Unqualified audit opinions were issued on the 2019–20 financial statements of central agencies and the Legislature.

The audit opinion on the Social and Affordable Housing NSW Fund's compliance with the payment requirements of the Social and Affordable Housing NSW Fund Act 2016 was qualified.

All agencies met statutory deadlines for submitting
financial statements. 

• Insurance and Care NSW
• New South Wales Government Telecommunications Authority
• Rental Bond Board
• Independent Commission Against Corruption
• NSW Treasury
• Crown Entity
• Department of Premier and Cabinet.

High risk findings include:

• Insurance and Care NSW (icare) allocates service costs to the Workers Compensation Nominal Insurer, and the other schemes it supports. The documentation supporting cost allocations does not demonstrate how these allocations reflect actual costs. There is a risk of the Workers Compensation Nominal Insurer being overcharged.
• New South Wales Government Telecommunications Authority's delay in capitalisation and valuation of material capital projects; and insufficient work performed to implement the new accounting standard AASB 16 ‘Leases’.
• NSW Treasury's four-year plan to transition RailCorp to a for-profit State Owned Corporation called Transport Asset Holding Entity of New South Wales (TAHE) by 1 July 2019, remains to be implemented. On 1 July 2020, RailCorp converted to TAHE. A large portion of the planned arrangements are still to be implemented. As at the time of the audit, the TAHE operating model, Statement of Corporate Intent (SCI) and other key plans and commercial agreements were not finalised. In the absence of commercial arrangements with the public rail operators, there is a lack of evidence to demonstrate TAHE’s ability to create a commercial return in the long term. This matter has been included as a high risk finding in our management letter as there may be financial reporting implications to the State if TAHE does not generate a commercial return for its shareholders in line with the original intent. NSW Treasury and TAHE should ensure the commercial arrangements, operating model and SCI are finalised in 2020–21.

Of the 122 moderate risk issues, 36 per cent were repeat issues. The most common repeat issue related to weaknesses in controls over information technology user access administration, which increases the risk of inappropriate access to systems and records.

GovConnect NSW provides transactional and information technology services to central agencies. It engages an independent service auditor (service auditor) from the private sector to perform annual assurance reviews of controls at service providers, namely Infosys, Unisys and the Department of Customer Service (DCS). The service auditor issued:

• unqualified opinions on information technology and business process controls at Infosys and Unisys, but there was an increase in control deficiencies identified in the user access controls at these service providers
• a qualified opinion on DCS's information technology (IT) security monitoring controls because security tools were not implemented and monitored for the entire financial year. Responsibility for IT security monitoring transitioned from Unisys to DCS in 2019–20. These control deficiencies can increase the risk of fraud and inappropriate use of sensitive data.

These may impact on the ability of agencies to detect and respond to a cyber incident.

Recommendation:

We recommend DCS work with GovConnect service providers to resolve the identified control deficiencies as a matter of priority.

The NSW Cyber Security Policy requires agencies to provide a maturity self-assessment against the Australian Cyber Security Centre (ACSC) Essential 8 to the head of the agency and Cyber Security NSW annually. Completed self-assessment returns highlighted limited progress in implementing the Essential 8.

Repeat recommendation:

Cyber Security NSW and NSW government agencies need to prioritise improvements to their cyber security resilience as a matter of urgency

Costs are incurred by icare as the 'service entity' of the statutory scheme it administers, and then subsequently recovered from the schemes through 'service fees'. In the absence of documentation supported by robust supporting analysis, there is a risk of the schemes being overcharged, and the allocation of costs being in breach of legislative requirements.

Recommendation:

icare should ensure its approach to allocating service fees to the Workers Compensation Nominal Insurer and the other schemes it manages, is transparent and reflects actual costs.

Section highlights

• Unqualified audit opinions were issued on the 2019–20 financial statements of central agencies and the Legislature. All agencies met the statutory deadlines for submitting their financial statements.
• The audit opinion on the Social and Affordable Housing NSW Fund's compliance with the payment requirements of the Social and Affordable Housing NSW Fund Act 2016 was qualified as a result of a payment made without a Treasurer's delegation.
• Agencies were impacted by emergency events during 2019–20. This included additional grants to fund specific deliverables.
• The implementation of new accounting standards was challenging for many agencies. The New South Wales Government Telecommunications Authority was not well-prepared to implement AASB 16 'Leases' and had not completely assessed contracts that contained leases. This resulted in understatements of leased assets and liabilities by $56 million which were subsequently corrected.
• NSW Treasury did not adequately implement the new revenue standard AASB 1058 ‘Income of Not-for-Profit Entities’ for the Crown Entity. This resulted in understatements of $274 million in opening equity and $254 million to current year revenue in the financial statements. These misstatements were due to incorrect revenue calculations performed by the Transport agencies. The Crown Entity relies on information from Transport agencies as they are responsible for carrying out the State’s contractual obligations for Commonwealth funded transport projects. The extent of misstatements could have been reduced with more robust quality review processes in place by Treasury and Transport.

Section highlights

• The 2019–20 audits identified nine high risk and 122 moderate risk issues across the agencies. Of the 122 moderate risk issues, 44 (36 per cent) were repeat issues. The most common repeat issue relates to weaknesses in controls over information technology user access administration.
• Service NSW delivers grants responding to emergency events on behalf of other NSW Public Sector agencies. Since the first grant program commenced in January 2020, Service NSW processed approximately $791 million to NSW citizens and businesses impacted by these emergency events for the financial year ended 30 June 2020.
• GovConnect NSW engaged an independent auditor (the service auditor) from the private sector to evaluate the internal controls of its service providers. DCS's information technology security monitoring controls were qualified by the service auditor because security tools were not implemented and monitored for the entire financial year. These may impact on the ability of agencies to detect and respond to a cyber incident.
• NSW Government agency self-assessment results show that the NSW Public Sector's cyber security resilience needs urgent attention.
• The Workers Compensation Nominal Insurer, NSW Self Insurance Corporation and the Lifetime Care and Support Authority of NSW all had negative net assets at 30 June 2020. The financial statements for these entities continued to be prepared on a going concern basis as their liabilities are not all due for settlement within the next 12 months.
• icare did not comply with the Government Information (Public Access) Act 2009 (GIPA) contract disclosure requirements in 2019–20, and has not complied for several years. A total of 417 contracts were identified by management as not having been published on the NSW Government’s eTendering website. The final upload of these past contracts occurred on 20 August 2020.
• Machinery of Government (MoG) changes impacted the governance and business processes of affected agencies. Our audits identified and reported areas for improvement in the consolidation of corporate functions following MoG changes at Infrastructure NSW and in the Customer Service cluster.

• establish an operating model in line with the original intent of a commercial return
• finalise commercial agreements with the public rail operators
• confirm forecast financial information to assess valuation of TAHE infrastructure
• finalise asset and safety management plans.

Resolution of the above matters are critical as they may significantly impact the financial reporting arrangements for TAHE for 2020–21, in particular, accounting policies adopted as well as measurement principles of its significant infrastructure asset base.

• agencies are fully aware of contractual and other obligations
• appropriate assessment of financial reporting implications
• ongoing assessments of accounting standards, in particular AASB 16 ‘Leases’, AASB 15 'Revenue from Contract with Customers', AASB 1058 'Income of Not-for-Profit Entities' and new accounting standard AASB 1059 'Service Concession Arrangements: Grantors' are accurate and complete.

Section highlights

• Total patronage and revenue for public transport decreased by approximately 18 per cent in 2019–20 due to COVID-19.
• Unqualified audit opinions were issued on all Transport agencies' financial statements.
• Transport cluster agencies continued to experience challenges with accounting of land and infrastructure assets.

Section highlights

• While there was a decrease in findings on internal controls across the Transport cluster, 43 per cent of all issues were repeat issues. Many repeat issues related to information technology controls around user access management.
• RailCorp transitioned to TAHE on 1 July 2020. TAHE's operating model and commercial arrangements with public rail operators has not been finalised despite government original plans to be operating from 1 July 2019. TAHE management should finalise its operating model and commercial agreements with public rail operators as they may significantly impact the financial reporting arrangements for TAHE for 2020–21.
• Completeness and accuracy of contracts registers remains an ongoing issue for the Transport cluster.

Agencies implemented three new accounting standards during the year.

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

Recommendation:

We recommend the Department and NESA:

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

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

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

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

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

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

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

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

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

Recommendation:

Cluster agencies should:

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

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

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

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

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

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

Recommendation:

The Department should:

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

Section highlights

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

Internal control deficiencies increased by 13 per cent compared to last year. This is predominately due to a seven per cent increase in new internal control deficiencies and 24 per cent increase in repeat internal control deficiencies. There were ten high risk findings compared to four last year.

The recent emergencies have consumed agency time and resources and may have contributed to the increase in internal control deficiencies, particularly repeat deficiencies.

Agencies should:

• prioritise addressing high-risk findings
• address repeat internal control deficiencies by re-setting action plans and timeframes and monitoring the implementation status of recommendations.

A number of findings remain common across multiple agencies over the last four years, including:

• out of date or missing policies to guide appropriate decisions
• poor record keeping and document retention
• incomplete or inaccurate centralised registers or gaps in these registers.

We found deficiencies in information security controls over key financial systems including:

• user access administration deficiencies relating to inadequate oversight of the granting, review and removal of user access at 53 per cent of agencies
• privileged users were not appropriately monitored at 43 per cent of agencies
• deficient password controls that did not align to the agency's own password policies at 25 per cent of agencies.

The deficiencies above increase the risk of non-compliance with the NSW Cyber Security Policy, which requires agencies to have processes in place to manage user access, including privileged user access to sensitive information or systems and remove that access once it is not required or employment is terminated.

The response to the recent emergencies and the COVID-19 pandemic has encompassed a wide range of activities, including policy setting, on-going service delivery, safety and availability of staff, availability of IT and other systems and financial management. Agencies were required to activate their business continuity plans in response, and with the continued impact of COVID-19 have not yet returned to a business-as-usual environment.

Our audits focused on the preparedness of agency business continuity and disaster recovery planning arrangements prior to the onset of the COVID-19 pandemic.

We identified deficiencies in agency business continuity and disaster recovery planning arrangements. Twenty-three per cent of agencies had not conducted a business impact analysis (BIA) to identify critical business functions and determine business continuity priorities. Agencies can also improve the content of their BIA. For example, ten per cent of agencies' BIAs did not include recovery time objectives and six per cent of agencies did not identify key IT systems that support critical business functions. Scenario testing improves the effectiveness with which a live crisis is handled, but 40 per cent of agencies had not conducted a business continuity scenario testing exercise in the period from 1 January 2019 to 31 December 2019. There were also opportunities to improve the effectiveness of scenario testing exercises by:

• involving key dependent or inter-dependent third parties who support or deliver critical business functions
• testing one or more high impact scenarios identified in their business continuity plan
• preparing a formalpost-exercise report documenting the outcome of their scenario testing.

Agencies have responded to the recent emergencies but addressing deficiencies will ensure agencies have adequate safeguards in their processes to again respond in the future, if required.

During 2020–21 we plan to conduct a performance audit on 'Business continuity and disaster recovery planning'. This audit will consider the effectiveness of agency business continuity planning arrangements to maintain business continuity through the recent emergencies and/or COVID-19 pandemic and return to a business-as-usual environment. We also plan to conduct a performance audit on whole-of-government 'Coordination of emergency responses'.

We found agencies' governance functions could have been better informed about responses to disruptive incidents that had activated a business continuity or disaster recovery response between 1 January 2019 to 31 December 2019. For instance:

in 89 per cent of instances where a business continuity response was activated, a post-incident review had been performed. In 82 per cent of these instances, the outcomes were reported to a relevant governance or executive management committee

in 95 per cent of instances where a disaster recovery response was activated, a post incident review had been performed. In 86 per cent of these instances, the outcomes were reported to a relevant governance committee or executive management committee.

Examples of recorded incidents included extensive air quality issues and power outages due to bushfires, system and network outages, and infected and hijacked servers.

Agencies should assess their response to the recent emergencies and the COVID-19 pandemic and update business continuity, disaster recovery and other business resilience frameworks to incorporate lessons learned. Agencies should report to those charged with governance on the results and planned actions.

Agency procurement policies did not capture the requirements of several key NSW Procurement Board Directions (the Directions), increasing the risk of non-compliance with the Directions. We noted: 

• 67 per cent of agencies did specify that procurement above $650,000 must be open to market unless exempt or procured through an existing Whole of Government Scheme or contract
• 36 per cent of agencies did specify that procurements above $500,000 payable in foreign currencies must be hedged
• 69 per cent of agencies' policies did specify that the agency head or cluster CFO must authorise the engagement of consultants where the engagement of the supplier does not comply with the standard commercial framework.

Recommendation: Agencies should review their procurement policies and guidelines to ensure they capture the key requirements of the NSW Government Procurement Policy Framework, including NSW Procurement Board Directions.

Eighty-eight per cent of agencies maintain a central contract register to record all details of contracts above $150,000, which is a requirement of GIPA legislation. Of the agencies that maintained registers, 13 per cent did not capture all contracts and eight per cent did not include all relevant contract details.

Sixteen per cent of agencies did not periodically review their contract register. Timely review increases compliance with GIPA legislation, and enhances the effectiveness with which procurement business units monitor contract end dates, contract extensions and commence new procurement.

Ninety-three per cent of agencies provide training to staff involved in procurement processes, and a further 77 per cent of agencies provide this training on an on-going basis. Of the seven per cent of agencies that had not provided training to staff, we noted gaps in aspects of their procurement activity, including:

• not conducting value for money assessments prior to renewing or extending the contract with their existing supplier
• not obtaining approval from a delegated authority to commence the procurement process
• procurement documentation not specifying certain key details such as the conditions for participation including any financial guarantees and dates for the delivery of goods or supply of services.

Training on procurement activities ensures there is effective management of procurement processes to support operational requirements, and compliance with procurement directions.

As at 30 June 2020, agencies within the scope of this report reported conducting 32,239 emergency procurements with a total contract value of $316,908,485. Emergency procurement activities included the purchase of COVID-19 cleaning and hygiene supplies.

The government, through NSW Procurement released the 'COVID-19 Emergency procurement procedure', which relaxed procurement requirements to allow agencies to make COVID-19 emergency procurements. Our review against the emergency procurement measures found most agencies complied with requirements. For example:

• 95 per cent of agencies documented an assessment of the need for the emergency procurement for the good and/or service
• 86 per cent of agencies obtained authorisation of the emergency procurement by the agency head or the nominated employee under Public Works and Procurement Regulation 2019
• 76 per cent of agencies reported the emergency procurement to the NSW Procurement Board.

Complying with the procedure helps to ensure government resources are being efficiently, effectively, economically and in accordance with the law.

Recommendation: Agency procurement frameworks should be reviewed and updated so they can respond effectively to emergency situations that may arise in the future. This includes:

• updating procurement policies and guidelines to define an emergency situation, specify who can approve emergency procurement and capture other key requirements
• using standard templates and documentation to prompt users to capture key requirements, such as needs analysis, supplier selection criteria, price assessment criteria, licence and insurance checks
• having processes for reporting on emergency procurements to those charged with governance and NSW Procurement.

We found that agencies have established financial and human resources delegations, but some had not revisited their delegation manuals following the legislative and machinery of government changes. For those agencies impacted by machinery of government changes we noted:

• 16 per cent of agencies had not updated their financial delegations to reflect the changes
• 16 per cent of agencies did not update their human resources delegations to reflect the changes.

Delegations manuals are not always complete; 16 per cent of agencies had no delegation for writing off bad debts and 26 per cent of agencies had no delegation for writing off capital assets.

Recommendation: Agencies should ensure their financial and human resources delegation manuals contain regular set review dates and are updated to reflect the Government Sector Finance Act 2018, machinery of government changes and their current organisational structure and roles and responsibilities.

Agencies did not understand or correctly apply the requirements of the Government Sector Finance Act 2018 (GSF Act), resulting in non-compliance with the Act. We found that 18 per cent of agencies spent deemed appropriations without obtaining 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 issue will be included in our Auditor-General's Reports to Parliament on Central Agencies, Education, Health and Stronger Communities, which will be tabled throughout December 2020.

Recommendation: Agencies should review financial and human resources delegations to ensure they capture all key functions of laws and regulations, and clearly specify the relevant power or function being conferred on the officer.

Recommendations were made last year to improve transparency over reporting on gifts and benefits and improve the visibility management and those charged with governance had over actions taken to address conflicts of interest that may arise. This year, we continue to note:

• 38 per cent of agencies have not updated their gifts and benefits register to include all the key fields required under the minimum standards set by the Public Service Commission
• 56 per cent of agencies have not provided training to staff and 63 per cent of agencies have not implemented an annual attestation process for senior management
• 97 per cent of agencies have not published their gifts and benefits register on their website and 41 per cent of agencies are not reporting on trends in the gifts and benefits register to those charged with governance.

While we acknowledge the significance of the recent emergencies, which have consumed agency time and resources, we note limited progress has been made implementing these recommendations. Further detail on the status of implementing all recommendations is in Appendix 2.

Recommendation: Agencies should re-visit the recommendations made in last year's report on internal controls and governance and action these recommendations.

Section highlights

We identified ten high risk findings, compared to four last year with two findings repeated from the previous year. There was an overall increase of 13 per cent in the number of internal control deficiencies compared to last year due to a seven per cent increase in new internal control deficiencies, and a 24 per cent increase in repeat internal control deficiencies. The recent emergencies have consumed agency time and resources and may have contributed to the increase in internal control deficiencies, particularly repeat deficiencies.

We identified a number of findings that remain common across multiple agencies over the last four years. Some of these findings related to areas that are fundamental to good internal control environments and effective organisational governance. Examples include:

• out of date or missing policies to guide appropriate decisions
• poor record keeping and document retention
• incomplete or inaccurate centralised registers, or gaps in these registers.

Policies, procedures and internal controls should be properly designed, be appropriate for the current organisational structure and its business activities, and work effectively.

Section highlights

Government agencies’ financial reporting is heavily reliant on information technology (IT). We continue to see a high number of deficiencies related to IT general controls, particularly those related to user access administration. These controls are key in adequately protecting IT systems from inappropriate access and misuse.

IT is also important to the delivery of agency services. These systems often provide the data to help monitor the efficiency and effectiveness of agency processes and services they deliver. Our financial audits do not review all agency IT systems. For example, IT systems used to support agency service delivery are generally outside the scope of our financial audit. However, agencies should also consider the relevance of our findings to these systems.

Agencies need to continue to focus on assessing the risks of inappropriate access and misuse and the implementation of controls to adequately protect their systems, focussing on the processes in place to grant, remove and monitor user access, particularly privileged user access.

Section highlights

We identified deficiencies in agency business continuity and disaster recovery planning arrangements and opportunities for agencies to enhance their business continuity management and disaster recovery planning arrangements. This will better prepare them to respond to a disruption to their critical functions, resulting from an emergency or other serious event. Twenty-three per cent of agencies had not conducted a business impact analysis (BIA) to identify critical business functions and determine business continuity priorities and 40 per cent of agencies had not conducted a business continuity scenario testing exercise in the period from 1 January 2019 to 31 December 2019. Scenario testing improves the effectiveness with which a live crisis is handled.

This section focusses on the preparedness of agency business continuity and disaster recovery planning arrangements prior to the onset of the COVID-19 pandemic. While agencies have responded to the recent emergencies, proactively addressing deficiencies will ensure agencies have adequate safeguards in their processes to again respond in the future, if required.

During 2020–21 we plan to conduct a performance audit on 'Business continuity and disaster recovery planning'. This audit will consider the effectiveness of agency business continuity planning arrangements to maintain business continuity through the recent emergencies and/or COVID-19 pandemic and return to a business-as-usual environment. We also plan to conduct a performance audit on whole-of-government 'Coordination of emergency responses'.

Section highlights

We found agencies have procurement policies in place to manage procurement activity, but the content of these policies was not sufficiently detailed to ensure compliance with NSW Procurement Board Directions (the Directions). The Directions aim to ensure procurement activity achieves value for money and meets the principles of probity and fairness.

Agencies have generally implemented controls over their procurement process. In relation to emergency procurement activity, agencies reported conducting 32,239 emergency procurements with a total contract value of $316,908,485 up to 30 June 2020. Our review of emergency procurement activity conducted during 2019–20 identified areas where some agencies did not fully comply with the 'COVID-19 Emergency procurement procedure'.

We also found not all agencies are maintaining complete and accurate contract registers. This not only increases the risk of non-compliance with GIPA legislation, but also limits the effectiveness of procurement business units to monitor contract end dates, contract extensions and commence new procurement in a timely manner. We noted instances where agencies renewed or extended contracts without going through a competitive tender process during the year.