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6 May 2022

Published

Transport 2021

Transport

Asset valuation

Compliance

Financial reporting

Information technology

Infrastructure

Internal controls and governance

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.

Fast facts

The Transport cluster plans and delivers infrastructure and integrated services across all modes of transport. This includes road, rail, bus, ferry, light rail, cycling and walking. There are 11 agencies in the cluster.

$128b road and maritime system infrastructure assets as at 30 June 2021
100% unqualified audit opinions were issued on agencies 30 June 2021 financial statements
26 monetary misstatements were reported in 2020–21
$24.9b rail systems infrastructure assets as at 30 June 2021
6 high-risk management letter findings were identified
37% of reported issues were repeat issues

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.

Section highlights

Unqualified audit opinions were issued on all Transport agencies' financial statements.
An 'Emphasis of Matter' paragraph was included in the Transport Asset Holding Entity of New South Wales' (TAHE) Independent Auditor's Report to draw attention to significant uncertainty associated with the judgements, estimates and assumptions supporting the valuation of TAHE’s property, plant and equipment (PPE) and intangible assets.
In 2020–21, the former RailCorp transitioned to TAHE, a for-profit state-owned corporation. When TAHE became a for-profit entity, it was required to change its valuation approach. The value of a for-profit entity's assets cannot exceed the cash flows they might realise either through their sale or continued use. This change in the basis of valuation resulted in a decrease of $20.3 billion in the fair value of the assets. The decrease in fair value was because the cash flows, which support measurement under the income approach, were insufficient to support the previous valuation based on the current replacement cost of those assets.
TAHE also corrected a misstatement of $1.2 billion relating to the valuation of its assets after significant deliberation on key judgements and assumptions, with TAHE adopting higher risk assumptions in its valuation when compared to the relevant market benchmarks.
On 18 December 2021, a Heads of Agreement (HoA) was signed between TAHE, Transport for NSW, Sydney Trains and NSW Trains. This HoA reflected TAHE's intention to negotiate higher access and licence fees in order to meet the shareholding ministers' revised expectation of a higher rate of return. This matter resolved the treatment of a significant accounting issue in the State’s consolidated (whole-of-government) financial statements. Refer to the Report on State Finances tabled on 9 February 2022. The expectation of an additional $5.2 billion in fees added to the valuation of TAHE's PPE and intangibles, with a final value of $17.15 billion.
The implementation of AASB 1059 ‘Service Concession Arrangements: Grantors’ resulted in a net increase in assets of $23.5 billion across the cluster. AASB 1059 had a significant impact on Transport for NSW, Sydney Metro, Sydney Ferries and TAHE's 2020–21 financial statements.
TAHE corrected a misstatement of $97.2 million relating to the application of AASB 1059 'Service Concession Arrangements: Grantors' for the Airport Link Company Contract.

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.

Section highlights

The number of findings reported to management increased from 56 in 2019–20 to 73 in 2020–21.
Thirty-seven per cent were repeat findings. Many repeat issues related to information technology controls around user access management and payroll processes. These included deficiencies in the monitoring of privileged user access to key financial systems, review of user access to key financial systems and segregation of duties between preparer and reviewer for new employee hires.
Six new high-risk issues were identified in 2020–21, an increase of three compared to last year.
One high-risk issue related to conflicts of interests not being declared by all officers involved in the land acquisition process at Transport for NSW.
Five high-risk issues arose from the audit of TAHE, with respect to:
- control over TAHE assets and operations
- asset valuations
- access price build up
- detailed business modelling to support returns
- conflict of interest management.
Based on the access and licence agreements signed at 30 June 2021 between TAHE, Sydney Trains and NSW Trains, our review of the expected returns calculated by NSW Treasury did not support the assumption that there was a reasonable expectation that a sufficient rate of return could be achieved from the NSW Government's investment in TAHE.
On 14 December 2021 the shareholding ministers' increased their expectations as to TAHE's target average return from 1.5 per cent to the expected long-term inflation rate of 2.5 per cent.
On 18 December 2021 the revised shareholder expectations were confirmed in a signed Heads of Agreement. The Heads of Agreement will increase access fees paid by rail operators to TAHE by $5.2 billion.
TAHE's access and licence agreements specified fees that were well short of the IPART regulated maximum (ceiling price).
The finalisation of the access and licence agreements with Sydney Trains and NSW Trains resulted in a significant write-down of TAHE's asset value by $20.3 billion. The revaluation loss will need to be recovered as part of the shareholders’ rate of return of 2.5 per cent in order to sustain the whole-of-government accounting treatment of cash contributions recorded as an equity contribution and not a grant expense.
There was a significant adjustment to TAHE’s valuation between the financial statements originally submitted for the audit and the final, signed financial statements due to differences in risk assumptions resulting in a correction of a $1.2 billion misstatement.

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.

Risk rating	Issue
Information technology
Moderate: 7 new, 4 repeat**	The financial audits identified opportunities for agencies to improve information technology processes and controls that support the integrity of financial data used to prepare agencies' financial statements. Of particular concern are issues associated with: monitoring of privileged user access user access management password configuration management.
Low: 4 new, 1 repeat***
Internal control deficiencies or improvements
High: 1 new*	The financial audits identified internal control deficiencies across key business processes, including: declarations of conflicts of interest over land acquisitions (see further details below) management of contracts and agreement register accounting for assets management of payroll and supplier masterfiles payroll processes.
Moderate: 15 new, 8 repeat**
Low: 2 new, 5 repeat***
Financial reporting
High: 3 new*	The financial audits identified opportunities for agencies to strengthen financial reporting, including: asset valuations (see further details below) detailed business modelling to support returns (see further details below) access price build-up (see further details below) timely capitalisation of completed assets.
Moderate: 3 new, 1 repeat**
Low: 2 new***
Governance and oversight
High: 1 new*	The financial audits identified opportunities for agencies to improve governance and oversight processes, including: control over TAHE assets and operations governance over Cyber Security.
Moderate: 2 new**
Non-compliance with key legislation and/or central agency policies
High: 1 new*	The financial audits identified the need for agencies to improve its compliance with key legislation and central agency policies, including: conflict of interest (COI) management outdated policies and procedures incomplete probation procedures.
Moderate: 4 new, 1 repeat**
Low: 1 new, 7 repeat***

* High-risk from the consequence and/or likelihood of an event that has had, or may have a negative impact on the entity.
** Moderate risk from the consequence and/or likelihood of an event that has had, or may have a negative impact on the entity.
*** Low risk from the consequence and/or likelihood of an event that has had, or may have a negative impact on the entity.
Note: Management letter findings are based either on final management letters issued to agencies.

2020–21 audits identified six high-risk findings

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

Agency	Description
2020–21 findings
Transport for NSW (new finding)	Declaration of conflicts of interest in the land acquisition process In 2021, we conducted a performance audit over the Acquisition of 4–6 Grand Avenue, Camellia which examined: whether Transport for NSW conducted an effective process to purchase 4–6 Grand Avenue, Camellia whether Transport for NSW has effective processes and procedures to identify and acquire property required to deliver the NSW Government’s major infrastructure projects. The report made several recommendations over Transport for NSW’s internal policies and procedures to guide the land acquisition process. As part of the financial audit, we obtained an understanding of key controls and processes relating to the acquisition of land, relevant to the audit of the financial statements. We found that conflicts of interests were not always declared by all officers involved in the land acquisition process. Furthermore, processes for declaring conflicts of interests are not consistently applied across cluster agencies. Out of a sample of 19 land acquisitions tested, we identified: 14 instances where there was no evidence of declarations of conflicts of interests made by the team members involved in the acquisition process 2 instances where conflicts of interest declarations were completed by key members of the acquisition team only at a project level 1 instance where conflicts of interest declarations were only completed by the property negotiator and the valuer, but not the other members of the acquisition team. Management advised that the land acquisition processes, at the time of the land acquisitions, did not require formal conflicts of interests to be declared as they believe that as per Transport for NSW code of conduct, declaration is only required where the staff member considers that a potential or perceived Conflict of Interest exists. However, Transport for NSW's Procurement Policy requires the documentation of formal declarations from all staff involved in procurement activities to formally disclose any conflicts of interest or state that they do not have a conflict of interest. This matter has been included as a high-risk finding in the management letter as absence of rigorous and consistent management of conflicts of interests, and non-compliance with established policies increases the risk that Transport for NSW may be exposed to reputational damage or financial losses in relation to land acquisitions. Furthermore, this may result in lack of probity or value-for money considerations during the land acquisition process. Further details are elaborated below under 'Land acquisitions'.
Transport Asset Holding Entity of New South Wales (new finding)	Control over TAHE assets and operations The State-Owned Corporations Act 1989 maintains that all decisions relating to the operation of a statutory state-owned corporation (SOC) are to be made by or under the authority of the board. However, under the Transport Administration Act 1988 (TAA), the functions of TAHE may only be exercised under one or more operating licences issued by the portfolio minister. The current Operating Licence confers terms and conditions for TAHE to carry out its functions, and imposes constraints on TAHE, including (but not limited to): railway operations not permitted transport services not permitted TAHE must not carry out maintenance of its assets. Such operating licences are short term in nature, and the TAA allows the transport minister (portfolio minister) to grant one or more operating licences to TAHE and may amend, substitute, or impose, amend or revoke conditions of the operating licence. For the current year, the legal form of the arrangements established in its first year of operation imply TAHE has control over the assets based on the Implementation Deed and the agreements signed with the public operators. However, risks remain as TAHE is in its early stages, and the actual substance of operations will need to be observed and considered. Given the restrictions that can be placed on the entity through the Operating Licence, and the ability to make further changes to the Operating Licence and Statement of Expectations set by the portfolio minister, there is a risk there could be limitations placed on the Board of Directors to operate with sufficient independence in its decision-making with respect to the operations of TAHE. Over time, this may further impact the degree of control required by TAHE to satisfy the recognition criteria over its assets. It may also fundamentally change the presentation of TAHE’s financial statements. Future limitations to the degree of control TAHE, and its Board, can exercise over its functions may impact the degree of control TAHE has over its assets going forward. As part of the 2021–22 audit, we will monitor and assess whether, in substance, these assets continue to be controlled by TAHE and whether, in substance, TAHE can operate as an independent SOC. We require management continue to demonstrate that TAHE continues to maintain control over its assets and has the ability to operate as an independent SOC. Further details are described below under 'Transport Asset Holding Entity'.
Transport Asset Holding Entity of New South Wales (new finding)	Asset valuation The final updated valuation was based on cash flows that were in a signed Heads of Agreement, which stated that it set out the proposed indicative future access and licence fees which will form the basis of the negotiations between TAHE, Transport for NSW, Sydney Trains and NSW Trains, who will work together to review access fees and licence fees payable under the agreements and to make all necessary changes to the Operating Agreements by 1 July 2022. This adds uncertainty in the cash flows. It is crucial that TAHE formalises these updated fees in legally binding signed access and licence agreements with the relevant parties as soon as possible. Refer below for further details on the Heads of Agreement.
Transport Asset Holding Entity of New South Wales (new finding)	Conflict of interest (COI) management For procurement transactions through direct negotiation with single quotes, there was no evidence of COI declarations obtained from the consultants and contractors regarding involvement in other engagements. Contractors and consultants are required to declare actual COI. However, there was no requirement to confirm nil conflict of interest. In addition, there is a risk that perceived COI may not be adequately assessed or managed. TAHE is expected to operate as an independent SOC and would need to ensure any perceived or actual conflict of interest is adequately addressed. Management should implement a process to: ensure conflicts of interest declarations are completed when engaging all consultants and contractors (including involvement with other engagements and confirmation of nil conflicts of interests) ensure probity is undertaken to identify any actual or perceived conflicts of interest. The declarations should consider individuals and relationships that may create, or may be perceived to create, conflicts of interest.
Transport Asset Holding Entity of New South Wales (new finding)	Detailed business modelling to support returns On 18 December 2021, Transport for NSW, TAHE and the operators, Sydney Trains and NSW Trains entered into a Heads of Agreement (HoA). This HoA forms the basis of negotiations to revise the pricing within the existing 10-year contracts and deliver upon the shareholders' expectation of a return of 2.5 per cent per annum of contributed equity, including recovering the revaluation loss incurred in 2020–21. TAHE needs to revise its business plan and include detailed business modelling that supports the shareholding ministers' revised expectations of return (2.5 per cent return on the State’s equity injections and recovery of the write-down of assets over the average useful life of those assets) and align the business plan and Statement of Corporate Intent. This requires more detailed projections, estimates and plans that support how TAHE expects to recover the asset write-down and expected returns to government. The current modelling for ten years needs to be enhanced with modelling over the expected recovery period of approximately 33 years.
Transport Asset Holding Entity of New South Wales (new finding)	Access price build-up Management explained that in determining access and licence fees for the agreements with Sydney Trains and NSW Trains, assets prior to the commencement of equity injections in 2015–16 were excluded from the calculations. Management explained the premise being that these assets were previously funded by government through capital grants. The replacement and refurbishment of these assets is expected to be through government funded maintenance performed through the public rail operators and/or the equity injections from NSW Treasury rather than through access and licence fees.

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.

17 December 2021

Published

Planning, Industry and Environment 2021

Environment

Industry

Local Government

Planning

Asset valuation

Financial reporting

Information technology

Internal controls and governance

Risk

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.

Fast facts

The Planning, Industry and Environment cluster aims to make the lives of people in New South Wales better by developing well-connected communities, preserving the environment, supporting industries and contributing to a strong economy.

There are 54 agencies, 609 State controlled Crown land managers that predominantly manage small parcels of Crown land and 120 common trusts in the cluster.

42% of the area of NSW is Crown land
$33.2b water and electricity infrastructure as at 30 June 2021
100% unqualified audit opinions were issued for all completed 30 June 2021 financial statements audits
7 high-risk management letter findings were identified
54 monetary misstatements were reported in 2020–21
40% of reported issues were repeat issues

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.

Section highlights

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. From 2020–21, the IPC is required to prepare financial statements under the Government Sector Finance Act 2018.
The 2010–11 to 2019–20 audits of the Water Administration Ministerial Corporation’s (the Corporation) financial statements were incomplete due to insufficient records and evidence to support the transactions of the Corporation, particularly for the earlier years. These audits are currently underway, and the 2020–21 audit will commence shortly.
The Department of Planning, Industry and Environment's (the department) preliminary assessment indicates that 60 State controlled Crown land managers (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. All 120 common trusts have never submitted their financial statements for audit. The department needs to do more to ensure that the CLMs and common trusts meet their statutory reporting obligations.
Nine agencies that were required to perform early close procedures did not complete a total of 20 mandatory procedures. The most common incomplete early close procedures include the revaluation of property, plant and equipment, documenting all significant management judgments and assumptions, and the implementation of new and updated accounting standards.

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.

Section highlights

The number of findings reported to management has increased from 135 in 2019–20 to 180 in 2020–21, and 40 per cent were repeat issues.
Seven high-risk issues were identified in 2020–21, and three high-risk findings were repeat issues.
There continues to be significant deficiencies in Crown land records. The department should prioritise action to ensure the Crown land database is complete and accurate.

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

13 December 2021

Published

Regional NSW 2021

Environment

Industry

Asset valuation

Compliance

Financial reporting

Infrastructure

Internal controls and governance

Management and administration

Service delivery

This report analyses the results of our audits of the Regional NSW cluster agencies for the year ended 30 June 2021.

As there are no outstanding matters relating to audits in the Regional NSW 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 Regional NSW cluster (the cluster) agencies’ financial statement audits for the year ended 30 June 2021.

What we found

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

The number of misstatements identified in the financial statements of cluster agencies decreased from 27 in 2019–20 to seven in 2020–21.

The Department corrected an understatement of $82.2 million in prepaid income related to the Bushfire Clean-up Program.

What the key issues were

Local Land Services (LLS) undertook a comprehensive revaluation of asset improvements on land reserves used for moving stock (travelling stock reserves).

The revaluation process identified that improvements on land reserves, with a value of $93.0 million, had not been previously recognised in the financial statements. LLS corrected this error by restating the 2019–20 comparative balances in its 2020–21 financial statements.

The Forestry Corporation of NSW revalued its biological assets that comprise approximately 225,000 hectares of softwood plantations and 34,000 hectares of hardwood forests. The current year valuation resulted in $71.4 million decrement in the total biological assets from $824.9 million in 2019–20 to $753.5 million in 2020–21.

The number of matters reported to management decreased from 36 in 2019–20 to 19 in 2020–21. Twelve moderate risk issues were identified and 47 per cent of reported issues were repeat issues.

What we recommended

Cluster agencies should prioritise and action recommendations to address internal control deficiencies.

Fast facts

The Regional NSW cluster plans and delivers regional programs and infrastructure to respond to regional issues, creating and preserving regional jobs, driving regional economy, growing existing and supporting emerging industries. There are 31 agencies in the cluster.

$2.3b of regional land and buildings as at 30 June 2021.
100% unqualified audit opinions were issued for all completed 30 June 2021 financial statements audits.
7 monetary misstatements were reported in 2020–21.
$603m of grants and subsidies administered to the regional community in 2020–21.
12 moderate risk management letter findings were identified and reported to management.
47% of reported issues were repeat issues.

This report provides Parliament and other users of the Regional NSW 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 Regional NSW cluster for 2021.

Section highlights

Unqualified audit opinions were issued for all completed 30 June 2021 financial statements audits of cluster agencies. Four audits are ongoing.
The number of monetary misstatements identified during the audit decreased from 27 in 2019–20 to seven in 2020–21.
Three cluster agencies could improve their early close process by completing all required procedures.
Local Land Services disclosed a prior period error relating to the completeness of asset improvements on travelling stock reserves.

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 Regional NSW cluster.

Section highlights

The number of findings reported to management decreased from 36 in 2019–20 to 19 in 2020–21, and 47 per cent were repeat findings.
The 2020–21 audits identified 12 moderate risk and seven low risk issues across the cluster.
Four moderate risk issues and five low risk issues were repeat findings from
2019–20.

Appendix one - Misstatements in financial statements submitted for audit

Appendix two - Early close procedures

Appendix three - Financial data

Copyright notice

18 May 2021

Published

Acquisition of 4–6 Grand Avenue, Camellia

Transport

Asset valuation

Compliance

Fraud

Infrastructure

Internal controls and governance

Management and administration

Procurement

Risk

The Auditor-General for New South Wales, Margaret Crawford, has today released a report on Transport for NSW’s (TfNSW) acquisition of 4–6 Grand Avenue in Camellia.

This audit, which was requested on 17 November 2020 by the Hon. Andrew Constance MP, the Minister for Transport and Roads, examined:

whether TfNSW conducted an effective process to purchase 4–6 Grand Avenue, Camellia
whether TfNSW has effective processes and procedures to identify and acquire property required to deliver the NSW Government’s major infrastructure projects.

The audit found that TfNSW conducted an ineffective process when it purchased 4–6 Grand Avenue, Camellia. The audit also found that TfNSW’s internal policies and procedures to guide the transaction were, and continue to be, insufficient.

The Auditor-General has made seven recommendations to address the issues identified in the report.

On 17 November 2020, the Hon. Andrew Constance MP, the Minister for Transport and Roads, requested this audit under section 27B(3)(c) of the Public Finance and Audit Act 1983.

On 15 June 2016, Transport for New South Wales (TfNSW) acquired 6.3 hectares of land at 4–6 Grand Avenue, Camellia, by agreement from Grand 4 Investments Pty Ltd. Grand 4 Investments was a business entity established by the owners of Billbergia Pty Ltd, a property development and investment company.

TfNSW paid Grand 4 Investments $53.5 million and assumed liability for addressing environmental issues and contamination associated with the site. This took place seven months after the vendor acquired the land as part of a competitive Expression of Interest process, in which TfNSW also participated, for $38.15 million.

TfNSW is the NSW Government agency responsible for most major transport infrastructure projects in New South Wales. TfNSW acquired the Camellia site for use as a stabling and maintenance depot to support the Parramatta Light Rail (PLR) project.

Consistent with the minister’s request, this audit assessed:

whether TfNSW conducted an effective process to purchase 4–6 Grand Avenue, Camellia
whether TfNSW has effective processes and procedures to identify and acquire property required to deliver the NSW Government’s major infrastructure projects.

In considering the effectiveness of the processes for this purchase, the audit considered:

the requirements of the Land Acquisition (Just Terms Compensation) Act 1991 (the Act)
the application of sound processes to manage risk to the NSW Government and to achieve value for money
the application of disciplines associated with complex procurement, such as probity, in a NSW Government context.

The acquisition of the 4–6 Grand Avenue site in Camellia was consistent with a 2014 feasibility study for the PLR, but occurred before the completion of detailed project planning or an acquisition strategy.

TfNSW made two attempts to acquire the 4–6 Grand Avenue site in Camellia, and was successful on the second attempt. TfNSW recognised the risks associated with early acquisition and had high-level strategies in place should the site not be required.

The specific site had been identified in a feasibility study for the PLR commissioned by TfNSW in 2014 as one of several options in Camellia for a stabling and maintenance depot. However, TfNSW had not done any substantive analysis of the various options to identify a preferred location before the two opportunities to acquire 4–6 Grand Avenue were brought to TfNSW’s attention by the landowners (or their agents). On both occasions, TfNSW chose to actively pursue acquisition in advance of any such analysis.

The acquisition was also not informed by a Property Acquisition Strategy, which TfNSW policy recommends in order to guide the process and manage acquisition specific risks.

In 2015, TfNSW identified that it would require a stabling and maintenance depot in the Camellia area for the Parramatta Light Rail

In 2014, TfNSW commissioned an external engineering consultancy to undertake a feasibility design study for the Parramatta Light Rail - the Parramatta Transport Corridor Strategy Feasibility Design study (herein referred to as ‘the feasibility study’). In early 2015, TfNSW received the feasibility study, which was one of several key sources that informed the development of business cases for the PLR.

The feasibility study recommended that TfNSW should consolidate the maintenance and cleaning operations with overnight stabling facilities on one site. The study noted that the optimal location for any such site would be in close proximity to the proposed network, and noted that the site must have access to road connections to accommodate access for cars and trucks.

The study found that a centrally located stabling and maintenance facility would be required for all routes serving the Parramatta CBD, and that the Camellia industrial area was a preferred location for such a facility. The study noted that the Camellia area was contaminated.

The feasibility study notes that its conclusions were based on assumptions about the light rail system adopted and decisions made by the future operator of the system, who had not yet been selected or appointed.

TfNSW's decision to progress a potential acquisition in 2015 considered the risk that the site may not be required

TfNSW's FIC was responsible for making decisions on funding allocations at a whole of program level within TfNSW. FIC was also responsible for approving ‘high-risk/high-value’ variations to program budgets. Members of the FIC included:

Secretary of Transport for NSW
Deputy Secretary, Infrastructure and Services
Deputy Secretary, Freight, Strategy and Planning
Deputy Secretary, Customer Services
Deputy Secretary Finance and Investment
Deputy Secretary People and Corporate Services.

An April 2015 submission, from the then Deputy Director-General to the agency’s FIC, sought authorisation and funding approval to participate in an Expression of Interest sale process. It noted the risk that the project may not go ahead. The submission advised that:

By acquiring a strategic site now, it reduces the risk of having to pay an improved value or a value that may be subject to rapidly improving land values due to changes in land use and rezoning.

The property can be acquired for the project, held strategically and income generated by leasing the site as hardstand ¹ space until the project requires the land for the Parramatta Light Rail project.

If the project does not proceed in the medium to longer term, the property can be sold at a premium to what has been paid today as property fundamentals improve.

This submission acknowledged the risks associated with environmental contamination and proposed that these risks would be managed by negotiating a contract where the remediation and associated expenses would be at the landowner’s cost.

TfNSW assessed the 4–6 Grand Avenue site as one of several sites in Camellia that was a feasible location for a stabling and maintenance facility

The Departmental feasibility study assessed six potential sites for a stabling and maintenance facility, including 4–6 Grand Avenue, noting strengths and weaknesses of each site. A different site on Grand Avenue was assessed as the ‘base case’ option (1 Grand Avenue). The study’s comments on the 4–6 Grand Avenue site included the following:

With an area of approximately 63,000m², this site has sufficient space for a depot with the required stabling yard and maintenance facilities. The location allows for good road access and LRT [light rail transit] access would be from Grand Avenue, which may require a road crossing or signalised intersection. The site has been used for general industrial uses; however the land has been cleared and is currently undergoing remediation ². The site is not affected by flooding based on one in 100-year flood data.

In early 2015, once the opportunity to acquire 4–6 Grand Avenue emerged, TfNSW commissioned a specific feasibility study of the 4–6 Grand Avenue site. The feasibility studies clearly documented the existence of environmental contamination. In April 2015, the report concluded:

Given the limitations of this report and within the parameters that have been set it is concluded that from a spatial and geographic perspective the site at 6 Grand Avenue would be suitable as a stabling and maintenance depot for the Parramatta light rail project. There are few engineering and environmental constraints that would affect the feasibility level analysis of this site and all issues identified, within this desk study, are considered to be resolvable. However this being said there is a significant amount of work necessary to reach the final layout and definition of the stabling and maintenance depot. There are numerous items which require further consideration and conformation; planning approvals could impose restrictions on building heights, noise mitigation measures, light and visual impact requirements all of which can have significant impacts on the spatial requirements of any stabling and maintenance depot.

The acquisition of 4–6 Grand Avenue was not informed by a Property Acquisition Strategy

For major projects, TfNSW typically requires the project team to complete a Property Acquisition Strategy, which is intended to guide both process as well as specific acquisition issues expected to be faced during the project. The Property Acquisition Strategy is not a mandated document but is a recommended tool to support property acquisition as part of major projects.

TfNSW did not have a Property Acquisition Strategy in place to guide the 2015 Expression of Interest process. On 6 November 2015, the then Project Director for the PLR project emailed the property team, noting a need to develop a Property Acquisition Strategy to close off the scoping design and preliminary business case.

In January 2016, TfNSW developed a draft Property Acquisition Strategy for the Parramatta Light Rail Project, although it was silent on the potential sites for the stabling and maintenance facility.

TfNSW focussed on 4–6 Grand Avenue because it was available and aligned to TfNSW's strategic interests

In early 2015, officials commenced monitoring the market for industrial real estate in the Camellia area and surrounds for possible sites for a stabling and maintenance facility.

In March 2015, then owner of the site, Akzo Nobel Pty Limited released the 4–6 Grand Avenue site through an Expression of Interest process managed by CBRE.

TfNSW’s then Deputy Director-General, Planning, sought approval from FIC to lodge an Expression of Interest up to $30.0 million. Approval was sought on the basis that it would ‘provide certainty for the Parramatta Light Rail project by allowing for a depot site in a suitable location and potentially avoid higher costs or longer timeframes associated with compulsory acquisition following completion of the project’s business case’. FIC approved the request at its meeting on 9 April 2015.

At this time, TfNSW had not conducted any analysis of financial or operational benefits and costs of the potential sites identified in earlier feasibility studies. TfNSW staff advised us that the decision to participate in the Expression of Interest process for 4–6 Grand Avenue was because it was available. There is no documentation substantiating this statement, which TfNSW staff provided verbally as part of this audit.

In November 2015, TfNSW was advised that it was unsuccessful in the Expression of Interest process and that Grand 4 Investments (a related entity of Billbergia) had purchased 4–6 Grand Avenue. TfNSW did not conduct any further analysis of alternative potential sites in Camellia between this date and commencing discussions with Grand 4 Investments in April 2016. In that time there had been some movement on other properties that were included in the feasibility study, including 37–39a Grand Avenue being under offer in September 2015.

In March 2016, TfNSW approached CBRE to organise a meeting with Grand 4 Investments. On 1 April 2016, TfNSW met with Grand 4 Investments.

TfNSW advises that a perceived benefit of the 4–6 Grand Avenue site was that it was not subject to other uses or leaseholds that would increase the cost of compulsory acquisition. Officers involved in the acquisition advised that other nominated sites in the feasibility study were subject to other uses or leaseholds.

¹ A hardstand space is a large, paved area to store cars, heavy vehicles and machinery.
² Officers familiar with the acquisition could not confirm the nature of remediation being undertaken, but noted that the previous landowner had cleared buildings from the site, which may have been considered part of remediation.

TfNSW's independent valuation, which it commissioned and received after the acquisition, specifically excluded consideration of environmental contamination risk. As a result, TfNSW is exposed to the risk that the acquisition was not fully compliant with the Land Acquisition (Just Terms Compensation) Act 1991 (the Act) because it did not use an accurate estimate of market value during negotiations. That said, the acquisition of 4–6 Grand Avenue by agreement was consistent with preferred processes described in the Act.

TfNSW acquired the site from the landowner by agreement, and this is consistent with provisions in the Act. Obtaining approval for compulsory acquisition should negotiations for agreement break down is also consistent with the Act. That said, TfNSW did not at any time assess whether a compulsory acquisition could have resulted in acquisition at a lower cost than what was negotiated by agreement.

Despite the high risks associated with the acquisition, TfNSW did not commission a formal valuation in time to inform the negotiation and purchase. Instead, TfNSW relied on internal advice to estimate market value, but did not obtain a formal valuation from those advisors. For high-risk transactions, the greater expertise and arm's-length independence of an external specialist valuer should be preferred over an agency's own staff.

On 15 June 2016, the settlement date for the acquisition, TfNSW commissioned a formal independent valuation of the site. On 23 November 2016, TfNSW received the final formal valuation report. By not obtaining a formal independent valuation of the property in advance of acquisition to inform the acquisition value, TfNSW exposed itself to non-compliance with the Act by not establishing the market value as the basis for the acquisition price. TfNSW also breached its own internal policies.

TfNSW instructed the valuer to conduct its valuation within the following parameters:

Market valuation on an ‘as is’ basis – market value based on the methodology described in the Act. This approach valued the site at $25.0 million.
Market valuation on a speculative development basis – market value based on the financial value of the vendor's intended use of the site which, in this case, involved leasing the site for industrial use. This approach valued the site at $52.0 million, and TfNSW advised us this valuation supported the purchase price.
Disregard the impact of environmental contamination – TfNSW specifically instructed the independent valuer to disregard any known (or unknown) site contamination. As TfNSW knew of the significant environmental contamination affecting the site, this parameter resulted in a valuation that overstated the value of the site as it did not consider the cost of environmental remediation. The valuer applied this assumption for both market valuation approaches.

Additionally, as the independent valuer completed the valuation after the purchase was finalised, there is a risk that the valuation may have been influenced by the known purchase price.

TfNSW's failure to acquire a formal valuation and an assessment of the financial impact of environmental remediation before it purchased 4–6 Grand Avenue represents ineffective administration and governance.

TfNSW acquired the site at a time when there was demand and increasing prices for industrial property in the area. However, TfNSW did not effectively assess and manage the risks associated with the acquisition, and gaps in process led to increased risk. Briefings to decision-makers did not contain important information, and we found no evidence that gaps in advice were queried or explored by decision-makers.

TfNSW did not have plans or advice in place to assist in managing risk, such as:

a property acquisition plan
a comprehensive and up-to-date risk management plan
a negotiation strategy, or any authorisation limit or minimal acceptable position
an independent professional evaluation
external expert advice (with the exception of legal advice relating to the contract of sale).

TfNSW was aware of contamination issues affecting the land and had access to considerable information about the environmental conditions, such as site environmental audit reports and information on the NSW Environment Protection Authority's contaminated land register. However, TfNSW had not analysed specific technical information about the contamination and therefore was not aware of the risk implications and cost for remediation. Despite this, TfNSW changed its position from not accepting the risks and costs of contamination, to acquiring the site unconditionally. The basis for this decision is unclear and undocumented.

Briefing to senior leaders on the acquisition was silent on a number of important matters that would have been important for approvers to consider, including:

an explanation of the 40 per cent increase in purchase price between November 2015 and May 2016, and a 165 per cent increase from TfNSW’s offer in April 2015
the contamination risks associated with the site and an evidence-based estimate of potential costs to remediate the site
advice that an independent valuation had not been obtained, inconsistent with TfNSW policy.

Consideration of the acquisition by FIC was based on a summary business paper and was managed out-of-session, thereby removing the ability for comprehensive consideration of the acquisition proposal and its risks.

The probity management controls and assurances in place for the acquisition of the 4–6 Grand Avenue site were insufficient. These insufficiencies were exacerbated by the probity risk profile of the transaction.

The 4–6 Grand Avenue acquisition was a high-risk/high-value transaction, undertaken in a volatile property market in a short timeframe under pressure from Grand 4 Investments. TfNSW was engaging in a direct negotiation in advance of detailed planning for the acquisition, or the PLR as a whole. These circumstances contribute to heightened probity risk.

TfNSW did not establish a probity plan and sought no probity support throughout the acquisition. Also, with one exception, the staff involved in the acquisition did not complete conflict of interest declarations.

TfNSW was aware of the potential for probity or integrity issues with the transaction when it commissioned an internal audit in connection with the transaction in 2019. Internal discussions considered whether a misconduct investigation may be more appropriate, however no such investigation was undertaken.

TfNSW's insufficient probity practices, in addition to its failure to keep complete or comprehensive records of negotiations or decisions, reduce transparency of the process and its outcome and expose TfNSW to a greater risk of misconduct, corruption and maladministration.

At the time of the transaction, the TfNSW policy framework was not sufficiently risk-focussed and did not provide clarity on when officers ought to apply specific guidance or procedures. TfNSW's policies and procedures are more focussed on acquiring land to meet project needs and timeframes, and less on assuring value for money and managing risks.

At the time of its acquisition of 4–6 Grand Avenue, TfNSW had property acquisitions policies and procedures in place. Each of these were broadly sound in their content and intent. However, they lacked specificity on how or when to apply guidance, and when risk levels should elevate the importance of recommended guidance.

TfNSW's key guidance was principles based and relied on agency staff using their experience and expertise to apply guidance according to the circumstances of an individual transaction. This guidance was not duly applied in the acquisition of 4–6 Grand Avenue, Camellia. In addition, TfNSW does not have quality or control assurance to identify when TfNSW officers did not apply important policies or processes.

The primary focus of the TfNSW’s property acquisition guidance is to achieve vacant possession of land in a timeframe that meets the need of the relevant transport project. There is less specific focus on the need to meet the requirements of the NSW Government financial management framework.

Appendix one – Response from agency

Appendix two – About the audit

Appendix three – Performance auditing

Copyright Notice

Parliamentary reference - Report number #349 - released (18 May 2021).

10 December 2020

Published

Transport 2020

Transport

Asset valuation

Cyber security

Financial reporting

Information technology

Infrastructure

Project management

1. Financial Reporting
Audit opinion	Unmodified audit opinions issued for the financial statements of all Transport cluster entities.
Quality and timeliness of financial reporting	All cluster agencies met the statutory deadlines for completing the early close and submitting the financial statements. Transport cluster agencies continued to experience some challenges with accounting for land and infrastructure assets. The former Roads and Maritime Services and Sydney Metro recorded prior period corrections to property, plant and equipment balances.
Impact of COVID-19 on passenger revenue and patronage	Total patronage and revenue for public transport decreased by approximately 18 per cent in 2019–20 due to COVID-19. The Transport cluster received additional funding from NSW Treasury during the year to support the reduced revenue and additional costs incurred such as cleaning on all modes of public transport and additional staff to manage physical distancing.
Completion of the CBD and South East Light Rail	The CBD and South East Light Rail project was completed and commenced operations in this financial year. At 30 June 2020, the total cost of the project related to the CBD and South East Light Rail was $3.3 billion. Of this total cost, $2.6 billion was recorded as assets, whilst $700 million was expensed.
2. Audit Observations
Internal control	While internal controls issues raised in management letters in the Transport cluster have decreased compared to the prior year, control weaknesses continue to exist in access security for financial systems. We identified 56 management letter findings across the cluster and 43 per cent of all issues were repeat issues. The majority of the repeat issues relate to information technology controls around user access management. There were three high risk issues identified - two related to financial reporting of assets and one for implementation of TAHE (see below).
Agency responses to emergency events	Transport for NSW established the COVID-19 Taskforce in March 2020 to take responsibility for the overall response of planning and coordination for the Transport cluster. It also implemented the COVIDSafe Transport Plan which incorporates guidance on physical distancing, increasing services to support social distancing and cleaning.
RailCorp transition to TAHE	On 1 July 2020, RailCorp was renamed Transport Asset Holding Entity of New South Wales (TAHE) and converted to a for-profit statutory State-Owned Corporation. TAHE is a commercial for-profit Public Trading Entity with the intent to provide a commercial return to its shareholders. A plan was established by NSW Treasury to transition RailCorp to TAHE which covered the period 1 July 2015 to 1 July 2019. A large portion of the planned arrangements were not implemented by 1 July 2020. As at the time of this report, the TAHE operating model, Statement of Corporate Intent (SCI) and other key plans and commercial agreements are not finalised. The State Owned Corporations Act 1989 generally requires finalisation of an SCI three months after the commencement of each financial year. However, under the Transport Administration Act 1988, TAHE received an extension from the voting shareholders, the Treasurer and Minister for Finance and Small Business, to submit its first SCI by 31 December 2020. In accordance with the original plan, interim commercial access arrangements were supposed to be in place with RailCorp prior to commencement of TAHE. Under the transitional arrangements, TAHE is continuing to operate in accordance with the asset and safety management plans of RailCorp. The final operating model is expected to include considerations of safety, operational, financial and fiscal risks. This should include a consideration of the potential conflicting objectives of a commercial return, and maintenance and safety measures. This matter has been included as a high risk finding in our management letter due to the significance of the financial reporting impacts and business risks for TAHE. Recommendation: TAHE management should: 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.
Completeness and accuracy of contracts registers	Across the Transport cluster, contracts and agreements are maintained by the transport agencies using disparate registers. Recommendation (repeat): Transport agencies should continue to implement a process to centrally capture all contracts and agreements entered. This will ensure: 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.

This report provides parliament and other users of the Transport cluster’s financial statements with the results of our audits, our observations, analysis, conclusions and recommendations in the following areas:

financial reporting
audit observations
the impact of emergencies and the pandemic.

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 Transport cluster for 2020, including any financial implications from the recent emergency events.

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.

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 Transport cluster
assessment of how well cluster agencies adapted their systems, policies and procedures, and governance arrangements in response to recent emergencies.

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.

Appendix one – List of 2020 recommendations

Appendix two – Status of 2019, 2018 and 2017 recommendations

Appendix three – Management letter findings

Appendix four – Financial data

Copyright notice

10 December 2020

Published

Planning, Industry and Environment 2020

Planning

Environment

Industry

Asset valuation

Compliance

Financial reporting

Internal controls and governance

Management and administration

This report analyses the results of our audits of financial statements of the Planning, Industry and Environment cluster agencies for the year ended 30 June 2020. The table below summarises our key observations.

1. Financial reporting

Audit opinions	There are 45 separate entities in the cluster. Unqualified audit opinions were issued for 38 cluster agencies' 30 June 2020 financial statements audits. Four financial statements audits are still ongoing, and three agencies were not subject to audit due to NSW Treasury reporting exemptions.
Timeliness of financial reporting	The majority of cluster agencies subject to statutory reporting deadlines met the revised timeline for submitting financial statements. Twenty‑four of the 26 cluster agencies required to submit early close financial statements met the revised timeframe. Due to issues identified during the audit, 13 financial statements audits were not completed and audit opinions not issued by the statutory deadline.
Implementation of AASB 16 'Leases'	Significant deficiencies were identified in Property NSW's lease data maintenance and lease calculations. Recommendation (partially repeat): Property NSW should: review and document the accounting implications for each lease ensure the accuracy and validity of lease data used for the lease calculations review user access to the leasing system, including privileged users. Our audits of the cluster agencies identified there was a lack of thorough quality assurance over the accuracy of lease information provided by Property NSW. Recommendation: The Department and cluster agencies should: quality assure and validate the information provided by Property NSW ensure changes made by Property NSW on lease data are supported and that assumptions and judgements applied are appropriate document their review of the data supplied.
Unprocessed Aboriginal land claims continued to increase	In 2019–20, the Department resolved an additional 468 Aboriginal land claims compared to the prior year. However, the total number of unprocessed Aboriginal land claims increased by 914 to 36,769 at 30 June 2020. The number of claims remaining unprocessed for more than ten years after lodgement increased by 10.9 per cent from last year. Until claims are resolved, there is an uncertainty over who is entitled to the land and the uses and activities that can be carried out on the land. Auditor-General's Reports to Parliament since 2007 have recommended action to address the increasing number of unprocessed claims. To date, the Department has not been able to resolve this issue. During 2020–21, a performance audit will assess the effectiveness and efficiency of the administration of Aboriginal land claims.
Financial reporting of Crown land managers	The Department will need to provide additional support and guidance to help Crown land managers (CLMs) meet their financial reporting obligations. Recommendation: The Department should: in consultation with NSW Treasury, develop an appropriate statutory reporting framework for CLMs ensure sufficient resources are available to help CLMs meet their reporting obligations. During 2019–20, NSW Treasury established the reporting exemption criteria for the CLMs. Based on available information, the Department determined 31 CLMs would not meet the exemption criteria and therefore are required to prepare annual financial statements.

2. Audit observations

Internal controls	Six high‑risk issues were identified across the cluster in 2019–20: 5 of those were related to financial reporting issues identified in Property NSW, Wentworth Park Sporting Complex Land Manager, Lord Howe Island Board, Planning Ministerial Corporation and Hunter and Central Coast Development Corporation 1 issue was related to Lord Howe Island Board's outdated business continuity plan. One in three internal control issues identified and reported to management in 2019–20 were repeat issues. Recommendation: Management letter recommendations to address internal control weaknesses should be actioned promptly, with a focus on addressing high‑risk and repeat issues.
Agencies response to recent emergencies	The unprecedented bushfires and COVID‑19 pandemic presented challenges for the cluster. Agencies established taskforces or response teams to respond to these emergencies. With more staff working from home, agencies implemented protocols and procedures to manage risks associated with the remote working arrangements, and also needed to address certain technology issues. The Department is responsible for the new Planning System Acceleration Program, which aims to fast‑track planning assessments, boost the State's economy and keep people in jobs during COVID‑19 pandemic. Between April and October 2020, the Department announced and determined 101 major projects and planning proposals.
Recognition of Crown land	Crown land is an important asset of the State. Management and recognition of Crown land assets is weakened when there is confusion over who is responsible for a particular Crown land parcel. Auditor-General's Reports to Parliament since 2017 have recommended that the Department should ensure the database of Crown land is complete and accurate. Whilst the Department has commenced actions to improve the database, this remained an issue in 2019–20. Recommendation (repeat issue): The Department should prioritise action to ensure the Crown land database is complete and accurate. This allows state agencies and local councils to be better informed about the Crown land they control.
Implementation of Machinery of Government (MoG) changes	Since its creation on 1 July 2019, the Department has largely established its governance arrangements, including setting up the Audit and Risk Committee and internal audit function for the Department and relevant cluster agencies. The Department still operated three main financial reporting systems in 2019–20, and has commenced the process to consolidate some of the systems. The recent Regional NSW MoG change led to the transfer of $446 million net assets and $284 million 2019–20 budget from the Department to the newly created Department of Regional NSW on 2 April 2020.

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

financial reporting
audit observations
the impact of emergencies and the pandemic.

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.

The COVID‑19 Legislation Amendment (Emergency Measures–Treasurer) Act 2020 amended legislation administered by the Treasurer to implement further emergency measures as a result of the COVID‑19 pandemic. These amendments:

allowed the Treasurer to authorise payments from the Consolidated fund until the enactment of the 2020–21 budget – impacting the going concern assessments of cluster agencies
revised budgetary, financial and annual reporting time frames – impacting the timeliness of financial reporting
exempted certain statutory bodies and departments from preparing financial statements.

This chapter outlines our audit observations related to the financial reporting of agencies in the Planning, Industry and Environment cluster for 2020, including any financial implications from the recent emergency events.

Section highlights

Unqualified audit opinions were issued for all completed 30 June 2020 financial statements audits. Timeliness of financial reporting remains an issue for 13 agencies.
Significant deficiencies were identified in Property NSW's lease data maintenance and lease calculations. Cluster agencies can also improve their management of lease information provided by Property NSW.
The number of unprocessed Aboriginal land claims continued to increase. During 2020–21, a performance audit will assess the effectiveness and efficiency of the administration of Aboriginal land claims.

The Department has not yet developed a statutory reporting framework for Crown land managers and will need to provide additional resources to help Crown land managers meet their financial reporting obligations.

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
assessment of how well cluster agencies adapted their systems, policies and procedures, and governance arrangements in response to recent emergencies
review of how the cluster agencies managed the increased risks associated with new programs aimed at stemming the spread of COVID-19 and stimulating the economy.

Cluster agencies experienced a range of control and governance related issues in recent years. An increased number of high risk issues and greater proportion of repeat issues were identified as part of our audits. It is important for cluster agencies to promptly address these issues.

Section highlights

Six high risk issues were identified during 2019–20 audits. One in three issues identified and reported to management in 2019–20 were repeat issues.
The Department has fast tracked the assessment and determination of 101 projects as a part of the Planning System Acceleration Program.
There continues to be significant deficiencies in Crown land records. The Department should ensure the Crown land database is complete and accurate.

Appendix one – List of 2020 recommendations

Appendix two – Status of 2019 recommendations

Appendix three – Financial data

Appendix four – Management letter findings

Appendix five – Timeliness of financial reporting

Appendix six – Selected agencies for review of response to emergency events

11 December 2019

Published

Planning, Industry and Environment 2019

Planning

Industry

Environment

Asset valuation

Cyber security

Financial reporting

Information technology

Infrastructure

Internal controls and governance

Management and administration

Service delivery

Workforce and capability

This report outlines the results of audits of the financial statements of agencies now grouped in the NSW Planning, Industry and Environment cluster.

Unqualified audit opinions were issued for 56 of the 66 cluster agencies’ 30 June 2019 financial statements. Ten audits remain incomplete. The cluster agencies need to improve the timeliness of financial reporting.

The Audit Office continued to identify issues regarding unprocessed Aboriginal land claims and the recognition of Crown land. ‘Auditor-General’s reports to parliament have recommended action to reduce the level of unprocessed land claims since 2007. However, the number of unprocessed claims continued to increase’, Margaret Crawford said.

One in five internal control findings were repeat issues. Key themes included information technology, asset management and improvements required to expense and payroll controls.

The report makes several recommendations including:

Property NSW should urgently address the deficiencies in the lease data used to calculate the impact of the new leasing standard effective from 1 July 2019
the Department of Planning, Industry and Environment should prioritise action to reduce unprocessed Aboriginal land claims
the Department of Planning, Industry and Environment should ensure the Crown land database is complete and accurate so state agencies and local government councils are better informed about the Crown land they control.

This report analyses the results of our audits of financial statements of the Planning, Industry and Environment cluster agencies for the year ended 30 June 2019. The table below summarises our key observations.

1. Machinery of Government changes

Creation of the Planning, Industry and Environment cluster

The Machinery of Government (MoG) changes abolished the former Planning and Environment cluster and former Industry cluster, and created the Planning, Industry and Environment cluster on 1 July 2019.

The Department of Planning and Environment (DPE), the Department of Industry (DOI), the Office of Environment and Heritage, and the Office of Local Government were abolished and the majority of their functions were transferred to the new Department of Planning, Industry and Environment (DPIE).

The Department of Planning, Industry and Environment is still in the process of implementing changes

The MoG changes bring risks and challenges to the cluster. A MoG Steering Committee, with the support of various project control groups and working groups, identified and developed responses to key risks arising from the changes.

However, the DPIE will take some time to fully integrate the policies, systems and processes of the abolished Departments and agencies.

2. Financial reporting

Audit opinions	Unqualified audit opinions were issued for 56 of the 66 cluster agencies' 30 June 2019 financial statements audits. Ten financial statements audits are still ongoing.
Timeliness of financial reporting	Fifty-five of the 57 agencies subject to statutory deadlines submitted their financial statements on time. Due to issues identified during the audit, 13 financial statements audits were not completed and audit opinions issued by the statutory deadline. Agencies prepared and submitted their early close procedures in accordance with the mandatory timeframe set by NSW Treasury. However, 17 of the 49 agencies where we reviewed early close procedures were assessed as either partially addressing or not addressing one or more of the mandatory requirements. The cluster agencies could benefit from an increased focus on early close procedures.
Introduction of AASB 16 'Leases'	We noted errors in the lease data used in Property NSW's AASB 16 impact calculations, which affect both Property NSW and other government agencies. These errors were significant enough to present a risk of material misstatements to the financial statements of Property NSW and other government agencies in future reporting periods. We had similar findings in our recent performance audit on 'Property Asset Utilisation', which highlighted issues with the quality of Property NSW's records. Recommendation: Property NSW should urgently address the deficiencies in the lease data used to calculate the impact of the new leasing standard effective from 1 July 2019.
Unprocessed Aboriginal land claims have continued to increase	Despite an increase in the number of claims resolved, the number of unprocessed Aboriginal land claims increased by 7.2 per cent from the prior year to 35,855 at 30 June 2019. Claims can be made over Crown land assets of the DPIE or other government agencies. Until claims are resolved, there is an uncertainty over who is entitled to the land and the uses and activities that can be carried out on the land. We first recommended action to address unprocessed claims in 2007. Recommendation (repeat issue): The DPIE should prioritise action to reduce unprocessed Aboriginal land claims.

3. Audit observations

Internal controls	One in five internal control issues identified and reported to management in 2018–19 were repeat issues. The lack of user access review was the most common IT general control issue in the cluster.
Drought relief	The NSW Government announced an emergency drought relief package of $500 million in 2018, in addition to other financial assistance measures already in place. Limited documentation and written agreements between relevant delivery agencies resulted in a $31.0 million misstatement relating to grant revenue.
Recognition of Crown land	Crown land is an important asset of the state. Management and recognition of Crown land assets is weakened when there is confusion over who is responsible for a particular Crown land parcel. Last year we recommended the DOI should ensure the database of Crown land is complete and accurate. While the DOI has commenced actions to improve the database, this continued to be an issue in 2018–19. Recommendation (repeat issue): The DPIE should ensure the Crown land database is complete and accurate so state agencies and local government councils are better informed about the Crown land they control.
Developer contributions	The former DPE continued to accumulate more developer contributions revenues than it spent on infrastructure projects. Total unspent funds increased to $274 million at 30 June 2019.

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

financial reporting
audit observations.

This cluster was created by the Machinery of Government changes on 1 July 2019. This report is focused on agencies in the Planning, Industry and Environment cluster from 1 July 2019. However, these agencies were all in other clusters during 2018–19. Please refer to the section on Machinery of Government changes for more details.

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

The MoG changes, announced following the NSW State election on 23 March 2019, created the Planning, Industry and Environment (PIE) cluster. The Administrative Changes Orders issued on 2 April 2019, 1 May 2019 and 28 June 2019 gave effect to these changes. These orders became effective on 1 July 2019.

Section highlights

The 2019 MoG changes significantly impacted the former Planning and Environment, and Industry clusters and agencies.

The PIE cluster combines most of the functions and agencies of the former Planning and Environment and Industry clusters from 1 July 2019.
The Department of Planning, Industry and Environment is the principal agency in the PIE cluster.
The MoG changes bring risks and challenges to the PIE cluster.
A MoG Steering Committee was established to oversee the transitional processes.
The full integration of the systems and processes will not be completed in the near future.

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 (PIE) cluster for 2019. In this chapter, the Department of Planning, Industry and Environment is referred to as DPIE, the former Department of Planning and Environment as DPE, and the former Department of Industry as DOI.

Section highlights

Unqualified audit opinions were issued for all completed 30 June 2019 financial statements audits. However, some cluster agencies can further enhance the quality of financial reporting.
Timeliness of financial reporting remains an issue for 13 agencies.
Deficiencies were identified in the data used to calculate the impact of AASB 16 ‘Leases’ effective from 1 July 2019. Property NSW should urgently address these deficiencies.
Unprocessed Aboriginal land claims continue to increase. DPIE should prioritise action to reduce unprocessed Aboriginal land claims.

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 audit observations and insights from our financial statement audits of agencies in the Planning, Industry and Environment (PIE) cluster for 2019. In this chapter, the Department of Planning, Industry and Environment is referred to as DPIE, the former Department of Planning and Environment as DPE, and the former Department of Industry as DOI.

Section highlights

One in five issues identified and reported to management in 2018–19 were repeat issues.
The lack of user access review was the most common IT general control issue in the PIE cluster.
The PIE cluster provided significant financial assistance for drought relief.
There continues to be significant deficiencies in Crown land records. The DPIE should ensure the Crown land database is complete and accurate.
Unspent developer contributions funds continued to build up in 2018–19.

Appendix one – List of 2019 recommendations

Appendix two – Status of 2018 recommendations

Appendix three – Cluster agencies

Appendix four – Financial data

Appendix five – Management letter findings

Appendix six – Timeliness of financial reporting

Copyright notice

28 November 2019

Published

Transport 2019

Transport

Asset valuation

Financial reporting

Infrastructure

Internal controls and governance

Management and administration

Service delivery

Workforce and capability

This report details the results of the financial audits of NSW Government's Transport cluster for the financial year ended 30 June 2019. The report focuses on key observations and findings from the most recent financial statement audits of agencies in the Transport cluster.

Unqualified audit opinions were issued for all agencies' financial statements. However, valuations of assets continue to create challenges across the cluster. The Audit Office identified some deficiencies in relation to asset valuations at Transport for NSW, Roads and Maritime Services, Rail Corporation New South Wales and Sydney Metro.

The Audit Office noted an increase in findings on internal controls across the Transport cluster. Key themes related to information technology, asset management and employee leave entitlements. The report also highlights the status of significant infrastructure projects across the Transport cluster.

The report makes several recommendations including:

agency finance teams need to be consulted on major business decisions and commercial transactions at the time of their execution to assess the financial reporting impacts
the Department of Transport should ensure consistent accounting policies are applied across its controlled entities.

Download the Transport 2019 report (PDF)

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

1. Machinery of Government changes

Transport for NSW, as the
lead agency, will absorb the
functions of Roads and
Maritime Services

The NSW Government announced its intention to integrate Roads and Maritime Services (RMS) into Transport for NSW (TfNSW) as part of the Machinery of Government changes.

This change was not included in the Administrative Orders as the Transport Administration Act 1988 No. 109 governs the composition of the Transport cluster. The Transport Administration Amendment (RMS Dissolution) Act 2019 (the Act) received assent on 22 November 2019. The Act dissolves RMS and transfers the assets, rights and liabilities of RMS to TfNSW. As at the date of this Report, the Act is not yet in force.

Transport is considering the impact of the changes on its operating model and financial reporting.

2. Financial reporting

Audit opinions	Unqualified audit opinions were issued on the 2018–19 financial statements of all agencies in the Transport cluster. TfNSW and Sydney Metro obtained a three-week extension from NSW Treasury to submit their financial statements for audit to resolve accounting issues surrounding the valuation of property, plant and equipment. The Department of Transport reported total consolidated property, plant and equipment of $158 billion at 30 June 2019. In 2018–19, there were issues with asset valuations at TfNSW, RMS, Sydney Metro and Rail Corporation New South Wales (RailCorp), resulting in adjustments after the submission of financial statements for audit and the correction of a prior period error. There was also a prior period error resulting from an agreement between TfNSW and the former UrbanGrowth Development Corporation due to a lack of assessment of the financial reporting implications at the time of signing the agreement. Recommendation: Agency finance teams need to be consulted on major business decisions and commercial transactions to assess their accounting impacts at the time of their execution, rather than at the end of a financial year. Agencies also need to resolve all key accounting issues such as valuations as part of the early close procedures. This would improve the quality of financial reporting and avoid the need for extensions for agencies to submit their financial statements for audit.
Preparedness for new accounting standards	Agencies across the cluster are progressing in their implementation of the new accounting standards. Transport cluster agencies need to improve their contracts registers to ensure they have a complete list of contracts and agreements to assess the impact of the new accounting standards.
Valuation of assets remains a challenge in the Transport cluster	Whilst agencies complied with the requirements of the accounting standards and NSW Treasury policies on valuations, the Audit Office identified some deficiencies in relation to asset valuations across the cluster. TfNSW reported a retrospective correction of a prior period error at 1 July 2017 which resulted in a reduction in the valuation of its Country Rail Network earthworks by $2.1 billion. This was due to survey results which identified the earthworks were flatter and lower than estimated in the valuation at 30 June 2017. RMS made several adjustments during the year to correct asset values due to changes to valuation assumptions or data improvements. This included: reduction of $318 million in the value of land under roads decrease of $84.9 million to the value of land and buildings changes to the value of traffic control and traffic signal network assets, due to data improvements. Sydney Metro North West officially opened in May 2019 and reported total assets of $9.1 billion. Sydney Metro derecognised $322 million in assets constructed to facilitate its operation but transferred to councils and utilities.
Inconsistent accounting policies across the Transport cluster	There was an inconsistency identified in the cluster relating to the valuation of substratum land. In 2018–19, RailCorp derecognised $109 million of substratum land to ensure consistency in its approach with other Transport agencies. As the parent entity, the Department of Transport needs to ensure accounting policies are consistently applied across all controlled entities for consolidation purposes. Inconsistencies in the application of accounting standards across agencies will impact comparability of financial reporting and decision making across the Transport cluster. Recommendation: The Department of Transport should ensure consistent accounting policies are applied across its controlled entities.
Revenue growth	Public transport passenger revenue increased by $89.0 million (5.9 per cent) in 2018–19, and patronage increased by 37.8 million (4.9 per cent) across all modes of transport based on data provided by TfNSW. The increase in revenue is mainly due to an increase in patronage as well as the annual increase in fares.
Negative Opal cards	Negative balance Opal cards resulted in $2.9 million in revenue not collected in 2018–19 ($10.4 million since the introduction of Opal). In January 2019, Transport made a change to the Sydney Airport stations to prevent customers with high negative balances exiting the station. In addition, in late 2018, Transport increased the minimum top up values for new cards at the airport stations. Recommendation (repeat): TfNSW should implement further measures to prevent the loss of revenue from passengers tapping off with negative balance Opal cards.

3. Audit observations

Internal controls	There was an increase in findings on internal controls across the Transport cluster. Key themes relate to information technology, employee leave entitlements and asset management. Twenty-nine per cent of all issues were repeat issues. The majority of the repeat issues related to information technology controls.
Write-off of assets	In addition to a $322 million derecognition of assets transferred to councils and utilities by Sydney Metro and a $109 million derecognition of substratum land at RailCorp, the Transport cluster wrote-off $278 million of assets related to roads, bridges, maritime assets, traffic signals and controls network. These mainly related to roads, bridges, maritime assets, traffic signals and the control network where new infrastructure assets substantially replaced an existing asset as part of construction activities.
Transport Asset Holding Entity (TAHE)	TAHE was established to be a dedicated asset manager for the delivery of public transport asset management. The Transport Administration Amendment (Transport Entities) Act 2017 will transition RailCorp into TAHE. RailCorp is now expected to transition to TAHE from 1 July 2020 (previously 1 July 2019). Several working groups have been considering various aspects of the TAHE transition including its status as a for profit Public Trading Enterprise, the operating model and the impact of the new accounting standards AASB 16 'Leases' and AASB 1059 'Service Concession Arrangements: Grantors'. The considerations of these aspects identified several challenges in the implementation of TAHE which has led to the revised transition date. Given the delays in implementation, it is important to clarify the intent of the TAHE model.
Excess annual leave	Twenty-six per cent of Transport employees have annual leave balances exceeding 30 days. Of the employees with excess leave balances, 732 (10.3 per cent) did not take any annual leave in 2018–19. Recommendation (repeat): Transport entities should further review the approach to managing excess annual leave in 2019–20. They should: monitor current and projected leave balances to the end of the financial year each month agree formal leave plans with employees to reduce leave balances over an acceptable timeframe ensure leave plans are actioned appropriately encourage all staff with excess leave balances take a minimum two-week period of leave per year.
Completeness and accuracy of contracts registers	There are no centralised processes to record all significant contracts and agreements in a register across the Transport cluster. Across the Transport cluster, contracts and agreements are maintained by the individual agencies using disparate registers. Agencies must perform detailed assessments of their existing contracts and agreements to quantify the impact of the new accounting standards (AASB 16 ‘Leases’, AASB 15 ‘Revenue from Contracts with Customers’, AASB 1058 ‘Income of Not-for-Profit Entities’ and AASB 1059 'Service Concession Arrangements: Grantors'). In 2018–19, there was also a prior period error resulting from an agreement between TfNSW and another government agency due to a lack of assessment of the financial reporting implications at the time of signing the agreement. A lack of a complete register of all contracts and agreements increases the risk that agencies may not be able to assess the full impact of the new accounting standards, as well as perform a complete assessment of the financial reporting implications of contracts and agreements. Recommendation: Transport agencies should implement a process to centrally capture all significant contracts and agreements entered. This will ensure: agencies are fully aware of contractual and other obligations appropriate assessment of financial reporting implications assessment of new accounting standards, in particular AASB 16 ‘Leases’, AASB 15 'Revenue from Contract with Customers', AASB 1058 'Income of Not-for-Profit Entities ' and AASB 1059 'Service Concession Arrangements: Grantors' are accurate and complete.

financial reporting
audit observations.

This cluster was impacted by the Machinery of Government changes on 1 July 2019. The NSW Government announced its intention to integrate Roads and Maritime Services (RMS) into Transport for NSW (TfNSW). This report is focused on the Transport cluster prior to these changes. Please refer to the section on Machinery of Government changes for more details.

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

The Transport cluster was impacted by recent Machinery of Government changes. These changes were announced by the Department of Premier and Cabinet but were not included in the Administrative Orders as the Transport Administration Act 1988 No. 109 governs the composition of the Transport cluster. It was the intention of government to transfer the functions of the RMS into TfNSW. This requires legislative changes to the Transport Administration Act 1988 No. 109.

Section highlights

Under the Machinery of Government changes, the NSW Government will transfer the functions of RMS into TfNSW.

The Transport Administration Amendment (RMS Dissolution) Act 2019 (the Act) received assent on 22 November 2019.
The Act will dissolve RMS and transfer its functions, assets, rights and liabilities to TfNSW.
As at the date of this report, the Act is not yet in force.
There are risks and challenges for asset and liability transfers, governance and retention of knowledge.
As of 1 July 2019, administrative arrangements (delegations and reporting line changes) were put in place to enable TfNSW and RMS to operate within a single management structure, while still remaining as separate legal entities.
Transport is working on a number of options as to how to implement the changes.

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 Transport cluster for 2019.

Section highlights

Unqualified audit opinions were issued on all agencies' financial statements.
RMS required an extension from NSW Treasury for their early close procedures.
TfNSW and Sydney Metro required extensions to submit their year-end financial statements.
Valuation of assets remains a challenge across the cluster.
There remains Opal cards with negative balances.
Sydney Metro derecognised assets of $322 million in relation to assets constructed for third parties.
Inconsistencies in the application of accounting policies across cluster agencies impact comparability of financial reporting across the Transport cluster.

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 Transport cluster.

Section highlights

There was an increase in findings on internal controls across the Transport cluster. Twenty-nine per cent of all issues were repeat issues.
Transport entities wrote-off over $278 million of assets which were replaced by new assets or technology.
Twenty-six per cent of Transport employees have excess annual leave.
There are no processes to ensure all significant contracts and agreements are captured by agencies in a centralised register.

Appendix one – Timeliness of financial reporting by agency

Appendix two – Management letter findings by agency

Appendix three – List of 2019 recommendations

Appendix four – Status of 2017 and 2018 recommendations

Appendix five – Cluster agencies

13 December 2018

Published

Planning and Environment 2018

Planning

Environment

Asset valuation

Financial reporting

Information technology

Infrastructure

Internal controls and governance

Service delivery

The Auditor-General for New South Wales, Margaret Crawford, released her report today on the NSW Planning and Environment cluster. The report focuses on key observations and findings from the most recent financial audits of these agencies. Unqualified audit opinions were issued for all agencies' financial statements. However, some cultural institutions had challenges valuing collection assets in 2017–18. These issues were resolved before the financial statements were finalised.

This report analyses the results of our audits of financial statements of the Planning and Environment cluster for the year ended 30 June 2018. The table below summarises our key observations.

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

financial reporting
audit observations
service delivery.

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 Planning and Environment cluster for 2018.

Observation	Conclusions and recommendations
2.1 Quality of financial reporting
Unqualified audit opinions were issued for all agencies' financial statements.	The quality of financial reporting remains high across the cluster.
2.2 Key accounting issues
There were errors in some cultural institutions' collection asset valuations.	Recommendation: Collection asset valuations could be improved by: early engagement with key stakeholders regarding the valuation method and approach completing revaluations, including quality review processes earlier improving the quality of asset data by registering all items in an electronic database.
2.3 Timeliness of financial reporting
Except for two agencies, the audits of cluster agencies’ financial statements were completed within the statutory timeframe.	Issues with asset revaluations delayed the finalisation of two environment and heritage agencies' financial statement audits.

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 Planning and Environment cluster for 2018
the areas of focus identified in the Audit Office work program.

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

Observation	Conclusions and recommendations
3.1 Internal controls
One in five internal control weaknesses reported in 2017–18 were repeat issues.	Delays in implementing audit recommendations can prolong the risk of fraud and error. Recommendation (repeat issue): Management letter recommendations to address internal control weaknesses should be actioned promptly, with a focus on addressing repeat issues.
One extreme risk was identified relating to the National Art School. The School does not have an occupancy agreement for the Darlinghurst campus.	Lack of formal agreement creates uncertainty over the School's continued occupancy of the Darlinghurst site. The School should continue to liaise with stakeholders to formalise the occupancy arrangement.
3.2 Information technology controls
The controls and governance arrangements when migrating payroll data from the Aurion system to SAP HR system were effective.	Data migration from the Aurion system to SAP HR system had no significant issues.
The Department can improve controls over user access to SAP system.	The Department needs to ensure the SAP user access controls are appropriate, including investigation of excess access rights and resolving segregation of duties issues.
3.3 Annual work program
Agencies used different benchmarks to monitor their maintenance expenditure.	The cluster agencies under review operate in different industries. As a result, they do not use the same benchmarks to assess the adequacy of their maintenance spend.

This chapter outlines certain service delivery outcomes for 2017–18. The data on activity levels and performance is provided by cluster agencies. The Audit Office does not have a specific mandate to audit performance information. Accordingly, the information in this chapter is unaudited.

We report this information on service delivery to provide additional context to understand the operations of the Planning and Environment cluster, and to collate and present service information for different segments of the cluster in one report.

In our recent performance audit, ‘Progress and measurement of Premier's Priorities’, we identified 12 limitations of performance measurement and performance data. We recommended the Department of Premier and Cabinet ensure that processes to check and verify data are in place for all relevant agency data sources.

Appendix one - List of 2018 recommendations

Appendix two - Status of 2017 recommendations

Appendix three- Cluster agencies

Appendix four - Financial data

Appendix five - Timeliness of financial reporting

Appendix six - Management letter findings by risk rating

28 November 2018

Published

Transport 2018

Transport

Asset valuation

Compliance

Financial reporting

Infrastructure

Management and administration

Procurement

Risk

Service delivery

Workforce and capability

The Auditor-General for New South Wales, Margaret Crawford released her report today on key observations and findings from the 30 June 2018 financial statement audits of agencies in the Transport cluster. Unqualified audit opinions were issued for all agencies' financial statements. However, assessing the fair value of the broad range of transport related assets creates challenges.

This report analyses the results of our audits of financial statements of the Transport cluster for the year ended 30 June 2018. The table below summarises our key observations.

This report provides Parliament and other users of the Transport cluster’s 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 Transport cluster for 2018.

Observation	Conclusions and recommendations
2.1 Quality of financial reporting
Unqualified audit opinions were issued for all agencies' financial statements	Sufficient audit evidence was obtained to conclude the financial statements were free of material misstatement.
2.2 Key accounting issues
Valuation of assets continues to create challenges. Although agencies complied with the requirements of the accounting standards and Treasury policies on valuations, we identified some opportunities for improvements at RMS.	RMS incorporated data from its asset condition assessments for the first time in the valuation methodology which improved the valuation outcome. Overall, we were satisfied with the valuation methodology and key assumptions, but we noted some deficiencies in the asset data in relation to asset component unit rates and old condition data for some components of assets. Also, a bypass and tunnel were incorrectly excluded from RMS records and valuation process since 2013. This resulted in an increase for these assets’ value by $133 million. The valuation inputs for Wetlands and Moorings were revised this year to better reflect the assets' characteristics resulting in a $98.0 million increase.
2.3 Timeliness of financial reporting
Residual Transport Corporation did not submit its financial statements by the statutory reporting deadline.	Residual Transport Corporation remained a dormant entity with no transactions for the year ended 30 June 2018.
With the exception of Residual Transport Corporation, all agencies completed early close procedures and submitted financial statements within statutory timeframes.	Early close procedures allow financial reporting issues and risks to be addressed early in the reporting and audit process.
2.4 Financial sustainability
NSW Trains and the Chief Investigator of the Office of Transport Safety Investigations reported negative net assets of $75.7 million and $89,000 respectively at 30 June 2018.	NSW Trains and the Chief Investigator of the Office of Transport Safety Investigations continue to require letters of financial support to confirm their ability to pay liabilities as they fall due.
2.5 Passenger revenue and patronage
Transport agencies revenue growth increased at a higher rate than patronage.	Public transport passenger revenue increased by $114 million (8.3 per cent) in 2017–18, and patronage increased by 37.1 million (5.1 per cent) across all modes of transport based on data provided by TfNSW.
Negative balance Opal Cards resulted in $3.8 million in revenue not collected in 2017–18 and $7.8 million since the introduction of Opal. A total of 1.1 million Opal cards issued since its introduction have negative balances.	Transport for NSW advised it is liaising with the ticketing vendor to implement system changes and are investigating other ways to reduce the occurrences.
2.6 Cost recovery from public transport users
Overall cost recovery from users has decreased.	Overall cost recovery from public transport users (on rail and bus services by STA) decreased from 23.2 per cent to 22.4 per cent between 2016–17 and 2017–18. The main reason for the decrease is due to expenditure increasing at a faster rate than revenue in 2017–18.

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 Transport cluster for 2018
the areas of focus identified in the Audit Office annual work program.

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

Observation	Conclusions and recommendations
3.1 Internal controls
There was an increase in findings on internal controls across the Transport cluster.	Key themes related to information technology, employee leave entitlements and asset management. Eighteen per cent of all issues were repeat issues.
3.2 Audit Office Annual work program
The Transport cluster wrote-off over $200 million of assets which were replaced by new assets or technology.	Majority of this write-off was recognised by RMS, with $199 million relating to the write-off of existing assets which have been replaced during the year.
RailCorp is expected to convert to TAHE from 1 July 2019.	Several working groups are considering different aspects of the TAHE transition including its status as a for-profit Public Trading Enterprise and which assets to transfer to TAHE. We will continue to monitor developments on TAHE for any impact to the financial statements.
RMS' estimated maintenance backlog at 30 June 2018 of $3.4 billion is lower than last year. Sydney Trains' estimated maintenance backlog at 30 June 2018 increased by 20.6 per cent to $434 million. TfNSW does not quantify its backlog maintenance.	TfNSW advised it is liaising with Infrastructure NSW to develop a consistent definition of maintenance backlog across all transport service providers.
Not all agencies monitor unplanned maintenance across the Transport cluster.	Unplanned maintenance can be more expensive than planned maintenance. TfNSW should develop a consistent approach to define, monitor and track unplanned maintenance across the cluster.

This chapter outlines certain service delivery outcomes for 2017–18. The data on activity levels and performance is provided by Cluster agencies. The Audit Office does not have a specific mandate to audit performance information. Accordingly, the information in this chapter is unaudited.

We report this information on service delivery to provide additional context to understand the operations of the Transport cluster and to collate and present service information for different modes of transport in one report.

In our recent performance audit, Progress and measurement of Premier's Priorities, we identified 12 limitations of performance measurement and performance data. We recommended that the Department of Premier and Cabinet ensure that processes to check and verify data are in place for all agency data sources.

Appendix one - Status of 2016 and 2017 recommendations

Appendix two - Cluster agencies

Appendix three - Financial data

Appendix four - Bus contracts regions

Audit progress

Sector

Year

Report type

Topic

Reports

What the report is about

What we found

What we recommended

Fast facts

Section highlights

Section highlights

Findings reported to management

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

2020–21 audits identified six high-risk findings

The number of moderate risk findings increased from prior year

Transport Asset Holding Entity of New South Wales

Background

Copyright notice

What the report is about

What we found

What the key issues were

What we recommended

Fast facts

Section highlights

Section highlights

Copyright notice

What the report is about

What we found

What the key issues were

What we recommended

Fast facts

Section highlights

Section highlights

Copyright notice

The acquisition of the 4–6 Grand Avenue site in Camellia was consistent with a 2014 feasibility study for the PLR, but occurred before the completion of detailed project planning or an acquisition strategy.

In 2015, TfNSW identified that it would require a stabling and maintenance depot in the Camellia area for the Parramatta Light Rail

TfNSW's decision to progress a potential acquisition in 2015 considered the risk that the site may not be required

TfNSW assessed the 4–6 Grand Avenue site as one of several sites in Camellia that was a feasible location for a stabling and maintenance facility

The acquisition of 4–6 Grand Avenue was not informed by a Property Acquisition Strategy

TfNSW focussed on 4–6 Grand Avenue because it was available and aligned to TfNSW's strategic interests

TfNSW's failure to acquire a formal valuation and an assessment of the financial impact of environmental remediation before it purchased 4–6 Grand Avenue represents ineffective administration and governance.

The probity management controls and assurances in place for the acquisition of the 4–6 Grand Avenue site were insufficient. These insufficiencies were exacerbated by the probity risk profile of the transaction.

1. Financial Reporting

2. Audit Observations

Section highlights

Section highlights

1. Financial reporting

2. Audit observations

Section highlights

Section highlights

1. Machinery of Government changes

2. Financial reporting

3. Audit observations

1. Machinery of Government changes

2. Financial reporting

3. Audit observations