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, namely the Premier and Cabinet, Treasury and Customer Service clusters. There are 191 agencies in these clusters, including government financial, superannuation and insurance entities.

Unqualified audit opinions were issued on the financial statements for all agencies in the clusters. There were two high risk and 99 moderate risk audit findings on internal controls. Of these, 31 percent were repeat issues, and most related to weaknesses in information technology access controls.

The report notes a number of audit observations including:

• a qualified opinion on information technology internal controls at an outsourced service provider
• self-insurance losses of $1.4 billion partly due to unfavourable movements in the risk free discount rate, and increases in workers compensation claims, including psychological injury claims
• a shortfall (unfunded liability) of $637 million at 30 June 2019 in the Home Building Compensation Fund, due to premiums not being sufficient to meet costs of the scheme
• agencies self-assessed against the Australian Cyber Security Centre’s ‘Essential 8’ cyber risk mitigation strategies for the first time in 2018-19. Based on their own self assessments, more work needs to be done to improve cyber security resilience.

This report analyses the results of our financial statement audits of the Treasury, Premier and Cabinet and Customer Service clusters for the year ended 30 June 2019. Our key observations are summarised below.

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, observations, analysis, conclusions and recommendations in the following areas:

• financial reporting
• audit observations
• government financial services.

Central agency clusters were significantly impacted by Machinery of Government changes which took effect on 1 July 2019. This report is focussed on agencies now in the Treasury, Premier and Cabinet and Customer Service clusters. Some of these agencies may have been in another cluster during 2018–19. Please refer to the section on Machinery of Government changes for more details.

Central agencies and their key responsibilities are set out below.

Machinery of Government (MoG) refers to how the government organises the structures and functions of the public service. MoG changes are where the government reorganises these structures and functions and they are given effect by Administrative orders.

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

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

This chapter outlines our audit observations on the 2019 financial reporting of agencies in the Treasury, Premier and Cabinet, and Customer Service clusters.

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 Customer Service clusters.

Background

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

Appendix one – Timeliness of financial reporting by agency

Appendix two – Management letter findings by agency

Appendix three – Status of 2018 recommendations

Appendix four – Cluster agencies

Appendix five – Financial data

Copyright notice

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

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

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

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

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

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

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

Download the PDF version of report

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

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

• financial reporting
• audit observations.

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

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

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

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

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

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

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

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

Appendix one – Timeliness of financial reporting by agency

Appendix two – Management letter findings by agency

Appendix three – List of 2019 recommendations 

Appendix four – Status of 2018 recommendations 

Appendix five – Cluster agencies 

Appendix six – Financial data 

Copyright notice

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

This report focuses on key observations and findings from the most recent financial audits of the Ministry of Health, local health districts, specialty health networks, health corporations and independent health agencies in New South Wales. The report also summarises self-reported performance measures across the network.

The number and value of adjustments to financial statements of entities in the Health Cluster decreased from the prior year. And unqualified audit opinions were issued for all heath entities’ financial statements.

Audit findings relating to internal controls deficiencies increased across health entities. Contributing to this increase were deficiencies in information system controls, which accounted for nearly a quarter of all control deficiencies. Repeat audit findings also accounted for more than a quarter of all control deficiencies.

The report notes health entities continued to experience challenges with managing employees’ excessive annual leave and time recording practices. The Ambulance Service of New South Wales continued to report high overtime payments to its employees. 

Download Health 2019 report (PDF).

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

1. Machinery of Government changes

2. Financial reporting

3. Audit observations

This report provides parliament and other users of the financial statements of agencies within the Health cluster with the results of our audits, our observations, analysis, conclusions and recommendations in the following areas for the year ended 30 June 2019:

• financial reporting
• audit observations. 

 The Health cluster was not impacted by the Machinery of Government changes on 1 July 2019. 

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

This chapter outlines our audit observations related to the financial reporting of agencies in the health cluster for 2019.

Audit opinions 

We issued unqualified audit opinions for all health entities and quality of financial reporting continues to improve

We identified fewer misstatements this year, and the errors were less significant. In 2018–19 no errors exceeded $5.0 million (eight errors recorded in 2017–18). Ten health entities conducted a full revaluation of their land, buildings and infrastructure systems in 2018–19, but more robust processes avoided the errors identified in the previous year.

Number of misstatements
Year ended 30 June	2019		2018		2017
Less than $50,000	--	--	--	6	3	3
$50,000 to $249,999	--	1	--	--	2	3
$250,000 to $999,999	1	--	--	--	1	3
$1 million to $4,999,999	--	2	--	2	1	5
$5 million and greater	--	--	6	2	1	2
Total number of misstatements	1	3	6	10	8	16

 Corrected mistatements.  Uncorrected statements.

We issued a qualified audit opinion for our compliance audit of the Ministry of Health's Annual Prudential Compliance Statement

The Ministry of Health operates eight aged care facilities in NSW and is required to comply with the Fees and Payments Principles 2014 (No. 2) (the Principles) when entering into agreements with and managing payments to and from care recipients. The Principles are set by the Commonwealth Assistant Minister for Social Services. We identified 40 instances of material non-compliance in 2018–19, including:

• not agreeing maximum accommodation amounts payable with aged care recipients before they entered the residential care services
• not entering into accommodation agreements with care recipients within the specified period
• charging incorrect fees for activities or services to one care recipient
• not refunding two bond balances within the statutory framework
• not paying the correct amount of interest for 14 care recipients’ bonds refunded during the year.

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 health cluster.

Appendix one – List of 2019 recommendations

Appendix two – Status of 2018 recommendations

Appendix three – Financial data 

Appendix four – Analysis of financial indicators

Appendix five – Analysis of performance against budget

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

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

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

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

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

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

1. Internal control trends

2. Information technology controls

3. Gifts and benefits

4. Internal audit

5. Managing contingent labour

6. Managing sensitive data

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Appendix one – List of 2019 recommendations 

Appendix two – Status of 2018 recommendations

Appendix three – In-scope agencies

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The Auditor-General for New South Wales, Margaret Crawford, has released a report on how the New South Wales Education and Standards Authority (NESA) and the Department of Education (the Department) ensure teaching quality in NSW public schools.

Around 2,200 NSW public school principals are responsible for accrediting their teachers in line with the Australian Professional Standards for Teachers. The report found that NESA does not oversight principals’ decisions to ensure that minimum standards for teaching quality are consistently met.

The Department does not effectively monitor teaching quality across the state. With limited data, it is difficult for the Department to ensure its strategies to improve teaching quality are appropriately targeted to improve teaching quality.

The Department’s Performance and Development Framework does not adequately support principals and supervisors to effectively manage and improve teacher performance or actively improve teaching quality. The Department manages those teachers formally identified as underperforming through teacher improvement programs. Only 53 of over 66,000 teachers employed by the Department were involved in these programs in 2018.

The report makes three recommendations towards NESA to improve accreditation processes, and four recommendations to the Department to improve its systems and processes for ensuring teaching quality across the State.

Australian research has shown that quality teaching is the greatest in-school influence on student engagement and outcomes, accounting for 30 per cent of the variance in student performance. An international comparative study of 15-year-old students showed the performance of New South Wales students in reading, mathematics and science has declined between 2006 and 2015.

The Australian Professional Standards for Teachers (the Standards) describe the knowledge, skills and understanding expected of effective teachers at different career stages. Teachers must be accredited against the Standards to be employed in NSW schools. The NSW Education Standards Authority (NESA) is responsible for ensuring all teachers in NSW schools are accredited. As part of the accreditation process the NSW Department of Education (The Department) assesses whether public school teachers meet proficient accreditation standards and advises NESA of its decisions.

The School Excellence Framework provides a method for the Department to monitor teaching quality at a school level across four elements of effective teaching practice. The Performance and Development Framework provides a method for teachers and their supervisors to monitor and improve teaching quality through setting professional goals to guide their performance and development.

The Department has a strategic goal that every student, every teacher, every leader and every school improves every year. In line with this goal, the Department has a range of strategies targeted to improving teaching quality at different career stages. These include additional resources to support new teachers, a program to support teachers to gain higher-level accreditation, support for principals to manage underperforming teachers, and a professional learning program where teachers observe and discuss each other's practice.

The objective of this audit was to assess the effectiveness of the NSW Department of Education's and the NSW Education Standards Authority's arrangements to ensure teaching quality in NSW public schools. To address this objective, the audit examined whether:

• agencies effectively monitor the quality of teaching in NSW public schools
• strategies to improve the quality of teaching are planned, communicated, implemented and monitored well.

Appendix one – Response from agencies

Appendix two – About the audit

Appendix three – Performance auditing

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Parliamentary Reference: Report number #327 - released 26 September 2019

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This report examines whether the Department of Education has the required contract management capability to effectively manage high-value goods and services contracts (over $250,000). In 2017–18, the department managed high-value goods and services contracts worth $3.08 billion, with most of the contracts running over multiple years.

NSW government agencies are increasingly delivering services and projects through contracts with third parties. These contracts can be complex and governments face challenges in negotiating and implementing them effectively.

Contract management capability is a broad term, which can include aspects of individual staff capability as well as organisational capability (such as policies, frameworks and processes).

In 2017–18, the Department of Education (the Department) managed high-value (over $250,000) goods and services contracts worth $3.08 billion, with most of the contracts running over multiple years. The Department delivers, funds and regulates education services for NSW students from early childhood to secondary school.

This audit examined whether the Department has the required capability to effectively manage high-value goods and services contracts.

We did not examine infrastructure, construction or information communication and technology contracts. We assessed the Department against the following criteria:

1. The Department’s policies and procedures support effective contract management and are consistent with relevant frameworks, policies and guidelines.
2. The Department has capable personnel to effectively conduct the monitoring activities throughout the life of the contract.

The NSW Public Service Commission and the Department of Finance, Services and Innovation are included as auditees as they administer policies which directly affect contract management capability, including:

• NSW Procurement Board Directions and policies
• NSW Procurement Agency Accreditation Scheme
• NSW Public Sector Capability Framework.

The Department of Finance, Services and Innovation's responsibility for NSW Procurement will transfer to NSW Treasury on 1 July 2019 as part of changes to government administrative arrangements announced on 2 April 2019 and amended on 1 May 2019.

Appendix one - Response from agencies

Appendix two - About the audit

Appendix three - Performance auditing

Parliamentary Reference: Report number #325 - released 28 June 2019

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The report focuses on the Department of Primary Industries’ (DPI) as the lead agency for biosecurity in New South Wales. It examines how well the department responds to biosecurity emergencies and manages compliance activities. DPI’s state partners include NSW Health, the NSW Environment Protection Authority, Local Land Services, and Local Control Authorities to manage biosecurity risks in New South Wales.

Biosecurity is the protection of the economy, environment, and community from the negative impacts of pests, diseases, weeds, and contaminants.

National and State governments have defined roles and responsibilities for biosecurity in Australia, reflecting the allocation of powers in the Australian Constitution. The Australian Government has direct responsibility for biosecurity (quarantine) at the international border, and works jointly with the states and territories to set the legislative framework and policy direction for managing biosecurity nationally. It also works with state and territory governments to ensure there is a national approach to biosecurity. State governments manage their biosecurity activities within the national framework.

The Department of Primary Industries (DPI), within the Department of Industry, is the lead agency for biosecurity in NSW. This audit was conducted with the Department of Industry as the auditee. On 2 April 2019 the NSW Government announced it will abolish the Department of Industry. From 1 July 2019 the Department of Planning, Industry and Environment, will have responsibility for biosecurity activities described in this report.

The NSW Biosecurity Strategy 2013–2021 (the Strategy) articulates the NSW Government’s responsibilities for biosecurity within the national legislative framework. Achieving the outcomes of the strategy relies on DPI fulfilling two key responsibilities. Firstly, undertaking direct actions, such as implementing strong regulatory compliance and licensing activities, and managing biosecurity emergency responses. Secondly, leading the response to biosecurity risks by fostering effective collaboration with stakeholders across government, industry, and the wider community.

In NSW, 11 regional Local Land Services (LLS) are the key partners for DPI in meeting its biosecurity responsibilities. Each LLS develops and implements strategies to manage invasive pests and diseases within their regions. They also investigate new reports of pests or diseases in their regions and staff local emergency control centres when an emergency response is triggered.

Local Control Authorities (LCAs) also have a role in biosecurity management. LCAs include local councils and a small number of specialist regional agencies. Their role focuses on strategies to manage weeds within their local areas.

This audit assessed the effectiveness and economy of DPI’s biosecurity emergency response and prevention activities. It looks at DPI’s emergency response practice and its compliance program as a key prevention activity for which DPI has primary responsibility. DPI sets policy and procedural compliance standards for management of biosecurity risks in NSW and also conducts an annual program of property inspections and investigations that ensure that its compliance policies and procedures are being applied effectively.

Appendix one - Response from agency

Appendix two - Location of selected biosecurity emergency responses

Appendix three - About the audit

Appendix four - Performance auditing

Parliamentary Reference: Report number #321 - released 18 June 2019

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Banner image: ‘Yellow crazy ant’, supplied and permitted for use by NSW Department of Primary Industries under Creative Commons Attribution-ShareAlike 3.0 Unported Licence. Full terms.

Three key agencies are not fully complying with the NSW Procurement Board’s Direction for engaging probity practitioners, according to a report released today by the Acting Auditor-General for New South Wales, Ian Goodwin. They also do not have effective processes to achieve compliance or assure that probity engagements achieved value for money.

Probity is defined as the quality of having strong moral principles, honesty and decency. Probity is important for NSW Government agencies as it helps ensure decisions are made with integrity, fairness and accountability, while attaining value for money.

Probity advisers provide guidance on issues concerning integrity, fairness and accountability that may arise throughout asset procurement and disposal processes. Probity auditors verify that agencies' processes are consistent with government laws and legislation, guidelines and best practice principles. 

According to the NSW State Infrastructure Strategy 2018-2038, New South Wales has more infrastructure projects underway than any state or territory in Australia. The scale of the spend on procuring and constructing new public transport networks, roads, schools and hospitals, the complexity of these projects and public scrutiny of aspects of their delivery has increased the focus on probity in the public sector. 

A Procurement Board Direction, 'PBD-2013-05 Engagement of probity advisers and probity auditors' (the Direction), sets out the requirements for NSW Government agencies' use and engagement of probity practitioners. It confirms agencies should routinely take into account probity considerations in their procurement. The Direction also specifies that NSW Government agencies can use probity advisers and probity auditors (probity practitioners) when making decisions on procuring and disposing of assets, but that agencies:

• should use external probity practitioners as the exception rather than the rule
• should not use external probity practitioners as an 'insurance policy'
• must be accountable for decisions made
• cannot substitute the use of probity practitioners for good management practices
• not engage the same probity practitioner on an ongoing basis, and ensure the relationship remains robustly independent. 

The scale of probity spend may be small in the context of the NSW Government's spend on projects. However, government agencies remain responsible for probity considerations whether they engage external probity practitioners or not.

The audit assessed whether Transport for NSW, the Department of Education and the Ministry of Health:

• complied with the requirements of ‘PBD-2013-05 Engagement of Probity Advisers and Probity Auditors’
• effectively ensured they achieved value for money when they used probity practitioners.

These entities are referred to as 'participating agencies' in this report.

We also surveyed 40 NSW Government agencies with the largest total expenditures (top 40 agencies) to get a cross sector view of their use of probity practitioners. These agencies are listed in Appendix two.

There are no professional standards and capability requirements for probity practitioners

NSW Government agencies use probity practitioners to independently verify that their procurement and asset disposal processes are transparent, fair and accountable in the pursuit of value for money. 

Probity practitioners are not subject to regulations that require them to have professional qualifications, experience and capability. Government agencies in New South Wales have difficulty finding probity standards, regulations or best practice guides to reference, which may diminish the degree of reliance stakeholders can place on practitioners’ work.

The NSW Procurement Board provides direction for the use of probity practitioners

The NSW Procurement Board Direction 'PBD-2013-15 for engagement of probity advisers and probity auditors' outlines the requirements for agencies' use of probity practitioners in the New South Wales public sector. All NSW Government agencies, except local government, state owned corporations and universities, must comply with the Direction when engaging probity practitioners. This is illustrated in Exhibit 1 below.

Appendix one – Response from agencies

Appendix two – List of selected agencies

Appendix three – About the audit

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

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

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

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

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

Despite this, the LECC incurred the expenditure.

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

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

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

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

Notably, s. 22 of the LECC Act states:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Chief Commissioner argues the overseas travel expenditure was properly incurred

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

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

The Chief Commissioner believes the Minister’s decision⁷:

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

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

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

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

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

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

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

The Minister referred the matter to the Inspector of the LECC

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Was the LECC able to incur expenditure without Ministerial approval?

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

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

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

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

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

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

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

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

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

In conducting my audit, I have complied with:

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

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

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

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

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

Appendix one - Legislated functions of the LECC

Appendix two - Timeline of events

Appendix three - The transactions

Appendix four - Interviews and key documents

One in three ambulance crews were delayed for longer than 30 minutes at hospital. Over the year these delays totalled 84,680 hours of lost time, up from 78,224 last year and 58,399 the year before. The longer ambulance crews are at hospitals the less time they are available to respond to the next emergency.