What the report is about

Poor attendance at school is related to poor student outcomes, particularly once patterns of non-attendance have been established.

This report examined how the NSW Department of Education (the department) is managing student attendance in NSW government schools.

What we found

Around a third of students in Years 1–10 attended school less than 90% of the time in semester one, 2021. Missing more than 10% of school may put a student's educational outcomes at risk.

Since 2018, the department has improved the quality of student attendance data, analysis and reporting. However, there are still gaps in understanding the reasons for absence at a system level.

The department set state-wide and school-level targets to increase the proportion of students attending school at least 90% of the time. This emphasis risks diverting attention away from students with very low attendance rates.

There are gaps in central programs to support schools in lifting student attendance. Schools are taking a variety of approaches to this work.

There is a large gap in attendance between Aboriginal and non-Aboriginal students, which has increased since 2018.

What we recommended

The Department of Education should:

• set new state-wide and school level attendance targets
• evaluate its attendance support programs
• update its attendance strategies and programs
• publish the attendance level for each school in their annual reports
• improve internal analysis and reporting of attendance data
• finalise the review of the attendance policy, procedure and codes
• review programs supporting Aboriginal student attendance and address any gaps
• review the approach to enforcing compulsory school attendance.

Regular attendance at school is important for academic and other long-term outcomes. Students who do not attend regularly are less likely to complete school and more likely to experience poorer long-term health and social outcomes. A range of factors influence student attendance including student engagement and wellbeing, family and community factors and the school environment.

The NSW Department of Education's (the department's) Strategic Plan for 2018–2022 identifies improving student attendance as a priority. It has identified 95% as its expected level of attendance. It set targets to increase the proportion of students attending school at least 90% of the time, from 79.4% to 82% in primary schools and 64.5% to 70% for secondary schools.

This report focuses on attendance data for semester one of 2018, 2019 and 2021. Unless otherwise noted, attendance data refers to Years 1–10 in alignment with national reporting conventions. Changes in recording systems and definitions mean attendance data prior to 2018 is not comparable. Attendance data for semester one of 2020 and 2022 was significantly affected by COVID-related disruptions, which prevented many students across the State from attending school. Data for semester one of 2021 is considered relatively less affected by COVID-related disruptions.

The Education Act 1990 (the Act) sets out the responsibilities of students, parents and the department for ensuring students receive compulsory schooling. The department has developed policies, procedures and guidance to assist schools in managing their responsibilities to promote regular attendance. In this report, we define 'regular' attendance as at least 90% of the time. This is equivalent to missing one day of school each fortnight or four weeks of school across a school year.

The objective of this audit was to assess whether student attendance is effectively managed in NSW government schools for students from kindergarten to Year 10. In making this assessment, the audit examined whether:

• there are effective systems and policies for managing student attendance
• the department effectively supports schools to manage student attendance
• schools are effectively managing student attendance.

This chapter considers the effectiveness of systems to accurately collect, analyse and report student attendance data. It also considers the effectiveness of policies and procedures to support attendance and central oversight of attendance issues.

This chapter considers the effectiveness of the department's strategies to improve student attendance and the support it provides to schools to achieve this. It also considers the effectiveness of school-level strategies and actions for students with low attendance.

Appendix one – Response from agency

Appendix two – About the audit

Appendix three – Performance auditing

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

Parliamentary reference - Report number #368 - released 27 September 2022

What the report is about

This audit examined whether the Department of Planning and Environment (DPE) and the Biodiversity Conservation Trust (BCT) have effectively designed and implemented the Biodiversity Offsets Scheme (‘the Scheme’) to compensate for the loss of biodiversity due to development.

Under the Biodiversity Conservation Act 2016, the Scheme enables landholders to establish in-perpetuity Biodiversity Stewardship Agreements on sites to generate credits for the unique biodiversity on that land. These credits can be sold to offset the negative impact of development on biodiversity.

What we found

DPE has not effectively designed core elements of the Scheme. DPE did not establish a clear strategic plan to guide the implementation of the Scheme.

The BCT has various roles in the Scheme but lacked safeguards against potential conflicts, creating risks to credit supply.

The effectiveness of its implementation has also been limited. Key concerns around the Scheme’s transparency, sustainability and integrity are yet to be fully resolved.

A market-based approach to biodiversity offsetting is central to the Scheme's operation but credit supply is lacking and poorly matched to growing demand. DPE has not established a clear, resourced plan to manage the shortage in credit supply. Data about the market, published by the DPE and the BCT, does not provide an adequate picture of credit supply, demand and price to readily support market participation.

These factors create a risk that biodiversity gains made through the Scheme will not be sufficient to offset losses resulting from development, and that the DPE will not be able to assess the Scheme’s overall effectiveness.

DPE is leading work with the BCT to improve the Scheme, but this is not yet guided by a long-term strategy with clear goals.

What we recommended

The audit made 11 recommendations to DPE and the BCT, focusing on:

• a long-term strategic plan for the Scheme
• improvements to the operation and transparency of the market and credit supply
• frameworks to ensure the financial and ecological sustainability of biodiversity stewardship sites
• enhanced public reporting and data management
• resolving issues in conflicting governance and oversight.

The NSW Government's Biodiversity Outlook Report 2020 estimates that, without effective management, only 50% of species and 59% of ecological communities that are listed as threatened in New South Wales will still exist in 100 years. The NSW State of the Environment 2021 report identifies habitat destruction and native vegetation clearing as presenting the single greatest threat to biodiversity in the State.

According to the Organisation for Economic Co-operation and Development (OECD), biodiversity offsets are 'measurable conservation outcomes that result from actions designed to compensate for significant, residual biodiversity loss from development projects'. The OECD states that a feature of such schemes is that biodiversity offsets are intended to be implemented as the 'final step of a mitigation hierarchy' whereby reasonable first steps are taken to avoid and minimise the negative impacts.

The NSW Biodiversity Offsets Scheme was established in 2017 under the Biodiversity Conservation Act 2016 (the Act). The purpose of the Act is to 'maintain a healthy, productive and resilient environment for the greatest well-being of the community, now and into the future, consistent with the principles of ecologically sustainable development'.

The Department of Planning and Environment (DPE) designed and manages this Scheme. Under the Act, a feature of the Scheme is a 'market-based conservation mechanism through which the impacts to biodiversity can be offset.' The Scheme enables landholders to establish in-perpetuity Biodiversity Stewardship Agreements (BSAs) on sites to generate biodiversity credits, which can be sold to offset the negative impact of development on biodiversity. BSA sites are intended to be managed over the long term to generate the biodiversity gains required to offset the impact.

The Biodiversity Conservation Trust (BCT) monitors and supports landholders to manage BSA sites under the Scheme. This includes making payments to landholders from funds held in the Biodiversity Stewardship Payments Fund for undertaking the required biodiversity management actions.

This Scheme was preceded by several other offsetting schemes in New South Wales, including the BioBanking scheme that started in 2008. DPE has arrangements to transition sites, credits, and offset obligations from this and other previous schemes.

The current biodiversity credit market in New South Wales consists of 1394 different types of ecosystem credits, which are approved to be traded in 364 different offset trading groups, and 867 different species credits. Trading rules, set out in the Biodiversity Conservation Regulation 2017 (the Regulation), prioritise offsetting the obligations of a development with like-for-like ecosystem or species credits.

The Scheme is implemented through the planning system in New South Wales. Proposed development that involves the clearing of native vegetation, and meets certain thresholds, is required to undertake a Biodiversity Development Assessment Report. These reports determine an offset obligation, in biodiversity credits, to compensate for the biodiversity loss proposed. These reports are considered by consent authorities (such as a council, for local development, or by the Minister for Planning for major projects). An offset obligation is then included in the conditions of development approval.

In addition to establishing a market for trading between developers, with offset obligations, and landholders, who sell credits from their BSA sites, the Scheme allows developers to pay into the Biodiversity Conservation Fund and transfer their obligations to the BCT. This allows the developer to proceed with their project. The BCT must then meet these acquired obligations by buying the required credits, or by undertaking other approved activities set out in the Regulation. The BCT has more options than developers on how and when it acquits its obligations.

This audit examined whether DPE and the BCT have effectively designed and implemented the Biodiversity Offsets Scheme to compensate for the loss of biodiversity due to development.

This section presents an overview of the status of the biodiversity credit market in New South Wales. It describes development of the market under the Scheme in the context of transitional arrangements from previous schemes, and the extent of market participation and transactions to date. It also presents information about emerging trends in credit demand and supply.

This section assesses the clarity and alignment of the goals of the Scheme to key features of its design and operations. It also examines structural elements of the Scheme that aim to maintain integrity within administering agencies, and the status of actions to address risks or issues.

This section assesses how effectively components of the Scheme have been designed and are being implemented to provide assurance that the impacts of development are being avoided and minimised such that only ‘unavoidable’ impacts remain to be offset. The section also assesses whether the Scheme and its market embeds the necessary controls to ensure that obligations are offset as required.

This section assesses how effectively the supply of biodiversity credits has been supported by encouraging and enabling landholders to participate in the Scheme. It also assesses whether sufficient action is underway to address issues and risks to the establishment of BSA sites, especially in the context of known credit supply issues (section 2).

This section assesses how effectively BSA sites, which need to be managed by landholders to generate the biodiversity gains represented by credits, are regulated and supported by the Biodiversity Conservation Trust. It also assesses whether actions have been taken to address identified risks to the suitability of funds required to ensure long-term BSA site management.

Appendix one – Response from agencies 

Appendix two – Like-for-like, variation and ancillary rules

Appendix three – Detail on progress of the IIAP

Appendix four – About the audit 

Appendix five – Performance auditing 

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Parliamentary reference - Report number #367 - released 30 August 2022

What the report is about

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

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

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

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

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

What we found

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

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

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

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

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

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

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

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

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

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

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

Margaret Crawford
Auditor-General for New South Wales

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

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

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

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

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

Appendix one – Included reports, 2018–2022

Appendix two – About this report

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

What the report is about

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

What we found

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

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

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

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

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

What the key issues were

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

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

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

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

Rural firefighting equipment

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

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

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

What we recommended

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

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

Early financial reporting procedures

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

What we recommended

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

Asset valuations

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

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

What we recommended

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

Integrity/completeness of asset records

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

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

What we recommended

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

Cybersecurity

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

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

What we recommended

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

Councils should monitor the implementation of recommendations

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

What we recommended

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

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

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

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

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

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

Margaret Crawford
Auditor-General for New South Wales

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

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

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

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

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

Total number of findings reported in audit management letters decreased

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

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

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

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

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

Focus on integrity of systems, good governance and good advice

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

Focus on local councils' continued response to recent emergencies

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

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

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

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

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

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

Focus on the effectiveness of cybersecurity in local government

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

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

Our approach to auditing cybersecurity across in the sector involves:

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

Local government elections

Local government elections took place in 2021–22

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

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

New rate peg methodology to support growing councils

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

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

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

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

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

Appendix two – Status of previous recommendations

Appendix three – Status of audits

Copyright notice

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

What the report is about

This report draws together the financial impact of COVID-19 on the agencies integral to responses across the state government sector of New South Wales.

What we found

Since the COVID-19 pandemic hit NSW in January 2020, and until 30 June 2021, $7.5 billion was spent by state government agencies for health and economic stimulus. The response was largely funded by borrowings.

The key areas of spending since the start of COVID-19 in NSW to 30 June 2021 were:

• direct health response measures – $2.2 billion
• personal protective equipment – $1.4 billion
• small business grants – $795 million
• quarantine costs – $613 million
• increases in employee expenses and cleaning costs across most agencies
• vaccine distribution, including vaccination hubs – $71 million.

The COVID-19 pandemic significantly impacted the financial performance and position of state government agencies.

Decreases in revenue from providing goods and services were offset by increases in appropriations, grants and contributions, for health and economic stimulus funding in response to the pandemic.

Most agencies had expense growth, due to additional operating requirements to manage and respond to the pandemic along with implementing new or expanded stimulus programs and initiatives.

Response measures for COVID-19 have meant the NSW Government is unlikely to meet targets in the Fiscal Responsibility Act 2012 being:

• annual expense growth kept below long-term average revenue growth
• elimination of State’s unfunded superannuation liability by 2030.

What the report is about

The results of the Transport cluster agencies’ financial statement audits for the year ended 30 June 2021.

What we found

Unmodified financial statement audit opinions were issued for all Transport cluster agencies. Resolution of issues delayed signing the Transport Asset Holding Entity of NSW (TAHE) until 24 December 2021. Matters relating to TAHE are also reported in the report on State Finances 2021.

Emphasis of Matter - TAHE

An Emphasis of Matter paragraph was included in TAHE's audit opinion to draw attention to uncertainty associated with:

• future access and licence fees that are subject to re-signed agreements
• an additional $4.1 billion of funding that is outside the forward estimates period
• a significant portion of the fair value of TAHE’s non-financial assets is reflected in the terminal value, which is outside the ten-year contract period to 30 June 2031, and the risk that TAHE will not be able to negotiate contract terms to support current projections.

TAHE's transition from RailCorp also changed its valuation of assets to an income approach, resulting in a $20.3 billion decrease to the fair value. The fair value decrease was because the cash flows were not sufficient to support the previous recorded value.

TAHE corrected a misstatement of $1.2 billion relating to the valuation of its assets. This followed significant deliberation on key judgements and assumptions, with TAHE adopting risk assumptions in its valuation that were not in line with comparable benchmarks.

Emphasis of Matter - State Transit Authority of New South Wales

An Emphasis of Matter paragraph was included in the State Transit Authority of NSW's (the Authority) audit opinion to draw attention to the financial statements not prepared on a going concern basis. This was because the NSW Government put the Authority's bus contracts out to competitive tender and accordingly, management assessed the Authority's principal activities are not expected to operate for a full 12 months after 30 June 2021.

The implementation of AASB 1059 ‘Service Concession Arrangements: Grantors’ resulted in a net increase in assets of $23.5 billion across the Transport cluster.

The 2020–21 audits identified six high-risk and 45 moderate risk issues across the cluster. Fourteen of the moderate risk issues were repeat issues, including information technology controls around management of user access for key financial systems and payroll processes.

The high-risk issues, in addition to those related to TAHE and previously reported in the report on State Finances 2021, include:

• absence of conflict of declarations related to land acquisition processes at Transport for NSW
• no evidence of conflict of interest declarations obtained by TAHE from consultants and contractors regarding involvement in other engagements.

What we recommended

TAHE needs to:

• finalise revised commercial agreements to reflect fees detailed in a Heads of Agreement signed on 18 December 2021
• prepare robust projections and business plans to support the required rate of return.

NSW Treasury and TAHE should monitor the risk that control of TAHE assets could change in the future.

Transport for NSW needs to significantly improve its processes to ensure all key information is identified and shared with the Audit Office.

Transport agencies should implement a process to ensure conflicts of interest declarations are completed for land acquisitions and applied consistently across the cluster.

Transport agencies should implement a process to capture all contracts and agreements entered to ensure:

• agencies are aware of contractual obligations
• financial reporting implications are assessed, particularly with respect to leases, revenue and service concession arrangements.

This report provides Parliament and other users of the transport cluster (the cluster) agencies’ financial statements with the results of our audits, our observations, analysis, conclusions and recommendations in the following areas:

• financial reporting
• audit observations.

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 cluster for 2021.

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 cluster.

Findings reported to management

The number of findings reported to management has increased, and 37 per cent of all issues were repeat issues

Breakdowns and weaknesses in internal controls increase the risk of fraud and error. Deficiencies in internal controls, matters of governance interest and unresolved issues were reported to management and those charged with governance of agencies. The Audit Office does this through management letters, which include observations, related implications, recommendations and risk ratings.

In 2020–21, there were 73 findings raised across the cluster (56 in 2019–20) and 37 per cent of all issues were repeat issues (43 per cent in 2019–20).

In view of the recent performance audit ‘Managing Cyber Risks’ and compliance audit ‘Compliance with the NSW Cyber Security Policy’ involving the cluster, it is noted with concern that the most common repeat issues related to weaknesses in controls over information technology user access administration and password management. Moderate risk issues included completeness and accuracy of contract registers, accounting for assets and management of supplier and payroll masterfiles.

A delay in implementing audit recommendations increases the risk of intentional and accidental errors in processing information, producing management reports, and generating financial statements. This can impair decision-making, affect service delivery and expose agencies to fraud, financial loss and reputational damage. Control deficiencies may also mean agency staff are less likely to follow internal policies, inadvertently causing the agency not to comply with legislation, regulation, and central agency policies.

The table below describes the common issues identified across the cluster by category and risk rating. 

2020–21 audits identified six high-risk findings

High-risk findings were reported at the following cluster agencies.

The number of moderate risk findings increased from prior year

Forty-five moderate risk findings were reported in 2020–21, representing a 73.1 per cent increase from 2019–20. Of these, 14 were repeat findings, and 31 were new issues. 

Key moderate risk findings related to:

• weaknesses in user access management to key financial systems
• management of contracts and agreements register
• management of supplier and payroll masterfiles
• accounting for assets
• control deficiencies at service organisations
• segregation of duties relating to the hiring of employees
• conflict of interest management
• annual leave management
• review of internal audit charter
• disaster recovery planning.

Transport Asset Holding Entity of New South Wales

Background

The establishment of TAHE was originally announced by the NSW Government in the 2015–16 State Budget. On 1 July 2020, the former Rail Corporation New South Wales (RailCorp), a not-for-profit entity, transitioned to the Transport Asset Holding Entity of New South Wales (TAHE), a for-profit statutory state-owned corporation under the Transport Administration Act 1988. There was no change in the structure of TAHE as a new entity was not created. Ownership remains fully with the government. TAHE, and the former RailCorp, were both classified as Public Non-Financial Corporation (PNFC) entities within the Total State Sector Accounts.

Prior to 1 July 2015, the government paid appropriations to Transport for NSW, a General Government Sector (GGS) agency, to construct transport assets. When completed, these assets were granted to the former RailCorp, a not for-profit entity within the PNFC sector. The grants to the former RailCorp were recorded as an expense in the State’s GGS budget result.

From 1 July 2015, the government announced the creation of TAHE (a dedicated asset manager). Funding for new capital projects was to be provided through equity injections and was no longer recorded as an expense to the GGS budget, even though the business model was yet to be determined. The change, as explained in the 2015–16 State Budget, was due to the expectation that the former RailCorp will transition to TAHE, which was intended, over time to provide a commercial return. That Budget also highlighted how the change, which was largely a change in the basis of accounting, was intended to improve the GGS budget result each year. In total, the GGS has contributed approximately $11.1 billion to TAHE since 2015–16. This includes the equity injections from the GGS to TAHE made in the current year of $2.4 billion.

NSW Treasury initially set a timetable for the stand-up of TAHE of 1 July 2019, which included finalising the business model, operating model and contracts for the use of TAHE's assets. The enactment of the Transport Administration Act 1988 resulted in RailCorp transitioning to TAHE on 1 July 2020, 12 months after its originally planned operational date. Contributions paid to the former RailCorp and subsequently to TAHE by the GGS were treated as equity investments from July 2015 forward. This treatment continued, despite delays in settling the business model. In 2020, the Audit Office raised a high-risk finding due to the significance of the financial reporting impacts and business risks for NSW Treasury and TAHE.

The business model adopted and the flow of funds between transport agencies in the GGS and PNFC sectors is shown in the diagram below. For further details refer to the Report on State Finances 2021.

Appendix one – Misstatements in financial statements submitted for audit

Appendix two – Early close procedures

Appendix three – 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.

What the report is about

The results of Treasury cluster agencies' financial statement audits for the year ended 30 June 2021. The results of the audit of the NSW Government's consolidated Total State Sector Accounts (TSSA), which are prepared by NSW Treasury, are reported separately in our report on State Finances 2021.

What we found

Unmodified audit opinions were issued for all Treasury cluster agencies.

The number of identified monetary misstatements increased from 16 in 2019–20 to 24 in 2020–21.

Reported corrected monetary misstatements decreased from 15 in 2019–20 to seven with a gross value of $1.1 billion in 2020–21.

The largest corrected misstatement was in NSW Treasury's financial statements and was a $1 billion correction to administered borrowings.

Reported uncorrected monetary misstatements increased from one in 2019–20 to 17 with a gross value of $168 million in 2020–21.

Seven of the 2020–21 uncorrected misstatements related to one common decision relating to investment management funds terminated during the year by the NSW Treasury Corporation (TCorp).

All agencies submitted their 2020–21 financial statements within NSW Treasury's reporting deadlines.

What the key issues were

Significant audit findings were identified with respect to NSW Treasury's processes to prepare the NSW Government's consolidated TSSA (whole of government accounts). This included one extreme finding and several high-risk findings related to NSW Treasury processes. These are reported in our report on State Finances 2021.

Two high-risk issues raised in 2019–20 were also not addressed by NSW Treasury during the year and were repeat issues reported to management. These related to the appropriations framework and resolution of cross cluster payments, and instances where some agencies spent deemed appropriations money without an authorised delegation.

A number of previously reported audit findings and recommendations with respect to icare continue to be ongoing issues, namely:

• The Workers Compensation Nominal Insurer continues to hold less assets than the estimated present value of its future payment obligations.
• The Workers Compensation Nominal Insurer's four week return-to-work rate fell from 68% to 64%. This is below icare's 70% target. Contributing factors include COVID-19 lockdowns which have impacted claims handling processes, and increased barriers to claimants returning to work.
• Instances were noted where inadequate documentation was kept on file to support claims, including pre-injury average weekly earnings (PIAWE) calculations.

The Workers Compensation (Dust Diseases) Authority increased its outstanding claims liability by $93.9 million, which included $39.3 million to remediate historical underpayments, resulting from workers not being paid the rate required by existing legislation.

The icare Board approved a new approach for remediating PIAWE underpayments on 24 September 2021, the date the Workers Compensation Nominal Insurer’s financial statements were approved for issue. The impact of the decision on the financial statements was not discussed with the Audit Office and assessed as an ‘after balance date event’.

What we recommended

Our report on State Finances 2021 made several recommendations to improve NSW Treasury processes. These included:

• improve processes to ensure information is shared with audit on a timely basis
• seek legislative amendments to resolve statutory inconsistencies relating to statutory reporting time frames
• implement effective quality review processes over key accounting information
• establish a policy to determine the minimum expected rate of return on equity injections in other public sector entities
• prepare robust financial projections to support accounting decisions
• re-confirm sector classifications of TAHE, Sydney Trains and NSW Trains
• ensure sufficient oversight of its use of consultants and assess the risk of an overdependence on consultants at the cost of internal capability
• improve disclosures of equity injections invested in other public sector entities
• determine a state-wide policy on when borrowings are recognised in agency financial statements
• make legislative amendments to ensure expenditure incurred across financial years does not exceed the appropriation authority and assess the financial reporting impact
• improve the guidance provided to agencies to ensure expenditure of public money is properly supported by authorised delegations.

We also recommended icare should ensure:

• it has sufficient controls over claim payments including an effective quality assurance program, to minimise claim payment errors
• that documentation to support injured worker benefit calculations is appropriately maintained, and the documentation requirements are set out in a policy
• the impact of ‘after balance date events’ on financial statements is appropriately assessed
• its operational practices are improved to ensure the correct payment of claims in compliance with legislative requirements. icare also needs to act on a timely basis on received legal advice and amend operational practices to ensure correct payments are made.

This report focuses on agencies within the Treasury cluster and provides parliament and other users of the Treasury cluster's financial statements with the results of our audits, our observations, analysis, conclusions and recommendations in the following areas:

• financial reporting
• audit observations.

NSW Treasury also prepares the consolidated NSW whole of government financial statements (the Total State Sector Accounts), which is reported in the report on State Finances 2021.

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

This chapter outlines our audit observations related to the financial reporting of agencies in the Treasury cluster (the cluster) for 2021.

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 cluster.

Findings reported to management

The number of findings reported to management has decreased, but 30% of all issues were repeat issues and these need greater focus and prioritisation

Breakdowns and weaknesses in internal controls increase the risk of fraud and error. Deficiencies in internal controls, matters of governance interest and unresolved issues were reported to management and those charged with governance of agencies. The Audit Office does this through management letters, which include observations, related implications, recommendations and risk ratings.

In 2020–21, there were 57 findings raised across the cluster (71 in 2019–20), 30% of which were repeat issues (32% in 2019–20).

The most common repeat issues related to claims processing and information technology user access administration.

A delay in implementing audit recommendations increases the risk of intentional and accidental errors in processing information, producing management reports and generating financial statements. This can impair decision-making, affect service delivery and expose agencies to fraud, financial loss and reputational damage. Poor controls may also mean agency staff are less likely to follow internal policies, inadvertently causing the agency not to comply with legislation, regulation and central agency policies.

The table below describes the common issues identified across the cluster by category and risk rating.

The number of moderate risk findings decreased from prior year

There were 21 moderate risk findings reported in 2020–21, representing a 30% decrease from 2019–20. Of these, ten were repeat findings, and 11 were new issues.

Moderate risk repeat findings include:

• claims processing weaknesses including claim payment errors, and inadequate documentation to support calculations and evidence claims were reviewed by someone with appropriate delegation
• inadequate review of user access and higher risks of unintended or unauthorised system access
• controls assurance reports from an outsourced service provider did not cover the services it provided to the government agency
• failure to review procurement contracts register to ensure it is accurate and complete
• ongoing control deficiencies with grant application and approval processes
• key policies including delegations not being reviewed in a number of years and do not incorporate new requirements from more recent legislation
• quality review processes failing to identify material classification errors associated with grant funding.

NSW Treasury related matters

Accounting for the Government's investment in Transport Asset Holding Entity

A total of seven recommendations were made with respect to NSW Treasury's processes to prepare the NSW Government's consolidated whole of government accounts (the TSSA). This included one extreme risk finding and six high risk findings. The extreme finding related to NSW Treasury needing to significantly improve its processes to ensure all key information is identified and shared with the Audit Office on a timely basis. Other high-risk findings were identified which resulted in the following recommendations for NSW Treasury:

• establishing a policy to determine the minimum expected rate of return on the GGS equity injections in other public sectors entities and report on the performance of these GGS investments in the TSSA, including how much and what type of returns the government is obtaining from its investments compared to its targeted return
• facilitate revised commercial agreements to reflect access and license fees that were agreed in the 18 December 2021 Heads of Agreement between Transport for NSW, TAHE and the operators Sydney Trains and NSW Trains
• with TAHE, prepare robust projections and business plans to support GGS investment returns beyond FY2031.
• liaising with the ABS to re-confirm the classification of TAHE, NSW Trains and Sydney Trains as entities within the PNFC sector
• monitoring the risk that control of TAHE assets could change in future reporting periods and the implications on the TSSA
• consider whether there is sufficient competent oversight of its use of consultants and assess the risk of an over dependence on consultants at the cost of internal capability.

More details on the recommendations to NSW Treasury relating to its accounting for the GGS investment in TAHE are included on pages 7 to 24 of the State Finances 2021 NSW Auditor-General’s Report to Parliament. 

Borrowings of $1 billion were understated by NSW Treasury

NSW Treasury, a GGS agency, made agreements to borrow $1 billion from New South Wales Treasury Corporation (TCorp), a PFC sector agency. Some of these agreements were entered as early as 17 May 2021 and all agreements for borrowings were entered into before 30 June 2021. However, NSW Treasury requested that settlement of those additional borrowings be deferred until 1 July 2021.

As TCorp raised the funds before 30 June 2021, it recognised a financial asset and liability to NSW Treasury on 30 June 2021. Despite TCorp having raised the funds by 30 June 2021 under the mutually agreed trade deal, NSW Treasury did not recognise any borrowings at year end on the basis that it requested the settlement date and receipt of cash to be deferred to past the balance sheet date. This led to an understatement of debt liabilities of $1 billion by NSW Treasury, and an inconsistent accounting treatment between the two agencies. NSW Treasury subsequently corrected the misstatement after the matter was raised by the audit, resulting in the GGS recognising $1 billion in financial assets and borrowings at 30 June 2021.

More detail on these inconsistencies is on page 37 of the State Finances 2021 NSW Auditor-General’s Report to Parliament. We recommended NSW Treasury seek develop a state-wide accounting policy for borrowings which ensure correct and consistent accounting treatment between agencies and sectors.

Inconsistencies exist in the GSF Act and GSA Act related to key statutory timeframes

There are inconsistencies between key statutory reporting timeframes imposed on the Treasurer and Auditor-General for the Consolidated State Financial Statements (the Statements) in the Government Sector Finance Act 2018 (GSF Act) and Government Sector Audit Act 1983 (GSA Act). Ambiguity in the statutory reporting timeframes could impact on the future timely provision of this information to Parliament. More detail on these inconsistencies is on page 54 of the State Finances 2021 NSW Auditor-General’s Report to Parliament. We recommended NSW Treasury seek legislative amendments in Parliament to resolve these inconsistencies.

NSW Treasury lacks a framework to monitor and provide assurance to ministers that they are in compliance with their appropriation authority

In July 2021, NSW Treasury highlighted a potential issue associated with certain cross-cluster payments which was based on advice received from the Crown Solicitor in January 2021. After being made aware of the issue, the Audit Office obtained its own advice on matters related to the appropriations framework under relevant state legislation. In the advice to the Audit Office, the Crown Solicitor advised that an agency is not subject to its own legally appropriated expenditure limit (assuming it is not subject to any annual spending limit imposed through an instrument of delegation or a budget control authority issued by the Treasurer under section 5.1 of the GSF Act). In effect, because responsible ministers are given appropriations, these legal expenditure limits, rest in aggregate, with the principal department and agencies the minister is responsible for. It is not possible for an individual agency to monitor or determine at what ‘point in time’ expenditure has been incurred in excess of the minister’s appropriation authority and there is currently no framework to monitor this.

Further detail on this matter is on pages 54 to 56 of the State Finances 2021 NSW Auditor-General’s Report to Parliament. In this report, we recommended that NSW Treasury:

• ensure a framework exists to monitor and provide assurance to ministers that expenditure incurred across a financial year by agencies under the relevant minister's coordination does not exceed the appropriation authority conferred by the annual Appropriations Act and the GSF Act
• assess how the requirement to prepare a Summary of Compliance under Australian Accounting Standards impacts relevant principal departments and cluster agencies financial statement disclosures.

Agencies have again spent monies without an authorised delegation

In the State Finances NSW Auditor-General's Report to Parliament for 2020 and 2021 we reported instances where agencies spent money received from an annual appropriation and/or deemed appropriation money without an authorised delegation from the relevant minister(s) as required by sections 4.6(1) and 5.5(3) of the GSF Act. Further detail on this matter is on pages 56 to 57 of the State Finances 2021 NSW Auditor-General’s Report to Parliament. In this report, we recommended NSW Treasury promptly improve the guidance it provides agencies to ensure that expenditure of public monies is properly supported by authorised delegations.

Control deficiencies at NSW Treasury's service providers

NSW Treasury's business processes and information technology services were provided by Infosys, Unisys and the Department of Customer Service during 2020–21. Together this constitutes the GovConnect environment.

The GovConnect information technology general controls (ITGC) were qualified in 2020–21. The key controls over user access, system changes and batch process failed in all ITGC reports. Most of these deviations were not mitigated or sufficiently mitigated to address the risk of unauthorised user access.

In response to the internal control qualifications, the audit teams performed data analytics over payroll and accounts payable to obtain reasonable assurance that these control deficiencies did not materially impact on relevant agencies' financial statements.

Refer to the Customer Service 2021 NSW Auditor-General’s Report to Parliament for further details.

Insurance related matters

icare is in the process of implementing organisational reform in response to findings in recent external reviews. These reviews have identified 151 recommendations for icare to improve in the areas of risk and governance, performance, and culture and accountability. The reviews include the April 2021 McDougall Review, and the February 2021 ‘Independent Review of icare governance, accountability and culture’ which was recommended by SIRA in the Dore Report.

All of these recommendations were accepted by icare and are expected to be addressed through their ‘Improvement Program’. As at February 2022, icare report that 21 have been addressed, 139 are in progress, and 15 still to commence.

A number of the observations referred to in this report were also identified in the above reviews and are expected to be actioned as part of the improvement program.

Workers Compensation Nominal Insurer (the Nominal Insurer)

The Nominal Insurer’s net asset deficiency at 30 June 2021

Last year's Central Agencies Report to Parliament reported that the Workers Compensation Nominal Insurer (the Nominal Insurer), the NSW Self Insurance Corporation and the Lifetime Care and Support Authority of New South Wales all had negative net assets at 30 June 2020. After strong investment returns in 2020–21, only the Nominal Insurer continued to have negative net assets at 30 June 2021.

The Nominal Insurer's negative net assets of $252.9 million at 30 June 2021 ($316.2 million at 30 June 2020) means that it still does not hold sufficient capital to meet the estimated present value of its future payment obligations, when measured in accordance with the accounting framework. The financial statements continued to be prepared on a going concern basis because the future payment obligations are not all due for settlement within the next 12 months.

As noted in section 2.4 ‘Key accounting issues’, icare changed from an 'Accounting Ratio', to an 'Insurance Ratio', to assess the Nominal Insurer’s capital position from 2020–21. The insurance ratio uses a (higher) discount rate based on the expected earnings rate on the Nominal Insurer’s assets, rather the ‘risk free’ rate which is used for financial reporting.

Last year's Report to Parliament also noted that the deterioration in the value of the Nominal Insurer’s net assets has resulted in its funding ratio at 30 June 2020 being outside of the ‘target operating zone’ set by the Board of icare. The Insurance Ratio at 30 June 2021 is 122%, which is less than icare's target operating zone of over 130%.

icare is assessing how it can increase the Nominal Insurer’s funding ratio, and advises that actions taken to date include the execution of the Nominal Insurer Improvement Program (the Improvement Program) and an increase in premium rates.

icare were given approval by the State Insurance Regulatory Authority (SIRA) to increase workers compensation premium rates from 1.4% to 1.44%  of wages (2.9%) for the 2021–22 policy year. icare advises that their pricing strategy for workers compensation premiums is for ‘modest increases over the medium term’.

Return-to-work rates have worsened

Last year's Central Agencies Report to Parliament noted that the Nominal Insurer has experienced deteriorating return-to-work rates since late 2017. According to data published by SIRA, the Nominal Insurer’s monthly four week return-to-work rate has continued to decline, falling from 68% at 30 June 2020 to 64% at 30 June 2021, and down to 63% at 30 September 2021.

A key assumption when measuring the Nominal Insurer’s outstanding claims liability, is the amount of time that injured workers will remain on benefits (i.e. continuance rates). This assumption is significantly aligned with return-to-work rate measures. At 30 June 2021, the liability was increased by $296 million due to changes in continuance rate assumptions, with workers expected to remain on benefits longer. This change is consistent with the fall in four week return-to-work rates.

The four week return-to-work rate trend since August 2017 is shown in the graph below.

Appendix one - Misstatements in financial statements submitted for audit

Appendix two – Early close procedures

Appendix three – Timeliness of financial reporting

Appendix four – Financial data

Appendix five – Acquittals and other opinions

Copyright notice

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

What the report is about

The report focuses on how effectively the Department of Customer Service (DCS) and Department of Planning and Environment (DPE) led reforms addressing the unsafe use of combustible external cladding on existing residential and public buildings.

Nine local councils were included in the audit because they have responsibilities and powers needed to implement the NSW Government’s reforms.

What we found

After the June 2017 Grenfell Tower fire in London, the NSW Government committed to a ten-point action plan, which included establishing the NSW Cladding Taskforce, chaired by DCS, and with DPE as a key member. The Taskforce co-ordinates and oversees the implementation of the plan.

Depending on the original source of development approval, either individual local councils or DPE are responsible for ensuring that buildings are identified, assessed, and remediated. NSW Government-owned buildings are the responsibility of each department.

Identifying buildings potentially at risk was complex and resource intensive. However, on balance, it is likely that most affected buildings have now been identified.

By October 2021, around 40 per cent of assessed high-risk buildings that are the responsibility of local councils had either been remediated or found not to pose an unacceptable fire risk.

By February 2022, almost 50 per cent of affected NSW Government-owned buildings, and 90 per cent of buildings that are the responsibility of DPE, have either been cleared or are in the process of being remediated.

Earlier guidance on some key issues could have been provided by DCS and DPE in the two years after the Grenfell Tower fire. This may have reduced confusion and inconsistency across local councils we audited, and in some NSW Government departments. This especially relates to the application of the Fair Trading Commissioner's product use ban.

Given the inherent risks posed by combustible external cladding, buildings initially assessed as low-risk may also still warrant further action.

While most high-risk buildings have likely been identified, poor information handling makes it difficult to keep track of all buildings from identification, through to risk assessment and remediation.

What we recommended

DCS and DPE should:

1. address the confusion surrounding the application of the Commissioner for Fair Trading's product use ban for aluminium composite panels with polyethylene content greater than 30 per cent
2. develop an action plan to address buildings assessed as low-risk
3. improve information systems to track all buildings from identification through to remediation.

NSW Government's response to the risks posed by combustible external cladding

The NSW Government first became aware of the potential heightened risks posed by combustible external cladding on building exteriors after the 2014 Lacrosse Tower fire in Melbourne. However, it was the tragic loss of life from the Grenfell Tower fire in London, in June 2017, that gave added urgency to the need to address these risks.

Within six weeks of the London fire, the NSW Government committed to a ten-point plan of action for NSW to:

• identify and remediate any buildings with combustible external cladding
• ensure that regulation prevented the unsafe use of such cladding
• ensure that experts involved in providing advice and certifying fire safety measures had the necessary skills and experience.

One of the actions in the ten-point plan was the creation of the NSW Government's Fire Safety and External Wall Cladding Taskforce (the Cladding Taskforce) chaired by the Department of Customer Service (DCS) and with the Department of Planning and Environment (DPE) as a key member.

The ten-point plan also specified that NSW Government departments would be responsible, in regard to buildings they owned to '…audit their buildings and determine if they have aluminium cladding'.

Local councils play a key role in implementing the Government's reforms, given their responsibilities and powers under the Environmental Planning and Assessment Act 1979 (EPA Act) and Local Government Act 1993 (Local Government Act) to approve building works (as 'consent authorities'), as well as to ensure fire safety standards are met. DPE plays an equivalent role for a smaller number of 'State Significant Developments' for which it is the consent authority under delegation from the Minister for Planning.

Commissioner for Fair Trading's building product use ban

On 18 December 2017, the Building Products (Safety) Act 2017 (BPS Act) came into effect in NSW, introducing new laws to prevent the use of unsafe building products. Notably, the BPS Act gave the Secretary of DCS and the Commissioner for Fair Trading the power to ban unsafe uses of building products.

After an extensive consultative process, the Commissioner for Fair Trading used these powers to issue a product use ban on 15 August 2018. This banned the use of external wall cladding of aluminium composite panels with a core comprised of more than 30 per cent polyethylene by mass on new buildings, unless the proposed use was subject to independent fire propagation testing of the specific product and method of application to a building in accordance with relevant Australian Standards.

Buildings occupied before the product use ban came into force are not automatically required to have the banned product removed. Under the BPS Act, consent authorities may determine necessary actions to eliminate or minimise the risk posed by the banned material on existing buildings.

Project Remediate

Project Remediate is a three-year NSW Government program announced in November 2020. The program was designed by the NSW Government to assist building owners of multi-storey apartments (two storeys or more) with high-risk combustible cladding to remediate their building to a high standard and for a fair price.

The scheme is voluntary and includes government paying for the interest on ten-year loans, as well as incorporating assurance and project management services to provide technical and practical support to owners’ corporations and strata managing agents. Building remediations under the program are expected to commence in 2022.

About this audit

This audit assessed whether DCS and DPE effectively led reforms to manage the fire safety risk of combustible external cladding on existing residential and public buildings.

In making this assessment, we considered whether the expressed policy intent of the NSW Government's ten-point plan for fire safety reform had been achieved by asking:

• are the fire safety risks of combustible external cladding on existing buildings identified and remediated?
• is there a comprehensive building product safety scheme that prevents the dangerous use of combustible external cladding products on existing buildings?
• is fire safety certification for combustible external cladding on existing buildings carried out impartially, ethically and in the public interest by qualified experts?

Consistent with the focus of the Cladding Taskforce on multi-storey residential buildings and public buildings, the scope of our audit is limited to buildings categorised under the Building Code of Australia (BCA) as class 2, 3 and 9. These classes are defined in detail in section 1.2, but include: multi-unit residential apartments, hotels, motels, hostels, back-packers, and buildings of a public nature, including health care buildings, schools, and aged care buildings. The scope was also limited to existing buildings, which is defined as buildings occupied by 22 October 2018.

Auditees

The Department of Customer Service chairs the NSW Government's Cladding Taskforce, which is responsible for coordinating the combustible external cladding reforms. The Commissioner of Fair Trading sits within DCS and DCS regulates the industry accreditation scheme for fire safety practitioners, as well as administering the BPS Act.

The Department of Planning and Environment administers the EPA Act and the Environmental Planning and Assessment Regulation 2000 (EPA Regulation), which regulate the building development process. As well as being the delegated consent authority for State Significant Developments, DPE is also responsible for maintaining the mandatory cladding register requiring building owners of multi-storey (BCA class 2, 3 or 9) buildings to register buildings with combustible external cladding on an online portal.

Functions and responsibilities between DCS and DPE varied over time. For example, in October 2019, the DPE building policy team responsible for co-ordinating the DPE response to the combustible cladding issue was transferred to DCS, following changes to agency responsibilities resulting from machinery of government changes. DPE advised this resulted in a lessening of DPE's subsequent policy work on combustible cladding and its involvement in the Cladding Taskforce.

While the focus of the audit was on the oversight and coordination provided by DCS and DPE, nine councils were also auditees for this performance audit. Councils play an essential part as consent authorities for building development approvals in NSW, as well as having responsibilities and powers to ensure fire safety standards. To fully understand how well their activities were overseen and coordinated, a sample of councils was included as auditees.

Nine councils were selected to represent both metropolitan and regional areas, noting that there are very few in-scope buildings in rural areas. The audited councils were:

• Bayside Council
• City of Canterbury Bankstown Council
• Cumberland City Council
• Liverpool City Council
• City of Newcastle Council
• City of Parramatta Council
• City of Ryde Council
• City of Sydney Council
• Wollongong City Council.

Terminology

The two NSW Government department auditees have, over time, been subject to machinery of government changes, which have changed some of their functions and what the departments are called.

Relevant to this audit, the effect of these changes has been:

• the Department of Finance, Services, and Innovation (DFSI) became the Department of Customer Services (DCS) on 1 July 2019
• on 1 July 2019, the Department of Planning and Environment became the Department of Planning, Industry, and Environment (DPIE)
• on 21 December 2021, DPIE became the Department of Planning and Environment (DPE).

To avoid confusion, we use the titles by which these departments are known at the date of this report: the Department of Customer Service and the Department of Planning and Environment.

This chapter considers the part played by DCS and DPE as key members of the Cladding Taskforce in ensuring that buildings with combustible external cladding were effectively identified and remediated through processes implemented by:

• local councils or DPE, where those bodies were consent authorities under the EPA Act for the relevant buildings
• in the case of NSW Government buildings, the departments that owned those buildings.

This chapter considers what has been done to deliver a comprehensive building product safety scheme that prevents the dangerous use of combustible external cladding products.

This chapter considers whether reforms have ensured that only people with the necessary skills and experience are certifying buildings and signing off on fire-safety.

Inspections of existing buildings and development of any subsequent action plans to address combustible external cladding are not activities covered by accreditation or registration schemes for building certifiers

Almost all the risk assessment and remediation work done on buildings in the scope of this audit have been undertaken under fire safety orders issued by consent authorities using their powers under the EPA Act. This has been the recommended approach by DPE and DCS since at least 2016 (that is, before the Grenfell Tower fire in London).

While there have been reforms to certifier registrations scheme, these were not intended to ensure that combustible cladding-remediation on existing buildings is supported by people with the necessary skills and experience in fire safety under the fire safety order process. Instead, they are focused on offering better assurance for work done in respect to new building projects where accredited experts certify that building work is carried out in accordance with BCA under the DCS managed certifier registration schemes.

No steps have been taken to ensure the quality of the work done by experts inspecting, assessing the fire risk and developing action plans to address combustible external cladding on existing buildings, other than where consent authorities have chosen to exercise their discretion. This includes requiring fire safety experts to be appropriately qualified and requiring peer review of some cladding risk assessments and remediation plans.

Consent authorities determine whether individuals with accreditation are required for combustible cladding inspection, risk assessments and remediation on existing buildings

Whether an individual with certifier accreditation participates in a cladding inspection, risk assessment, or remediation for an existing building will be determined by what councils as consent authorities specify in their fire safety orders unless building owners opt to use such experts without being directed to do so by the consent authority.

As discussed earlier, councils acting as consent authorities vary in whether they require building owners to engage individuals with certifier accreditation. In most of the councils we audited, A1 or C10 accredited experts were either required, or recommended, to perform functions such as auditing suspected combustible cladding, or conducting fire safety risk assessments and developing plans to rectify combustible cladding.

However, these types of work are not functions covered by the accreditation or registration schemes that apply to building and development certifiers.

Certifier accreditation schemes do not cover cladding remediation work done under fire safety orders

While councils may require or recommend that independent accredited A1 or C10 certifiers be engaged by building owners for cladding risk assessment and remediation, they are not performing those functions as certifiers — they are, in effect, more akin to expert consultants. Accordingly, how they perform their functions and duties is not covered by the legislation supporting the accreditation scheme for certifiers that was operated until July 2020 by the Building Professional Board.

Instead, their use in this process is a convenient and practical way for consent authorities to ensure that building owners use appropriate experts who have the qualifications, skills and experience needed to investigate and identify combustible cladding, and then to formulate appropriate action to deal with such cladding. However, these individuals are not performing regulated or accredited work, are not subject to regulatory oversight, and are not accountable to any accreditation body for the quality of the work they perform.

While councils could (and sometimes do) choose to decline poor quality or incomplete cladding-related work prepared by A1 or C10 certifiers, the burden of resolving poor quality would fall on the building owner, who would have to seek amended or additional risk assessments or rectification plans.

In the absence of regulatory oversight, disincentives for poor quality cladding-related work, may include litigation being commenced by the property owner, harm to the expert's reputation in a small and competitive market, and the potential impact on whether the individual could retain their professional indemnity insurance at a reasonable cost (especially in an environment when many insurance providers withdrew coverage for cladding related work).

Reforms impact on regulated experts doing work on new buildings

The reforms that commenced on 1 July 2020, replaced categories of accreditation with classes of registration, and varied the classes such that:

• accredited building surveyor category A1 became registered building surveyor-unrestricted
• accredited certifier—fire safety engineer category C10 became registered certifiers-fire safety.

The legislation that introduced these reforms, the Building and Development Certifiers Act 2018, also repealed the pre-existing Building Professionals Act 2005 and abolished the Building Professionals Board. The new Act was accompanied by the Building and Development Certifiers Regulation 2020.

While the scope of this audit is limited to existing buildings, we note that there are buildings with combustible external cladding that are yet to be remediated. Just as these processes previously drew on the expertise of A1 and C10 category certifiers, it seems inevitable that the remediation of existing buildings will continue to draw on the expertise of the equivalent new classes of registered building surveyor-unrestricted and registered certifier-fire safety.

Appendix one – Response from agencies

Appendix two – About the audit

Appendix three – Performance auditing

Copyright notice

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

Parliamentary reference - Report number #364 - released 13 April 2022.

What the report is about

Natural disaster events, including bushfires and floods, have directly impacted some local councils in New South Wales over recent years. It is important for local councils to effectively plan so that they can continue operations through natural disasters and other disruptions.

This audit assessed the effectiveness of Bega Valley Shire Council and Snowy Valleys Council’s approaches to business and service continuity arrangements for natural disasters.

What we found

Bega Valley Shire Council has a documented approach to planning for business and service continuity that provides for clear decision making processes and accountability.

Bega Valley Shire Council has prepared for identified natural disaster risks to business and service continuity but can do more to monitor how it has implemented controls responding to these risks.

Bega Valley Shire Council did not follow all aspects of its business continuity plan in responding to the 2019–20 bushfires.

Bega Valley Shire Council can do more to ensure its business continuity management approach is regularly reviewed and updated, and that staff are regularly trained in its implementation.

Snowy Valleys Council did not have a finalised approach to ensure business and service continuity until October 2020. Now in place, this approach identifies governance, assigns roles and responsibilities, and includes procedures to retain or resume services. That said, the Council has not adequately documented key elements of its business continuity management approach.

Snowy Valleys Council's strategic risk register identifies that natural disasters may impact its ability to deliver services, but the Council has not identified controls to respond to these risks.

During the 2019–20 bushfires, in the absence of a business continuity plan, Snowy Valleys Council relied on the local knowledge of its staff to manage service continuity in line with directions from the Local Emergency Operations Controller and the combat agency (the Rural Fire Service).

Both councils advised that, during the 2019–20 bushfires, services were maintained, sometimes with adaptation and sometimes with support from other councils, NSW Government and Australian Government agencies.

What we recommended

Bega Valley Shire Council should update and regularly review its business continuity plans, provide business continuity training, and improve its monitoring of risk controls and actions, including for natural disaster impacts.

Snowy Valleys Council should document and monitor all disruption-related risks and controls, regularly review and update its business continuity plans, and progress planned actions to increase staff awareness of business continuity plans.

Across both councils, we recommended that recordkeeping relating to service delivery during natural disasters should be adequate to inform post incident reviews and future updates to business continuity.

Natural disaster events, including bushfires and floods, have directly impacted some local councils in New South Wales over recent years. Given their important role in delivering essential services to their communities, it is important for local councils to effectively plan so that they can continue operations through natural disasters and other disruptions.

Business continuity plans are a widespread mechanism used by governments and private sector organisations to ensure they are prepared to respond effectively to disruptions. In New South Wales, business continuity plans are widely used by local councils to help ensure continuity of service delivery, safety and availability of staff, availability of information technology systems and other systems, financial management and governance. There are no current sector-wide requirements or policies for business continuity management issued by the Department of Planning and Environment (DPE)¹ for NSW councils. As such, councils can develop their own business continuity management frameworks.

Our 'Report on Local Government 2020' considered the financial and governance impacts from recent natural disaster events on local councils in New South Wales. It also considered sector-wide trends in business continuity planning, including how many councils enacted or updated their business continuity plans in 2019–20.

The report found that all councils were impacted by emergency events, and that some councils changed their governance, policies, systems, and processes to respond to the emergency events. Sixty-five per cent of councils updated their business continuity plan as a response to recent emergency events, and 43 per cent of councils updated their disaster recovery plan.

This audit follows on from the 'Report on Local Government 2020' with a detailed examination of the effectiveness of business and service continuity arrangements for natural disasters in two councils.

The selected councils for this audit were Bega Valley Shire Council and Snowy Valleys Council. They were selected because they had been heavily impacted by the 2019–20 bushfires and other natural disaster events, such as storms and floods between December 2018 to December 2020.

The objective of this performance audit was to assess the effectiveness of the councils' approaches to business and service continuity arrangements for natural disasters. In making this assessment, we considered whether the selected councils:

• had documented approaches for identifying, mitigating, and responding to disaster-related risks to business and service continuity
• effectively implemented strategies to prepare for identified disaster-related impacts
• responses during selected disasters were effective in managing business and service continuity.

Appendix one – Responses from councils and the Department of Planning and Environment 

Appendix two – Emergency management arrangements for local councils 

Appendix three – About the audit 

Appendix four – Performance auditing 

Copyright notice

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

Parliamentary reference - Report number #362 - released 17 February 2022.

This report analyses the results of our audits of the Planning, Industry and Environment cluster agencies for the year ended 30 June 2021.

Our preferred approach is to table the ‘Report on State Finances’ in Parliament before any other cluster report. This is because the 'Report on State Finances' focuses on the audit results and observations relating to the Total State Sector Accounts, in effect a consolidation of all government agencies. This year the 'Report on State Finances' has been delayed due to significant accounting issues being considered in the Total State Sector Accounts and which may impact the Treasury and Transport clusters.

As there are no outstanding matters relating to audits in the Planning, Industry and Environment cluster impacting the Total State Sector Accounts we have decided to break with normal practice and table this cluster report ahead of the ‘Report on State Finances’.

What the report is about

The results of the Planning, Industry and Environment cluster agencies' financial statements audits for the year ended 30 June 2021.

What we found

Unmodified audit opinions were issued for all completed 30 June 2021 financial statements audits of cluster agencies. Three audits are ongoing.

An 'Other Matter' paragraph was included in the Independent Planning Commission's (the IPC) audit opinion because the prior year comparative figures were not audited. Prior to 2020–21, the IPC was not required to prepare separate financial statements under the Public Finance and Audit Act 1983 (PF&A Act). The financial reporting provisions of the Government Sector Finance Act 2018 now require the IPC to prepare financial statements.

The number of identified misstatements increased from 51 in 2019–20 to 54 in 2020–21.

The 2010–11 to 2019–20 audits of the Water Administration Ministerial Corporation’s (the Corporation) financial statements are incomplete due to insufficient records and evidence to support the transactions of the Corporation, particularly for the earlier years. Management has commenced actions to improve the governance and financial management of the Corporation. These audits are currently in progress and the 2020–21 audit will commence shortly.

There are 609 State controlled Crown land managers (CLMs) across New South Wales that predominantly manage small parcels of Crown land.

Eight CLMs prepared and submitted 2019–20 financial statements by the revised deadline of 30 June 2021. A further 24 CLMs did not prepare financial statements in accordance with the PF&A Act. The remaining CLMs were not required to prepare 2019–20 financial statements as they met NSW Treasury's financial reporting exemption criteria.

The Department of Planning, Industry and Environment's (the department) preliminary assessment indicates that 60 CLMs are required to prepare financial statements in 2020–21. To date, no CLMs have prepared and submitted financial statements for audit in 2020–21.

There are also 120 common trusts that have never submitted financial statements for audit. Common trusts are responsible for the care, control and management of land that has been set aside for specific use in a certain locality, such as grazing, camping or bushwalking.

What the key issues were

The number of matters we reported to management increased from 135 in 2019–20 to 180 in 2020–21, of which 40 per cent were repeat findings.

Seven high-risk issues were identified in 2020–21:

• system control deficiencies at the department relating to user access to HR and payroll management systems, vendor master data management and journal processing, which require manual reviews to mitigate risks
• deficiencies related to the Centennial Park and Moore Park Trust's tree assets valuation methodology
• the Lord Howe Island Board did not regularly review and monitor privileged user access rights to key information systems
• the Natural Resources Access Regulator identified and adjusted three prior period errors retrospectively, which indicate deficiencies within the financial reporting processes
• deficiencies relating to the Parramatta Park Trust's tree assets valuation methodology
• lease arrangements have not been confirmed between the Planning Ministerial Corporation and Office of Sport regarding the Sydney International Regatta Centre
• the Wentworth Park Sporting Complex land manager (the land manager) has a $6.5 million loan with Greyhound Racing NSW (GRNSW). GRNSW requested the land manager to repay the loan. However, the land manager subsequently requested GRNSW to convert the loan to a grant. Should this request be denied, the land manager would not be able to continue as a going concern without financial support. This matter remains unresolved for many years.

There continues to be significant deficiencies in Crown land records. The department uses the Crown Land Information Database (CLID) to record key information relating to Crown land in New South Wales that are managed and controlled by the department and land managers (including councils and land managers controlled by the state). The CLID system was not designed to facilitate financial reporting and the department is required to conduct extensive adjustments and reconciliations to produce accurate information for the financial statements.

The department is implementing a new system to record Crown land (the CrownTracker project). The department advised that the project completion date will be confirmed by June 2022.

What we recommended

The department should ensure CLMs and common trusts meet their statutory reporting obligations.

Cluster agencies should prioritise and action recommendations to address internal control deficiencies, with a focus on addressing high-risk and repeat issues.

The department should prioritise action to ensure the Crown land database is complete and accurate. This will allow the department and CLMs to be better informed about the Crown land they control.

This report provides parliament and other users of the Planning, Industry and Environment cluster (the cluster) agencies’ financial statements with the results of our audits, our observations, analysis, conclusions and recommendations in the following areas:

• financial reporting
• audit observations.

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 Planning, Industry and Environment cluster (the cluster) for 2021.

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 statements audits of agencies in the Planning, Industry and Environment cluster.

Appendix one - Misstatements in financial statements submitted for audit

Appendix two – Early close procedures

Appendix three – Timeliness of financial reporting

Appendix four – 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.