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Appendix three – Financial data

Copyright notice

20 April 2022

Published

Treasury 2021

Treasury

Finance

Compliance

Financial reporting

Internal controls and governance

Management and administration

What the report is about

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

What we found

Unmodified audit opinions were issued for all Treasury cluster agencies.

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

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

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

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

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

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

What the key issues were

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

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

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

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

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

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

What we recommended

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

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

We also recommended icare should ensure:

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

Fast facts

NSW Treasury notes that it is the Government's principal financial and economic adviser to guide the State’s growth for the benefit of the people who live, work and study in NSW.

$111b funds under management as at 30 June 2021
100% unqualified audit opinions were issued on agencies’ 30 June 2021 financial statements
24 monetary misstatements were reported in 2020–21
$17b total expenditure incurred in 2020–21
12 extreme and high-risk findings were identified
30% of reported issues were repeat issues

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

financial reporting
audit observations.

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

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

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

Section highlights

Unmodified audit opinions were issued on all the cluster agencies 2020–21 financial statements.
The number of identified monetary misstatements increased from 16 in 2019–20 to 24 in 2020–21.
Reported corrected monetary misstatements decreased from 15 in 2019–20 to seven with a gross value of $1.1 billion in 2020–21. The largest corrected misstatement was in NSW Treasury's financial statements resulting in a $1 billion correction to its administered borrowings. The correction was to address an understatement by NSW Treasury which did not recognise a liability for funds raised by NSW Treasury Corporation (TCorp) on its behalf as it applied settlement date accounting rather than trade date when recognising these borrowings. A corresponding receivable from TCorp was also recognised to reflect that funds were to be received on 1 July 2021.
The number of uncorrected misstatements increased from one in 2019–20 to 17 in 2020–21. Two of the misstatements above $5 million related to investment valuations within the SAS Trustee Corporation Pooled Fund, two related to premium income overstatements within the Workers Compensation Nominal Insurer, and one related to NSW Treasury administered liabilities and expenses where it recognised a provision for remediation costs when it had no present obligation. A further seven related to investment management funds that were terminated during the year by TCorp.
Nine agencies that were required to perform early close procedures did not complete a total of 25 mandatory procedures. The most common incomplete early close procedures include inter and intra (cluster) agency balances and transactions not confirmed with the counterparty agency and significant management judgements and assumptions made when estimating transactions and balances not documented.
To ensure compliance with Australian Accounting Standards, transactions and balances that were formerly reported in the Crown Entity’s financial statements are now reported by NSW Treasury as it primarily controls or administers the transactions and balances on behalf of the State.
icare changed the risk margin applied to measure the Workers Compensation Nominal Insurer's outstanding claims liability. If the risk margin used when valuing its 2019–20 outstanding claims liability had been retained, its net asset deficiency would have worsened compared to the prior year. The change in risk margin aligns the Nominal Insurer’s ‘probability of adequacy’ with the Australian Prudential Regulation Authority’s minimum reporting requirements for general insurers.
The icare Board approved a new approach for remediating pre-injury average weekly earnings underpayments (subject to legal advice, and assessment by a wage remediation expert), on 24 September 2021 and announced on 11 November 2021. The impact of the decision on the Nominal Insurer's financial statements was not assessed by icare as an ‘after balance date event’ and was not raised with the Audit Office prior to icare finalising its 2021 financial statements on 24 September 2021.

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

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

Section highlights

The 2020–21 audits identified one new Extreme Risk and 11 High Risk findings. The extreme risk finding related to the incomplete provision and timely access to information to the Total State Sector Accounts (TSSA) audit and the accounting for the General Government Sector's investment in TAHE. Findings related to the TSSA audit are reported in the report on State Finances 2021. Of the 11 high risk findings, two were repeat findings relating to cross cluster payments and authorisation to spend deemed funds. High risk repeat findings need to be addressed with greater priority.
There were 21 moderate risk findings reported to management in 2020–21, ten of which were repeat findings. The most common repeat finding related to claims processing, information technology user access administration. Repeat findings, particularly those that relate to data protection, need greater prioritisation and should be implemented on a timely basis.
icare is in the process of implementing organisational reform in response to findings in recent external reviews. These reviews identified 151 recommendations for icare to improve in the areas of risk and governance, performance, and culture and accountability. All of the recommendations were accepted by icare and are expected to be addressed through their ‘Improvement Program’. A number of the observations referred to in this report were also identified in the external reviews.
The Nominal Insurer's four week return-to-work rate fell from 68% at 30 June 2020 to 64% at 30 June 2021 and was at 63% at 30 September 2021. This is below icare's target of 70%.
The Nominal Insurer overpaid, and underpaid claims to policyholders due to claims processing weaknesses. There was also insufficient documentation to support key inputs to weekly benefit payments, thereby further increasing the risk of claims being overpaid, and underpaid.
The Home Building Compensation Fund's net liability position reduced from $746 million at 30 June 2020 to $534 million at 30 June 2021 due to increases in premium rates and increased building activity from stimulus measures.
The Nominal Insurer's provision for errors in pre-injury average weekly earnings decreased from $21 million to 30 June 2020, to $11.6 million at 30 June 2021. The provision was not reassessed for icare’s decision to proactively remediate PIAWE underpayments.
The NSW Self Insurance Corporation also recognised a $12.8 million provision at 30 June 2021 to remediate past underpayments.

Findings reported to management

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

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

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

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

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

Risk rating		Issue
Information technology
Moderate² 4 new 2 repeat Low¹ 6 new 4 repeat		The financial audits identified the need 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: poor user access administration and monitoring of privileged user activities lack of disaster recovery planning.
Internal control deficiencies or improvements
High³ 1 repeat Moderate² 5 new 7 repeat Low¹ 9 new		The financial audits identified internal control weaknesses across key business processes, including: lack of controls to ensure cluster expenditure does not exceed a minister's appropriation authority received under the annual Appropriations Act and the GSF Act inadequate procurement controls including purchase orders not being used and policy documents not stipulating thresholds which require minimum quotations or tenders inadequate claim processing controls leading to documentation not kept to support claims, and errors in payments. High risk issues are discussed later in this chapter.
Financial reporting
High³ 2 new Moderate² 2 new 1 repeat Low¹ 2 new		The financial audits identified opportunities for agencies to strengthen financial reporting, including: need to review significant judgements, and continue to assess whether assets are controlled grants being incorrectly accounted for leading to errors provisions not including costs to settle the obligation and errors in the accuracy and completeness of underlying data used in valuations. High risk issues are discussed later in this chapter.
Governance and oversight
Extreme⁴ 1 new High³ 7 new Low¹ 1 new		The financial audits identified the need for agencies to improve governance and oversight processes, including: documentation was inadequate and key documents were either not provided to the Audit Office, or were not provided on a timely basis, or their existence was not made known to the Audit Office inconsistencies in the GSF Act and GSA Act relating to statutory timeframes numerous versions of working papers were submitted all of which contained errors, omissions and/or poor logic no formal policy or benchmark on expected investment returns from other government sectors addressing significant uncertainty relating to access fees to be paid by rail operators raised in the Total State Sector Accounts audit opinion the sector classification of certain Public Non-Financial Corporations needs to be confirmed with the Australian Bureau of Statistics external consultants were used extensively to advise government agencies on matters related to TAHE there is no state-wide policy about borrowings which provides guidance around performance obligations arising under trades between government agencies. Extreme and high risk issues are discussed later in this chapter and in the report on State Finances 2021.
Non-compliance with key legislation and/or central agency policies
High³ 1 repeat Low¹ 1 new 1 repeat		The financial audits identified the need for agencies to improve its compliance with key legislation and central agency policies, including: non-compliance with the GSA Act and expenditure of public monies not supported by authorised delegations or spent for an authorised and valid purpose input tax credits were not always claimed correctly. High risk issues are discussed later in this chapter.
⁴Extreme risk from the consequence and/or likelihood of an event that has had, or may have a negative impact on the entity. ³ High risk from the consequence and/or likelihood of an event that has had, or may have a negative impact on the entity. ² Moderate risk from the consequence and/or likelihood of an event that has had, or may have a negative impact on the entity. ¹ 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, or draft letters where findings have been agreed with management.

The number of moderate risk findings decreased from prior year

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

Moderate risk repeat findings include:

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

NSW Treasury related matters

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

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

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

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

Borrowings of $1 billion were understated by NSW Treasury

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

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

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

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

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

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

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

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

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

Agencies have again spent monies without an authorised delegation

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

Control deficiencies at NSW Treasury's service providers

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

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

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

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

Insurance related matters

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

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

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

Workers Compensation Nominal Insurer (the Nominal Insurer)

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

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

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

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

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

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

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

Return-to-work rates have worsened

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

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

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

Appendix one - Misstatements in financial statements submitted for audit

Appendix five – Acquittals and other opinions

Copyright notice

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 one – Misstatements in financial statements submitted for audit

Copyright notice

16 December 2021

Published

Stronger Communities 2021

Justice

Community Services

Financial reporting

Internal controls and governance

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

As there are no outstanding matters relating to audits in the Stronger Communities 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 Stronger Communities cluster agencies' financial statement audits for the year ended 30 June 2021.

What we found

Unqualified audit opinions were issued for all 30 June 2021 financial statements of cluster agencies.

Eleven of the 15 cluster agencies required to submit 2020–21 early close financial statements and other mandatory procedures did not meet the statutory deadline. Five agencies did not perform all mandatory procedures.

The implementation of AASB 1059 'Service Concession Arrangements: Grantors' had a significant impact on the Department of Communities and Justice's (the department) 2020–21 financial statements. The department applied a modified retrospective approach upon initial adoption at 1 July 2020 and recognised service concession assets and liabilities of $1.0 billion and $1.2 billion respectively (relating to three correctional centres with private sector operators).

The department was, this year for the first time, able to reliably measure Incurred But Not Reported (IBNR) claims relating to its Victims Support Scheme. The department recorded a liability of $200 million at 30 June 2021. Liabilities for Child Sexual Assault IBNR claim continue to be not recorded on the basis they are unable to be reliably measured.

The number of monetary misstatements identified during the audit of the financial statements for the cluster increased from 61 in 2019–20 to 72 in 2020–21.

What the key issues were

The number of issues reported to management decreased from 191 in 2019–20 to 172 in 2020–21. However, 45 per cent were repeat issues related to information technology, governance and oversight controls.

Seven high risk issues were identified in 2020–21, an increase of five compared to last year. High risk issues related to deficiencies in IT access controls at Sydney Cricket and Sports Ground Trust; a lack of a formal agreement between the Office of Sport and Planning Ministerial Corporation over the management of a sporting venue; asset revaluations at both Fire and Rescue NSW and the Trustees of the Anzac Memorial Building; and three issues related to revenue recognition control deficiencies at New South Wales Aboriginal Land Council and two of its subsidiaries.

What we recommended

Cluster agencies should ensure all applicable mandatory early close procedures are completed and the outcomes provided to the audit team in accordance with the deadlines set by NSW Treasury.

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

Fast facts

The Stronger Communities cluster, consisting of 28 agencies, aims to deliver community services that support a safe and just New South Wales.

$14.0b property, plant and equipment as at 30 June 2021
$20.9b total expenditure incurred in 2020–21
100% unqualified audit opinions were issued for all 30 June 2021 financial statements
7 high risk management letter findings were identified
72 monetary misstatements were reported in 2020–21
45% of reported issues were repeat issues.

This report provides Parliament and other users of the Stronger Communities 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 Stronger Communities cluster (the cluster) for 2021.

Section highlights

Unqualified audit opinions were issued for all 30 June 2021 financial statements of cluster agencies including the acquittal and compliance audits for the Legal Aid Commission of New South Wales and Crown Solicitor's Office.
An 'Other Matter' paragraph was included within the Multicultural NSW and Office of the Ageing and Disability Commissioner’s Independent Auditor's Report. While the paragraph did not modify the audit opinion, it noted the agencies did not have a signed instrument of delegation from their responsible Minister(s) to incur expenditure for the 2020–21 financial year and therefore were non‑compliant with section 5.5 of the Government Sector Finance Act 2018 .
11 of the 15 cluster agencies required to submit 2020–21 early close financial statements and all other mandatory procedures did not meet the statutory deadlines. The agencies cited changes in key staff, delays in finalising actuarial and valuation work and the timing of Audit and Risk Committee meetings as the main reasons for not meeting the deadlines. Five agencies did not complete all mandatory procedures.
The Department of Communities and Justice (the department) was, for the first time, able to reliably measure and record a liability of $200 million at 30 June 2021 for Incurred But Not Reported (IBNR) claims relating to its Victims Support Scheme. Child Sexual Assault IBNR claim liabilities continue to be not recorded on the basis they are still unable to be reliably measured.
The International Financial Reporting Standards Interpretations Committee released an agenda decision on 'Configuration or customisation costs in a cloud computing arrangement' (the IFRIC agenda decision). The department treated the financial impacts of the IFRIC agenda decision as a change in accounting policy and retrospectively recorded prepaid assets and expenses of $52.3 million and $90.5 million respectively relating to intangible assets they had previously capitalised.
The implementation of AASB 1059 'Service Concession Arrangements: Grantors' had a significant impact on the department's 2020–21 financial statements. The department applied a modified retrospective approach upon initial adoption at 1 July 2020 and recognised service concession assets and liabilities of $1.0 billion and $1.2 billion respectively in relation to three correctional centres with private sector operators.

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

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

Section highlights

The number of issues reported to management has decreased from 191 in 2019–20 to 172 in 2020–21, and 45 per cent were repeat issues. Many repeat issues related to information technology, governance and oversight controls.
Seven high risk issues were identified in 2020–21, an increase of five compared to last year.
The two high risk issues identified in 2019–20 relating to New South Wales Institute of Sport were resolved.

Findings reported to management

The overall number of findings has decreased, but the level of repeat issues increased

In 2020–21, there were 172 findings raised across the cluster (191 in 2019–20). 45 per cent of all issues were repeat issues (32 per cent in 2019–20).

Repeat issues largely related to weaknesses in controls over information technology (IT), governance and oversight.

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

2020–21 audits identified seven high risk findings

High risk findings were reported at the following cluster agencies. Two high risk findings reported in 2019–20 were resolved.

Agency	Description
2020–21 findings
Sydney Cricket and Sports Ground Trust (new finding) *	The audit of Sydney Cricket and Sports Ground Trust's IT access controls identified: activity (audit) logs of privileged access within iPOS (purchasing system) and Microsoft Dynamics (sales system) are not maintained and periodically reviewed by an independent officer the review of privileged activity logs of booking system Event Business Management Software (EBMS) is not formally documented 8 generic super user accounts are being shared across four IT systems including iPOS, Microsoft Dynamics, EBMS and SUN (accounting system). The matter has been included as a high risk finding in the management letter as there is an increased risk of: unauthorised transactions and changes to financial data unauthorised users gaining access to financial systems data breaches or financial loss.
Fire and Rescue NSW (new finding)	Fire and Rescue NSW (FRNSW) completed a comprehensive revaluation of its fire appliances in 2020–21. The audit of the revaluation found there was inadequate analysis and quality control by management over the valuation process prior to the outcomes being included in the financial statements. FRNSW had 57 fleet assets that have not been revalued due to problems with data supplied by the valuer. The written down value: did not agree to the valuer's calculations for 28 assets was provided by the valuer for 29 assets, but there were no supporting calculations. These assets have been left at their previous book values of $3.0 million. The accounting standards require the entire class of assets to be revalued when a revaluation is performed. The review also found: inconsistent valuation of vehicles of the same make, model, age and specifications errors had been made when the previous valuation was uploaded into the fixed asset register the valuer incorrectly included additional equipment in the replacement cost estimate for vehicles that did not have that equipment. The matter has been included as a high risk finding as it resulted in monetary misstatements and caused delays to the overall timeframes for the audit.
New South Wales Aboriginal Land Council (NSWALC) (new finding)	The audit of NSWALC's revenue identified there was no formal assessment of relevant contracts for the nature, amount and timing of revenue recognition before preparing the financial statements. This matter has been included as a high risk finding as it contributed to material monetary misstatements and disclosure deficiencies relating to revenue transactions.
NSWALC Employment and Training Limited (new finding)	The audit of NSWALC Employment and Training Limited's revenue found: there was no formal assessment of relevant contracts for the nature, amount and timing of revenue recognition before preparing the financial statements the financial statements' preparation did not include updated accounting policies reflecting the requirements of AASB 15 'Revenue from Contracts with Customers' (AASB 15) and AASB 1058 'Income of Not-for-Profit Entities' (AASB 1058). This matter has been included as a high risk finding as it contributed to material monetary misstatements and disclosure deficiencies relating to revenue transactions.
NSWALC Housing Limited (new finding)	The audit of NSWALC Housing Limited's revenue identified it: did not perform formal assessments of relevant contracts for the nature, amount and timing of revenue recognition before preparing the financial statements deferred revenue recognition for funding received from NSWALC (the parent entity). There are no sufficiently specific performance obligations in the funding letter, hence revenue should be recognised on receipt of the funding recognised rental income from managing properties from the Aboriginal Housing Office (AHO) without considering the agreement, which requires remittance of profit to the AHO the financial statements did not include updated accounting policies according to the requirements of AASB 15 and AASB 1058. This matter has been included as a high risk finding as it contributed to material monetary misstatements and disclosure deficiencies relating to revenue transactions.
Office of Sport (new finding)	The Olympic Co-ordination Authority Dissolution Act 2002 transferred the assets, rights and liabilities relating to the Sydney International Regatta Centre (SIRC) to the Planning Ministerial Corporation (the Corporation) effective from 1 July 2002. The Corporation recognised the related land assets but did not recognise any of the built assets at the time of transfer. The total value of the land and built assets at 30 June 2021 was $13.8 million and $11.2 million (written down value) respectively. The SIRC has been managed by the Office of Sport (the Office) for many years in accordance with a not yet executed management agreement. It appears there was a clear intention in 2005 that the control of SIRC built assets was to be transferred from the then Department of Planning to the then Department of Tourism, Sport and Recreation (a predecessor of the Office), through the exchange of letters between the relevant Ministers and an Administrative Order (the Order). The Order transferred the SIRC staff from the then Department of Planning to the then Department of Tourism, Sport and Recreation. However, it was silent on whether the relevant built assets were transferred. Currently, the Office recognises the SIRC built assets in the financial statements whilst the Corporation recognises the land assets as the legal owner of the property. This matter has been included as a high risk finding as the lack of a formal management agreement casts doubt over the accounting treatment of SIRC property.
The Trustees of the Anzac Memorial Building (new finding)	The audit of the Trustees of the Anzac Memorial Building's property, plant and equipment identified: the fixed assets register for plant and equipment had not previously included sufficient detail about the individual assets to which costs related to reconcile it to the work performed by management's valuation expert the financial statements did not meet the requirement of AASB 108 ‘Accounting Policies, Changes in Accounting Estimates and Errors’ to disclose the nature and reason why it corrected a prior period error of $778,000. This matter has been included as a high risk finding as it contributed to material monetary misstatements and disclosure deficiencies relating to property, plant and equipment.

* The finding related to the former Sydney Cricket and Sports Ground Trust (based on the completion audit for the period 1 March 2020 to 30 November 2020). This agency was dissolved and transferred to Venues NSW on 1 December 2020.

Recommendation (repeat issue)

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

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

Risk rating	Issue
Information technology
High³ 1 new	The financial audits identified weaknesses in information technology processes and controls that support the integrity of financial data used to prepare agencies' financial statements. Of particular concern are issues with: user access administration cyber security including governance arrangements, monitoring of third-party system access and patch management password security and policy parameters development, review and testing of disaster recovery plans.
Moderate² 8 new, 22 repeat
Low¹ 5 new, 6 repeat
Internal control deficiencies or improvements
High³ 1 new	The financial audits identified internal control weaknesses across the following key business processes: expenditure, including the approval of purchase requisitions and review of open purchase orders supplier and employee masterfile maintenance segregation of duties.
Moderate² 6 new, 3 repeat
Low¹ 23 new, 7 repeat
Financial reporting
High³ 4 new	The financial audits identified weaknesses in financial reporting processes, including: fully depreciated assets still in use, indicating the need to perform more frequent assessments of useful lives of assets robustness of property, plant and equipment asset revaluations incomplete or inaccurate recording of balances in the financial statements.
Moderate² 9 new, 1 repeat
Low¹ 11 new, 5 repeat
Governance and oversight
High³ 1 new	The financial audits identified areas where agencies could strengthen governance and oversight processes, including: review and update of policies and procedures formalising existing key business arrangements records management practices.
Moderate² 5 new, 11 repeat
Low¹ 12 new, 8 repeat
Non-compliance with key legislation and/or central agency policies
Moderate² 7 new, 6 repeat	The financial audits identified the need for agencies to improve their compliance with key legislation and/or central agency policies, including: management of excessive annual leave balances existence of and compliance with financial delegations related party transactions disclosures from key management personnel.
Low¹ 2 new, 8 repeat

⁴ Extreme risk from the consequence and/or likelihood of an event that has had, or may have a negative impact on the entity.

³High risk from the consequence and/or likelihood of an event that has had, or may have a negative impact on the entity.
² Moderate risk from the consequence and/or likelihood of an event that has had, or may have a negative impact on the entity.
¹ 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, or draft letters where findings have been agreed with management.

The number of moderate risk findings decreased from prior year

Seventy‑eight moderate risk findings were reported in 2020–21, representing a 22 per cent decrease from 2019–20. Of these, 43 were repeat findings, and 35 were new issues.

Moderate risk findings reported in 2020–21 include:

weaknesses in governance arrangements, including outdated policies and procedures and arrangements that do not align with NSW Government guidelines, such as the NSW Government Procurement Policy Framework and NSW Cyber Security Policy
weaknesses in user access administration including:
- user access reviews
- monitoring of privileged user access and activities
- password policy configuration
cyber security improvements including:
- implementation and update of governance arrangements
- monitoring of third‑party system access
- patch management improvement
outdated instruments of financial delegation and non‑compliance with established financial delegations
weaknesses in supplier and employee masterfile maintenance.

Appendix one – Misstatements in financial statements submitted for audit

Copyright notice

15 December 2021

Published

Health 2021

Health

Asset valuation

Compliance

Cyber security

Financial reporting

Infrastructure

Internal controls and governance

Procurement

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

As there are no outstanding matters relating to audits in the Health 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 Health cluster (the cluster) agencies' financial statements audits for the year ended 30 June 2021.

What we found

Unmodified audit opinions were issued for the financial statements of all Health cluster agencies.

The COVID-19 pandemic increased the complexity and number of accounting matters faced by the cluster. The total gross value of corrected misstatements in 2020–21 was $250.2 million, of which $226.0 million were pandemic related.

A qualified audit opinion was issued on the Annual Prudential Compliance Statement. The basis of the qualification related to 19 instances (18 in 2018–19) of non-compliance relating to three of the 20 prudential requirements across five aged care facilities.

What the key issues were

The total number of matters we reported to management across the cluster increased from 112 in 2019–20 to 116 in 2020–21. Of the 116 issues raised in 2020–21, three were high risk (one in 2019–20) and 57 were moderate risk (47 in 2019–20). Nearly one half of the issues were repeat issues.

The three new high-risk issues identified were:

Hotel Quarantine (HQ) fees

The absence of a tailored debt recovery strategy, data integrity issues and uncertainties around future HQ arrangements increased risks around the recoverability of HQ fees from travellers.

COVID-19 inventories

Data errors and anomalies in the impairment model and difficulties forecasting key factors impacting the management of Personal Protective Equipment (PPE) increased uncertainty associated with the valuation and impairment of COVID-19 inventories.

COVID-19 vaccines

The Commonwealth did not provide information about the cost of vaccines provided to NSW free of charge, which required the performance of internal valuations to reflect the consumption of vaccines in the financial statements.

What we recommended

Hotel Quarantine (HQ) fees

Develop a tailored assessment methodology to estimate recoverability of HQ fees and work with Revenue NSW to develop a tailored debt recovery strategy.

COVID-19 inventories

Review the current stocktaking and impairment methodology to incorporate validation of data key to the management of COVID-19 related PPE.

COVID-19 vaccines

Work with the Commonwealth to obtain primary price information on COVID-19 vaccines.

Fast facts

The Health cluster, comprising 15 local health districts, five pillars agencies, two specialty health networks and six shared state-wise services agencies, deliver health services to the people of New South Wales.

100% unqualified audit opinions were issued on agencies' 30 June 2021 financial statements
24 monetary misstatements were reported in 2020–21
3 high risk management letter findings were identified
47.4% of reported issues were repeat issues
$23.5b property, plant and equipment as at 30 June 2021
$26.8b total expenditure incurred in 2020–21

This report provides Parliament and other users of the Health 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 Health cluster (the cluster) for 2021.

Section highlights

Unqualified audit opinions were issued for all cluster agencies required to prepare general-purpose financial statements.
The total gross value of all corrected monetary misstatements for 2020–21 was $250.2 million, of which $226.0 million were related to complexities arising from the COVID-19 pandemic.
A qualified audit opinion was issued on the Ministry's Annual Prudential Compliance Statement.

Appropriate financial controls help ensure the efficient and effective use of resources and administration of agency policies. They are essential for quality and timely decision-making. This chapter outlines our observations and insights from our financial statement audits of agencies in the Health cluster.

Section highlights

The total number of internal control deficiencies has increased from 112 issues in 2019–20 to 116 in 2020–21. Of the 116 issues raised in 2020–21, three were high (one in 2019–20) and 57 were moderate (47 in 2019–20); with nearly one half of all control deficiencies reported in 2020–21 being repeat issues.
The complexities arising from accounting for agreements between governments to respond to the COVID-19 pandemic presented three new high risk audit findings with respect to the:
- expected rate of recoverability of outstanding Hotel Quarantine fees
- procurement, stocktaking and impairment of COVID-19 inventories
- valuation and recognition of COVID-19 vaccines received from the Commonwealth Government.
Management of excessive leave balances and poor quality or lack of documentation supporting key agreements were amongst the repeat issues observed again in the 2020–21 financial reporting period.

Findings reported to management

The number of findings reported to management has increased, with 47.4 per cent of all issues being 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 cluster agencies. The Audit Office does this through our management letters, which include observations, implications, recommendations and risk ratings.

In 2020–21, there were 116 findings raised across the cluster (112 in 2019–20). 47.4 per cent of all issues were repeat issues (38.4 per cent in 2019–20).

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

Risk rating	Issue
Information technology
Moderate² 7 new, 3 repeat	We identified the need 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: lack of reviews of user access and privileged user access for HealthRoster Assets and Facilities Management Online vMoney Powerhouse Patient Billing and Revenue Collection system. Repeat issues included: deficient password controls no independent review for data integrity of any changes made to HealthRoster incomplete reviews of StaffLink User Access.
Low¹ 4 new, 5 repeat
Internal control deficiencies or improvements
High³ 1 new, 0 repeat	We identified internal control weaknesses across key business processes, including new issues relating to: procurement, stocktaking and impairment of COVID-19 inventories (personal protective equipment) instances where employees' timesheets were approved in advance monthly reconciliations not reviewed in a timely manner asset revaluation processes at Illawarra Shoalhaven Local Health District. Repeat issues included: forced finalisation of rosters in order to finalise processing of payroll partial repeat issue relating to HealthShare NSW's stocktake process, refer to details in the following section of this report.
Moderate² 6 new, 12 repeat
Low¹ 10 new, 4 repeat
Financial reporting
High³ 2 new, 0 repeat	We identified weaknesses with respect to financial reporting in relation to the: expected rate of recoverability of outstanding Hotel Quarantine fees valuation and recognition of COVID-19 vaccines received from the Commonwealth Government application of AASB 16 'Leases' improvement in health agencies' grant register to better support management's accounting treatment under the applicable revenue accounting standards.
Moderate² 6 new, 1 repeat
Low¹ 8 new, 3 repeat
Governance and oversight
Moderate² 9 new, 5 repeat	We identified opportunities for agencies to improve governance and oversight processes, including: ensure better documentation around governance arrangements for major health capital works delivered by Health Infrastructure absence of documented practices at health agencies level relating to Visiting Medical Officer claims. Repeat issues include: delegations manual for Health Infrastructure remains in draft and has done so since 2017.
Low¹ 2 new, 2 repeat
Non-compliance with key legislation and/or central agency policies
Moderate² 1 new, 7 repeat	We identified the need for agencies to improve compliance with key legislation and central agency policies, with new findings including: bank signatories list not updated to remove terminated employees subsequent changes made to Junior Medical Officers' approved rosters not approved by an authorised delegate. Repeat issues include: management of excessive annual leave non-compliance with the Government Information (Public Access) Act 2009 (GIPA Act) by Ambulance NSW.
Low¹ 5 new, 13 repeat

⁴Extreme risk from the consequence and/or likelihood of an event that has had, or may have a negative impact on the entity.
³ High risk from the consequence and/or likelihood of an event that has had, or may have a negative impact on the entity.
² Moderate risk from the consequence and/or likelihood of an event that has had, or may have a negative impact on the entity.
¹ 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, or draft letters where findings have been agreed with management.

Complexities arising from the COVID-19 response

The 2020–21 audit identified three new high-risk findings

COVID-19 has presented the cluster with several new accounting challenges. New and evolving matters arose from changes to operating conditions, which characterised the 2020–21 financial reporting period. Issues with a high degree of estimation uncertainty will require ongoing attention as the strategies employed to deal with the COVID-19 pandemic evolve.

Expected rate of recovery of outstanding Hotel Quarantine invoices

The estimation of the amount likely to be recovered is complicated not only by the uncertainties that exist regarding the assumptions those estimations rely upon, but also the debt collection processes and strategies put into place to manage the accumulated debtors' balance. Debt collection is not administered by the cluster, but rather Revenue NSW. We observed an absence of a methodology to assess the likelihood of recovery. Instead, Sydney Local Health District was relying on Revenue NSW to develop and execute on a collection strategy. Sydney Local Health District was using the same approach to hotel quarantine debts as it did to other Health receivables. As the approach to managing international borders evolves over time, so too will the cluster's need to develop robust estimation models to assess the likely collectability of debtors.

Procurement, management and impairment of COVID-19 inventories

$656.2 million of COVID-19 inventories were procured in 2020–21, with $220.2 million consumed; $558.7 million impaired and a further $217.1 million written off. Estimates of the degree to which inventories are expired, not fit for purpose or are faulty is often based on management judgement at all stages in the procurement cycle.

With respect to the stocktaking methodology applied, the following issues were identified:

discrepancies noted in the stock bin listing provided for audit
discrepancies in the recount sheet generated
inconsistent application of the stocktake methodology
inconsistent labelling of quarantined stock
a lack of an approach for validating stock expiry dates, which is a key input to the impairment calculations.

Although management had developed processes and a methodology to count as well as to assess the level of inventory that was not fit for purpose, ongoing attention to the operating environment that emerges post pandemic will be important in assessing the degree to which existing COVID-19 inventories can be integrated into a ‘business as usual’ model going forward. Further refinement of the key elements of the stocktaking methodology will also be required to ensure that key inputs upon which management relies to calculate the year-end inventory impairment provision can be appropriately validated.

Valuation and recognition of COVID-19 vaccines received from the Commonwealth Government

The 2020–21 financial reporting period saw the Commonwealth acquire COVID-19 vaccines and provide these to state jurisdictions to dispense to their communities. The vaccines, although provided free of charge require recognition. However, Health entities were not responsible for acquiring the vaccines and data on the vaccines' cost was not shared by the Commonwealth. Management undertook a valuation using publicly available data to estimate the value to attribute to the vaccine inventory; developed new systems and leveraged existing pharmacy systems to track physical quantities received from the Commonwealth and ultimately distributed to NSW citizens. As the response to the pandemic evolves, larger quantities, and new lines of vaccine stock will be dealt with, and policy settings will need to adapt when patterns of distribution of those vaccines (e.g., timing of third booster shots) emerge. The Ministry of Health will need to ensure that the valuations applied to the prices of inventory distributed and held in stock are as accurate as possible. This can be done through further refinement of the existing valuation methodology, obtaining price information from the Commonwealth and engaging specialist pharmaceutical valuers.

Emerging trends

Recognition of provisions without sufficient support

Several NSW Health entities raised accruals and provisions in 2020–21, which did not have an appropriate basis for recognition. Liabilities can only be recognised where there is a present obligation to make a payment arising from a past event. A number of these errors remain uncorrected in the financial statements of those entities as they are not material, individually or in aggregate to the financial statements as a whole. Increased training and guidance are required to ensure that treatment within the cluster is consistent and reflects events that have occurred and give rise to obligations.

Treatment of Commonwealth funding

In the 2020–21 and 2019–20 financial reporting periods, we observed prior period errors arising from the treatment of Commonwealth funding. These errors related to recognising revenue under funding agreements entered into with the Commonwealth in the incorrect period. The conditions of these funding arrangements, the transactional information requiring validation and the circumstances when revenue should be recognised are not always clear and can be complex. Early and continuous engagement with the Commonwealth is required to ensure that revenue recognition principles are consistently applied across the cluster.

Key repeat issues

Management of excessive annual leave

NSW Treasury guidelines stipulate annual leave balances exceeding 30 days are considered excess annual leave balances. Managing excess annual leave balances has been reported as an issue for the cluster for more than five years, with the average percentage of employees with excessive leave balances over the last five years being 36.1 per cent (35.5 per cent over five years covering 2015–16 to 2019–20).

The operational demands required to manage the COVID-19 pandemic have presented new challenges for the cluster in trying to manage its excessive leave balances. 39.2 per cent of employees now have excess leave balances at 30 June 2021 (35.4 per cent at 30 June 2020).

The state's leave policy C2020-12 Managing Accrued Recreation Leave Balances requires agencies to manage excessive leave balances to 30 days or less to maintain their workforces physical and mental health.

Accurate time recording

Forced-finalisation of time records by system administrators within HealthRoster remains an issue and we continue to observe time records forced-finalised by system administrators so pay runs can be finalised on a timely basis. During 2020–21, a total of two million (2.2 million in 2019–20) time records were force approved, which represents 5.7 per cent of total time records (6.9 per cent in 2019–20).

Existence, completeness and accuracy of key agreements

Delivery of major capital projects

Health Infrastructure (a division of the Health Administration Corporation) is responsible for the delivery of major capital projects with a budgeted spend of more than $10.0 million. Health Infrastructure oversee the planning, design, procurement, and construction phases. Capital works in progress are recognised in the financial statements of the health entity that intends to use those assets upon completion. The health entities recognise both the capital work in progress and the revenue associated with the capital funding from the Ministry for the construction of the assets. Capital funding is currently agreed with health entities as part of the annual Service Agreement. The assumption that the health entities control the assets during their construction is consistent with Health Infrastructure's role as an agent for the health entity and the Ministry's policy directive PD2020-033 'Management and control of Health Administration Corporation owned Real Property'.

We continued to observe a lack of clarity regarding agreements between Health Infrastructure, the Ministry and the cluster agency that will eventually receive the completed asset. This can lead to confusion and uncertainty around the rights and obligations of each party to the transaction.

Cross border patient funding arrangements

When patients require medical care in a jurisdiction where they are not generally domiciled, there are arrangements in place to provide funding to support cross border patient treatments. We have previously observed that agreements between NSW and other jurisdictions have not been finalised, and this continues to be the case. In the case of Victoria, no agreement has been finalised for the past seven years.

We continue to note that the cluster has long outstanding receivables and payables with other states. The absence of formal agreements between the states hampers the settlement of the debts relating to the treatment of cross border patients. The following table shows the status of Cross Border Agreements between NSW and other jurisdictions:

States	2014–15	2015–16	2016–17	2017–18	2018–19	2019–20	2020–21
Queensland	Signed	Signed	Signed	Signed	Signed	Not finalised	Not finalised
Victoria	Not finalised	Not finalised	Not finalised	Not finalised	Not finalised	Not finalised	Not finalised
Australian Capital Territory	Signed	Signed	Signed	Signed	Signed	Signed	Not finalised
South Australia	Signed	Signed	Signed	Signed	Signed	Signed	Not finalised
Tasmania	Signed	Signed	Signed	Signed	Signed	Signed	Not finalised
Northern Territory	Signed	Signed	Signed	Signed	Signed	Signed	Not finalised
Western Australia	Signed	Signed	Signed	Signed	Signed	Signed	Not finalised

Albury Base Hospital

Albury Base hospital is located on the border of NSW and Victoria and services residents of both states. Documentation supporting the extension of the expired Intergovernmental Agreement 2009–2017 between NSW and Victoria in relation to the integration of health services in Wodonga and Albury could not be located.