliverables under that arrangement. The misstatements were mainly caused by late revisions of key assumptions and issues with the accuracy and completeness of Property NSW's lease information.

Our 2019–20 financial audits identified 191 internal control issues. Of these, two were high risk and almost one-third were repeat findings from previous audits. While repeat findings reduced by 5.7 percentage points in 2019–20, the number remains high.

Recommendation (repeat issue):

Cluster agencies should action recommendations to address internal control weaknesses promptly. Focus should be given to addressing high risk and repeat issues.

The severity of the recent bushfires and floods meant natural disaster expenses incurred by emergency services agencies rose from $67.4 million in 2018–19 to $497 million in 2019–20.

The COVID-19 pandemic presented unprecedented challenges for the cluster. Social distancing and other infection control measures disrupted the traditional means of delivering services. Agencies established committees or response teams to respond to these challenges.

The department introduced measures to minimise the risk of the spread of COVID-19 amongst inmates in custodial settings.

Managing excess annual leave was a challenge for cluster agencies directly involved in the government's response to the emergency events. Employees in frontline cluster agencies deferred leave plans and many have taken little or no annual leave during the reporting period.

Annual leave liabilities rose at the department, NSW Police Force, Fire and Rescue NSW, Office of the NSW Rural Fire Service, the Legal Aid Commission of New South Wales and the Office of the Director of Public Prosecutions. The combined liabilities increased from $620 million to $692 million or 11.6 per cent between 30 June 2019 and 30 June 2020.

Administrative Arrangement Orders effective from 1 July 2019, created the department of Communities and Justice and transferred functions and staff, together with associated assets and liabilities into the department from the former departments of Justice and Family and Community Services.

The department continues to establish its governance arrangements following the MoG changes.

Recommendation:

The department should finalise appropriate governance arrangements for its new organisational structure as soon as possible. This includes:

• harmonising policies and procedures to ensure a unified approach across the department
• finalising risk management and monitoring processes across the department
• updating its delegation instruments to reflect the current organisational structure, delegation limits and roles and responsibilities.

The department continued to expand prison system capacity through the NSW Government's $3.8 billion Prison Bed Capacity Program. The department reported it spent $480 million on the Program in 2019–20. Six prison expansion projects were completed during the year, which added 1,660 new and 395 refurbished beds to the NSW prison system.

Data from the department shows the number of adult inmates in the NSW prison system reached a maximum of 14,165 during the year. Operational capacity was 16,096 beds on 19 August 2020.

Section highlights

• Unqualified audit opinions were issued for all agencies' 30 June 2020 financial statements. All agencies met the revised statutory deadlines for completing early close procedures and submitting their financial statements.
• Emergency events significantly impacted cluster agencies in 2019–20. Agencies received additional funding of $1.1 billion to respond to the emergencies.
• Cluster agencies implemented three new accounting standards in 2019–20. Adoption of AASB 16 'Leases' resulted in significant changes to agencies' financial statements.

Section highlights

• Almost one-third of internal control issues reported were repeat findings. Cluster agencies should address these issues more promptly.
• The severity of the recent bushfires and floods meant natural disaster expenses incurred by emergency services agencies increased by $430 million in 2019–20.
• The department continues to establish its governance arrangements following Machinery of Government changes effective 1 July 2019.

Agencies implemented three new accounting standards during the year.

Our financial statement audits of the Department of Education (the Department) and NSW Education Standards Authority (NESA) identified issues with the leasing information provided by Property NSW (PNSW). Despite the outsourcing arrangement, both the Department and NESA remain ultimately responsible for the completeness and accuracy of this information, which would have benefited from a more thorough quality assurance, validation and review process before they placed reliance upon it.

Recommendation:

We recommend the Department and NESA:

• quality assure and validate the information provided by PNSW
• ensure changes made by PNSW to lease data are supported and that assumptions and judgements applied are appropriate
• document their review of the data supplied.

Emergency legislation was enacted during the year in response to the COVID-19 pandemic. The legislation revised the statutory reporting deadlines for agencies to submit their financial statements and allowed the Treasurer to continue authorising payments from the consolidated fund until the enactment of the 2020–21 budget.

All cluster agencies prepared their financial statements on a going concern basis and submitted their financial statements within the revised statutory deadlines.

The State provided $159.0 million in stimulus funding to support the operations of cluster agencies during emergency events. Nearly half of this funding was to support cleaning activities by the Department and the Technical and Further Education Commission (the TAFE Commission) during the COVID-19 pandemic.

The number of monetary misstatements identified in agencies' financial statements decreased to 14 (23 in 2018–19).

While the number of corrections made to the financial statements after the submission date increased to eight (two in 2018–19), it is important to note these corrections provide parliament and other users of the financial statements increased confidence in the accuracy and presentation of agencies' performance and financial position.

We identified 33 internal control issues, including 15 findings that were repeated from previous years.

A high-risk issue was reported at the Department relating to the inadequate monitoring and follow up of privileged user activity in its enterprise resource planning system – SAP.

Repeat findings relate to ongoing deficiencies in information technology controls and management policies, practices and procedures.

Recommendation:

Cluster agencies should:

• prioritise and action recommendations to address internal control deficiencies
• review and confirm the appropriateness of existing privileged user access accounts
• implement a rigorous monitoring regime to ensure that any improper use of privileged user accounts can be detected in a timely manner.

The Department established a separate bushfire relief directorate and COVID-19 Taskforce to assist and support school communities in response to recent emergencies.

Other cluster agencies have established committees or response teams to oversee and address all aspects of the impact of COVID-19.

Since 2015, the NSW Government has encouraged the use of purchasing cards by public sector agencies. Purchasing cards are efficient to transact low value, high volume procurement of goods and services, but the use must be effectively monitored.

Our review of the Department's purchasing cards identified weaknesses in its oversight and monitoring controls, including the issue and cancellation of purchasing cards

Opportunities exist for the Department to better monitor card use. Tools such as data analytics are an efficient and effective detective control to identify irregular activity or misuse by cardholders.

Recommendation:

The Department should:

• improve the accuracy and completeness of exit procedures for terminated employees to ensure cards are returned and cancelled
• perform periodic reviews to ensure active cards are held only by current employees
• set transaction limits that do not exceed the limits of the user’s financial delegation
• establish a data analytics regime to help analyse and identify high risk patterns and anomalies in their purchasing card usage, augmenting their existing monitoring and detective controls.

Section highlights

• A high-risk issue regarding inadequate monitoring of privileged user access was identified at the Department.
• We continue to observe issues by schools in relation to cash management and non-compliance with procurement guidelines and purchasing card use.
• Opportunities exist for the Department and cluster agencies to enhance their monitoring and review of purchasing card activities. Tools such as data analytics procedures provide an efficient and effective detective control, particularly when used in conjunction with independent spot-checks.