This report analyses the results of our audits of the Health 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 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.

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.

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.

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).

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.

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:

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.

Appendix one – Misstatements in financial statements submitted for audit

Appendix two – Early close procedures

Appendix three – Timeliness of financial reporting

Appendix four – Financial data

Copyright notice

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

This report analyses the results of our audits of the Premier and Cabinet 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 Premier and Cabinet 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 Premier and Cabinet cluster (the cluster) agencies' financial statement audits for the year ended 30 June 2021.

What we found

Unmodified audit opinions were issued for all Premier and Cabinet cluster agencies.

The number of monetary misstatements decreased from 49 in 2019–20 to 38 in 2020–21.

The Library Council of New South Wales corrected a prior period error of $325 million. In 2017, the council split its collection assets into six asset classes, but not the related asset revaluation reserves. To correct this error, some revaluation decrements previously recognised in asset revaluation reserves were reclassified to accumulated funds.

Eight agencies did not complete all of the mandatory early close procedures.

What the key issues were

The Premier and Cabinet cluster was impacted by three Machinery of Government (MoG) changes during 2020–21.

The changes resulted in the transfer of activities and functions in and out of the cluster and the creation of a new entity - Investment NSW.

The transferor entities continued to provide services to Investment NSW subsequent to 30 June 2021. There were no formal service level agreements in place for the provision of these services.

The New South Wales Electoral Commission (the Commission) and Sydney Opera House Trust obtained letters of financial support from their relevant Minister and/or NSW Treasury in 2020–21. The postponement of local government elections impacted the Commission's operations due to increased planned expenditure to support a COVID-safe election. Sydney Opera House Trust's ability to generate revenue was impacted due to the closure of the Concert Hall partly due to COVID-19 and planned renovations.

The number of repeated audit issues raised with management and those charged with governance increased from 22 in 2019–20 to 24 in 2020–21.

There were 47 moderate risk and 28 low risk findings identified. Of the total findings there were 24 repeat issues.

What we recommended

Investment NSW should ensure services received from other agencies are governed by service level agreements.

This report provides Parliament and other users of the Premier and Cabinet’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 Premier and Cabinet cluster (the cluster) for 2021.

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

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

Appendix one – Misstatements in financial statements submitted for audit

Appendix two – Early close procedures

Appendix three – Timeliness of financial reporting

Appendix four – Financial data

Copyright notice

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

What the report is about

This audit assessed nine agencies’ compliance with the NSW Cyber Security Policy (CSP) including whether, during the year to 30 June 2020, the participating agencies:

• met their reporting obligations under the CSP
• reported accurate self-assessments of their level of maturity implementing the CSP’s requirements including the Australian Cyber Security Centre’s (ACSC) Essential 8.

What we found

Key elements to strengthen cyber security governance, controls and culture are not sufficiently robust and not consistently applied. The CSP is not achieving the objectives of improved cyber governance, controls and culture because:

• the CSP does not specify a minimum level for agencies to achieve in implementing the 'mandatory requirements' or the Essential 8
• the CSP does not require agencies to report their target levels, nor does it require risk acceptance decisions to be documented or formally endorsed
• each participating agency had implemented one or more of the mandatory requirements in an ad hoc or inconsistent basis
• none of the participating agencies had implemented all of the Essential 8 controls
• agencies tended to over-assess their cyber security maturity - all nine participating agencies were unable to support all of their self-assessments with evidence
• there is no monitoring of the adequacy or accuracy of agencies' self-assessments.

What we recommended

In this report, we repeat recommendations made in the 2019 and 2020 Central Agencies reports, that Cyber Security NSW and NSW Government agencies need to prioritise improvements to cyber security resilience as a matter of urgency.

Cyber Security NSW should:

• monitor and report compliance with the CSP
• require agencies to report the target and achieved levels of maturity
• require agencies to justify why it is appropriate to target a low level of maturity
• require the agency head to formally accept the residual risk
• challenge agencies' target maturity levels.

Agencies should resolve discrepancies between their reported level of maturity and the level they are able to support with evidence.

Separately, the agencies we audited requested that we not disclose our audit findings. We reluctantly agreed to anonymise our findings, even though they are more than 12 months old. We are of the view that transparency and accountability to the Parliament of New South Wales are part of the solution, not the problem.

The poor levels of agency cyber security maturity are a significant concern. Improvement requires leadership and resourcing.

This report assesses whether state government agencies are complying with the NSW Cyber Security Policy. The audit was based on the level of compliance reported at 30 June 2020.

Our audit identified non-compliance and significant weaknesses against the government’s policy.

Audited agencies have requested that we not report the findings of this audit to the Parliament of New South Wales, even though the findings are more than 12 months old, believing that the audit report would expose their weaknesses to threat actors.

I have reluctantly agreed to modify my report to anonymise agencies and their specific failings because the vulnerabilities identified have not yet been remedied. Time, leadership and prioritised action should have been sufficient for agencies to improve their cyber safeguards. I am of the view that transparency and accountability to the Parliament is part of the solution, not the problem.

The poor levels of cyber security maturity are a significant concern. Improvement requires dedicated leadership and resourcing. To comply with some elements of the government’s policy agencies will have to invest in technical uplift and some measures may take time to implement. However, other elements of the policy do not require any investment in technology. They simply require leadership and management commitment to improve cyber literacy and culture. And they require accountability and transparency. Transparent reporting of performance is a key means to improve performance.

Cyber security is increasingly a focus of governments around Australia. The Australian Cyber Security Centre (ACSC) is the Australian Government’s lead agency for cyber security and is part of the Australian Signals Directorate, a statutory authority within the Australian Government’s Defence portfolio. The ACSC has advised that government agencies at all levels, as well as individuals and other organisations were increasingly targeted over the 2021 financial year¹. The ACSC received over 67,500 cybercrime reports, a 13 per cent increase on the previous year. This equates to one reported cyber attack every eight minutes. They also noted that attacks by cyber criminals and state actors are becoming increasingly sophisticated and complex and that the attacks are increasingly likely to be categorised as ‘substantial’ in impact.

High profile attacks in Australia and overseas have included a sustained malware campaign targeted at the health sector², a phishing campaign deploying emotet malware, spear phishing campaigns targeting people with administrator or other high-level access, and denial of service attacks. The continuing trend towards digital delivery of government services has increased the vulnerability of organisations to cyber threats.

The COVID-19 pandemic has increased these risks. It has increased Australian dependence on the internet – to work remotely, to access services and information, and to communicate and continue our daily lives. Traditional security policies within an organisation’s perimeter are harder to enforce in networks made up of home and other private networks, and assets the organisation does not manage. This has increased the cyber risks for NSW Government agencies.

In March 2020, Service NSW suffered two cyber security incidents in short succession. Technical analysis undertaken by the Department of Customer Service (DCS) concluded that these cyber breaches resulted from a phishing exercise through which external threat actors gained access to the email accounts of 47 staff members. These attacks resulted in the breach of a large amount of personal customer information contained in these email accounts. These attacks were the subject of the Auditor-General's report on Service NSW's handling of personal information tabled on 18 December 2020.

This audit also follows two significant performance audits. Managing cyber risks, tabled on 13 July 2021 found Transport for NSW and Sydney Trains were not effectively managing their cyber security risks. Integrity of data in the Births, Deaths and Marriages Register, tabled 7 April 2020 found that although there are controls in place to prevent and detect unauthorised access to, and activity in the register, there were significant gaps in these controls.

The NSW Cyber Security Policy (CSP) was issued by Cyber Security NSW, a business unit within the Department of Customer Service, and took effect from 1 February 2019. It applies to all NSW Government departments and public service agencies, including statutory authorities. Of the 104 agencies in the NSW public sector that self-assessed their maturity implementing the mandatory requirements, only five assessed their maturity at level three or above (on the five point maturity scale). This means that, according to their own self-assessments, 99 agencies practiced requirements within the framework in what the CSP’s maturity model describes as an ad hoc manner, or they did not practice the requirement at all. Cyber Security NSW and NSW Government agencies need to prioritise improvements to their cybersecurity and resilience as a matter of priority.

This audit looks specifically at the compliance of nine key agencies with the CSP. It looks at their achievement implementing the requirements of the policy, the accuracy of their self-assessments and the attestations they made as to their compliance with the CSP.

The CSP outlines the mandatory requirements to which all NSW Government departments and public service agencies must adhere. It seeks to ensure cyber security risks to agencies’ information and systems are appropriately managed. The key areas of responsibility for agencies are:

• Lead - Agencies must implement cyber security planning and governance and report against the requirements outlined in the CSP and other cyber security measures.
• Prepare - Agencies must build and support a cyber security culture across their agency and NSW Government more broadly.
• Prevent - Agencies must manage cyber security risks to safeguard and secure their information and systems.
• Detect/Respond/Recover - Agencies must improve their resilience including their ability to rapidly detect cyber incidents and respond appropriately.
• Report - Agencies must report against the requirements outlined in the CSP and other cyber security measures.

DCS has only recommended, but not mandated the CSP for state owned corporations, local councils and universities.

NSW Government agencies must include an attestation on cyber security in their annual report and provide a copy to Cyber Security NSW by 31 August each year stating whether, for the preceding financial year, the agency has:

• assessed its cyber security risks
• appropriately addressed cyber security at agency governance forums
• a cyber incident response plan that is integrated with the security components of business continuity arrangements, and the response plan has been tested during the previous 12 months (involving senior business executives)
• certified the agency’s Information Security Management System (ISMS) or confirmed the agency’s Cyber Security Framework (CSF)
• a plan to continuously improve the management of cyber security governance and resilience.

The purpose of the attestation is to focus the agency's attention on its cyber risks and the mitigation of those risks.

Agencies assess their level of compliance in accordance with a maturity model. The CSP does not mandate a minimum maturity threshold for any requirement, including implementation of the Australian Cyber Security Centre's (ACSC) Essential 8 Strategies to Mitigate Cyber Security Incidents (Essential 8).

Agencies are required to set a target maturity level based on their risk appetite for each requirement, seek continual improvement in their maturity, and annually assess their maturity on an ascending scale of one to five for all requirements (refer to Appendix two for the maturity model). Each control within the Essential 8 is assessed on an ascending scale of zero to three reflecting the agency's level of alignment with the strategy (refer to Appendix three for the maturity model).

Scope of this audit

We assessed whether agencies had provided accurate reporting on their level of maturity implementing the requirements of the CSP in a documented way and covering all their systems.

The scope of this audit covered nine agencies (the participating agencies). These agencies were selected because they are the lead agency in their cluster, or have a significant digital presence within their respective cluster. The list of participating agencies is in section 1.2. The audit aimed to determine whether, during the year to 30th June 2020, the participating agencies:

• met their reporting obligations under the CSP
• provided accurate reporting in self-assessments against the CSP’s mandatory requirements, including their implementation of the Australian Cyber Security Centre’s (ACSC) Essential 8
• achieved implementation of mandatory requirements at maturity levels which meet or exceed the ‘level three - defined’ threshold (i.e. are documented and practiced on a regular and consistent basis).

While the audit does assess the accuracy of agency self-assessed ratings, the audit did not assess the appropriateness of the maturity ratings.

1. Key findings

The CSP allows agencies to determine their own level of maturity to implement the 'mandatory requirements', which can include not practicing a policy requirement or implementing a policy requirement on an ad hoc basis. These determinations do not need to be justified

Agencies can decide not to implement requirements of the CSP, or they can decide to implement them only in an informal or ad-hoc manner. The CSP allows agencies to determine their desired level of maturity in implementing the requirements on a scale of one to five - level one being 'initial – not practiced' and level five being 'optimised'. The desired level of maturity is determined by the agency based on their own assessment of the risk of the services they provide and the information they hold.

The reporting template for the 2019 version of the CSP stated that level three maturity - where a policy requirement is practiced on a regular and consistent basis and its processes are documented - was required for compliance with the CSP. This requirement was removed in the 2020 revision of the reporting template.

This CSP does not require the decisions on risk tolerance, or the timeframes agencies have set to implement requirements to be documented or formally endorsed by the agency head. There is no requirement to report these decisions to Cyber Security NSW.

Some comparable jurisdictions require formal risk acceptance decisions where requirements are not implemented. The NSW CSP does not have a similar formal requirement

Some jurisdictions, with a similar policy framework to NSW, require agencies to demonstrate reasons for not implementing requirements, and require agency heads to formally acknowledge the residual risk. The NSW CSP does not require these considerations to be documented, nor does it require an explicit acknowledgement and acceptance of the residual risk by the agency head or Cyber Security NSW. The NSW CSP does not require that the records of how agencies considered and decided which measures to adopt to be documented and auditable, limiting transparency and accountability of decisions made.

All of the participating agencies had implemented one or more of the mandatory requirements in an ad hoc or inconsistent basis

All of the participating agencies had implemented one or more of the mandatory requirements at level one or two. Maturity below level three typically means not all elements of the requirement have been implemented, or the requirements have been implemented on an ad-hoc or inconsistent basis.

None of the participating agencies has implemented all of the Essential 8 controls at level one – that is, only partly aligned with the intent of the mitigation strategy

Eight of the nine agencies we audited had not implemented any of the Essential 8 strategies to level three – that is, fully aligned with the intent of the mitigation strategy. At the time of this audit the ACSC advised that:

as a baseline organisations should aim to reach to reach Maturity Level Three for each mitigation strategy³.

The Australian Signals Directorate⁴ currently advises that, with respect to the Essential 8:

[even] level three maturity will not stop adversaries willing and able to invest enough time, money and effort to compromise a target. As such, organisations still need to consider the remainder of the mitigation strategies from the Strategies to Mitigate Cyber Security Incidents and the Australian Government Information Security Manual

All agencies failed to reach even level one maturity for at least three of the Essential 8.

Cyber Security NSW modified the ACSC model for implementation of the Essential 8

The NSW maturity model used for the Essential 8 does not fully align with the ACSC’s model. At the time of this audit the major difference was the inclusion of level zero in the NSW CSP maturity scale. Level zero broadly means that the relevant cyber mitigation strategy is not implemented or is not applied consistently. Level zero had been removed by the ACSC in February 2019 and was not part of the framework at the time of this audit. It was re-introduced in July 2021 when the ACSC revised the detailed criteria for each element of the essential 8 maturity model. The indicators to reach level one on the new ACSC model are more detailed, specific and rigorous than those currently prescribed for NSW Government agencies. Cyber Security NSW asserted the level zero on the CSP maturity scale:

is not identical to the level zero of the ACSC’s previous Essential 8 maturity model, but is a NSW-specific inclusion designed to prevent agencies incorrectly assessing as level one when they have not achieved that level.

Attestations did not accurately reflect whether agencies implemented the requirements

Of the nine participating agencies, seven did not modify the proforma wording in their attestation to reflect their actual situation. Despite known gaps in their implementation of mandatory requirements, these agencies stated that they had 'managed cyber security risks in a manner consistent with the Mandatory Requirements set out in the NSW Government Cyber Security Policy'. Only two agencies modified the wording of the attestation to reflect their actual situation.

Attestations should be accurate so that agencies’ and the government’s response to the risk of cyber attack is properly informed by an understanding of the gaps in agency implementation of the policy requirements and the Essential 8. Without accurate information about these gaps, subsequent decisions as to prioritisation of effort and deployment of resources are unlikely to effectively mitigate the risks faced by NSW Government agencies.

Participating agencies were not able to support all of their self-assessments with evidence and had overstated their maturity assessments, limiting the effectiveness of agency risk management approaches

Seven of the nine participating agencies reported levels of maturity against both the mandatory requirements and the Essential 8 that were not supported by evidence.

Each of the nine participating agencies for this audit had overstated their level of maturity against at least one of the 20 mandatory requirements. Seven agencies were not able to provide evidence to support their self-assessed ratings for the Essential 8 controls.

Where agency staff over-assess the current state of their cyber resilience, it can undermine the effectiveness of subsequent decision making by Agency Heads and those charged with governance. It means that actions taken in mitigating cyber risks are less likely to be appropriate and that gaps in implementing cyber security measures will remain, exposing them to cyber attack.

Agencies' self-assessments across government exposed poor levels of maturity in implementing the mandatory requirements and the Essential 8 controls

We reviewed the data 104 NSW agencies provided to Cyber Security NSW. The 104 agencies includes nine audited agencies referred to in more detail in this report. Our review of the 104 agency self-assessment returns submitted to Cyber Security NSW highlighted that, consistent with previous years, there remains reported poor levels of cyber security maturity. We reported the previous years’ self-assessments in the Central Agencies 2019 Report to Parliament and the Central Agencies 2020 Report to Parliament.

Only five out of the 104 agencies self-assessed that they had implemented all of the mandatory requirements at level three or above (against the five point scale). Fourteen agencies self-assessed that they had implemented each of the Essential 8 controls at level one maturity or higher (using Cyber NSW’s four point scale). The remainder reported at level zero for implementation of one or more of the Essential 8 controls, meaning that for the majority of agencies the cyber mitigation strategy has not been implemented, or is applied inconsistently.

Where agencies had reported in both 2019 and 2020, agencies’ self-assessments showed little improvement over the previous year’s self-assessments:

• 14 agencies reported improvement across both the Essential 8 and the mandatory requirements
• 8 agencies reported a net decline in both the Essential 8 and the mandatory requirements.

The poor levels of maturity in implementing the Essential 8 over the last couple of years is an area of significant concern that requires better leadership and resourcing to prioritise the required significant improvement in agency cyber security measures.

2. Recommendations

Cyber Security NSW should:

1. monitor and report compliance with the CSP by:

• obtaining objective assurance over the accuracy of self-assessments
• requiring agencies to resolve inaccurate or anomalous self-assessments where these are apparent

2. require agencies to report:

• the target level of maturity for each mandatory requirement they have determined appropriate for their agency
• the agency head's acceptance of the residual risk where the target levels are low

3. identify and challenge discrepancies between agencies' target maturity levels and the risks of the information they hold and services they provide

4. more closely align their policy with the most current version of the ACSC model.

Participating agencies should:

5. resolve the discrepancies between their reported level of maturity and the level they are able to demonstrate with evidence, and:

• compile and retain in accessible form the artefacts that demonstrate the basis of their self-assessments
• refer to the CSP guidance when determining their current level of maturity
• ensure the attestations they make refer to departures from the CSP
• have processes whereby the agency head and those charged with governance formally accept the residual cyber risks.

Repeat recommendation from the 2019 Central Agencies report and the 2020 Central Agencies report

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

The objective of the CSP is to ensure cyber security risks are appropriately managed. However, meeting this objective depends on the requirements being implemented at all agencies to a level of maturity that addresses their specific cyber security risks. Agency systems and data are increasingly interconnected. If an agency does not implement the requirements, or implements them only in an ad-hoc or informal way, an agency is more susceptible to their systems and data being compromised, which may affect the confidentiality of citizens' data and the reliability of services, including critical infrastructure services.

Agencies determine their own target level of maturity, which may mean the requirement is not addressed, or is addressed in an ad hoc or inconsistent way

While the CSP is mandatory for all agencies, it does not set a minimum maturity threshold for agencies to meet.

The reporting template issued in 2019 stated that agencies were required to reach level three maturity in order to comply with the CSP. The 2020 revision⁶ of the CSP and guidance indicates that level three maturity may not be sufficient to mitigate risks. It advises the agency may determine the level to which it believes it is suitable to implement the requirements, and allows for an agency to aim for a target level of maturity less than level three. The agency can set its optimal maturity level with reference to its risk tolerance with the objective that that aim ‘to be as high as possible’. However, ‘as high as possible’ does not necessarily mean ‘fully implemented’. The CSP contemplates that a lower level of maturity is sufficient if it aligns with the agency's risk tolerance.

The Department of Customer Service asserts that while the quotes above were part of their annual templates and policy documents, their documents were incorrect. They assert that the policy has never required a minimum level of maturity to be reached. They have responded to our enquiries that:

…a level three maturity was not a requirement of the Policy or Maturity Model’ and ‘it is misleading to suggest it was a requirement of the Policy.

This audit found that, based on the 2020 reporting template there is no established minimum baseline. Consequently, because the Department of Customer Service had not established a minimum baseline agencies are able to target lower levels (providing they were within the agency’s own risk appetite), which includes targeting to not practice a CSP policy requirement, or to practice a CSP policy requirement on an ad hoc basis.

Where requirements are not implemented, documentation of formal acceptance of the residual risks by the agency head is not required

The New Zealand Government has an approach that is not dissimilar to NSW, in that it also identifies 20 mandatory requirements and allows for a risk based approach to implementation. However, the New Zealand approach puts more rigor around risk acceptance decisions.

The New Zealand Government requires that agencies that do not implement the requirements must demonstrate that a measure is not relevant for them. It requires agencies to document the rationale for not implementing the measure, including explicit acknowledgement of the residual risk by the agency head. They require these records to be auditable.

A security measure with a ‘must’ or ‘must not’ compliance requirement is mandatory. You must implement or follow mandatory security measures unless you can demonstrate that a measure is not relevant in your context.

Not using a security measure without due consideration may increase residual risk for your organisation. This residual risk needs to be agreed and acknowledged by your organisation head.

A formal auditable record of how you considered and decided which measures to adopt is required as part of the governance and assurance processes within your organisation.

The NSW CSP does not require these considerations to be documented or auditable and does not require an explicit acknowledgement or acceptance of the residual risk by the agency head.

None of the participating agencies achieved level three implementation for all mandatory risk prevention and mitigation requirements

Maturity level three is the minimum level whereby an agency has implemented documented processes that are practiced on a regular basis across their environment. An agency has not reached level three if the requirement is implemented on an ad-hoc or inconsistent basis, or if not all elements of the requirement have been implemented.

None of the participating agencies achieved level three implementation for all mandatory requirements.

The requirements of the CSP are organised into five sections. Agency implementation of these requirements is discussed in the next five sections of this report.

• Lead: Planning and governance requirements. Section 2.1
• Prepare: Cyber security culture requirements. Section 2.2
• Prevent: Managing cyber incident prevention requirements. Section 2.3
• Detect/Respond/Recover: Resilience requirements. Section 2.4
• Report: Reporting requirements. Section 2.5.

Appendix one – Response from agencies

Appendix two – The maturity model for the mandatory requirements

Appendix three – Essential 8 maturity model

Appendix four – About the audit

Copyright notice

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

What the report is about

This audit assessed how effectively Transport for NSW (TfNSW) and Sydney Trains identify and manage their cyber security risks.

The NSW Cyber Security Policy (CSP) sets out 25 mandatory requirements for agencies, including implementing the Australian Cyber Security Centre’s Essential 8 strategies to mitigate cyber security incidents, and identifying the agency’s most vital systems, their ‘crown jewels’. 

The audited agencies have requested that we do not disclose detail of the significant vulnerabilities detected during the audit, as these vulnerabilities are not yet remediated. We provided a detailed report to the agencies in December 2020 outlining significant issues identified in the audit. We have conceded to the agencies' request but it is disappointing that transparency to the Parliament and the public on issues that potentially directly affect them needs to be limited in this way.

What we found

TfNSW and Sydney Trains are not effectively managing their cyber security risks.

Both agencies have assessed their cyber security risks as unacceptably high and both agencies had not identified all of the risks we detected during this audit – some of which are significant.

Both agencies have cyber security plans in place that aim to address cyber security risks. TfNSW and Sydney Trains have combined this into the Transport Cyber Defence Rolling Program, part of the Cyber Defence Portfolio (CDP). 

However, neither agency has reached its target ratings for the CSP and the Essential 8 and maturity is low in relation to significant risks and vulnerabilities exposed.

Further, neither agency is fostering a culture where cyber security risk management is an important and valued aspect of decision-making.

TfNSW is not implementing cyber security training effectively across the cluster with only 7.2% of staff having completed basic cyber security training.

What we recommended

TfNSW and Sydney Trains should:

• develop and implement a plan to uplift the Essential 8 controls to the agency's target state
• as a matter of priority, address the vulnerabilities identified as part of this audit and previously described in a detailed Audit Office report provided to both agencies
• ensure cyber security risk reporting to executives and the Audit and Risk Committee
• collect supporting information for the CSP self assessments 
• classify all information and systems according to importance and integrate this with the crown jewels identification process
• require more rigorous analysis to re-prioritise CDP funding 
• increase uptake of cyber security training.

TfNSW should assess the appropriateness of its target rating for each of the CSP mandatory requirements.

Department of Customer Service should:

• clarify the requirement for the CSP reporting to apply to all systems
• require agencies to report the target level of maturity for each mandatory requirement.

Response to requests by audited agencies to remove information from this report

In preparing this audit report, I have considered how best to balance the need to support public accountability and transparency with the need to avoid revealing information that could pose additional risk to agencies’ systems. This has involved an assessment of the appropriate level of detail to include in the report about the cyber security vulnerabilities identified in this audit.

In making this assessment, the audit team consulted with Transport for NSW (TfNSW), Sydney Trains, and Cyber Security NSW to identify content which could potentially pose a threat to the agencies’ cyber security.

In December 2020, my office also provided TfNSW and Sydney Trains with a detailed report of many of the significant vulnerabilities identified in this audit, to enable the agencies to address the cyber security risks identified. The detailed report was produced as a result of a 'red team' exercise, which was conducted with both agencies' knowledge and consent. The scope of this exercise reflected the significant input provided by both agencies. More information on this exercise is at page 12 of this report.

TfNSW and Sydney Trains have advised that in the six months from December 2020 and at the time of tabling this audit report, they have not yet remediated all the vulnerabilities identified. As a result, they, along with Cyber Security NSW, have requested that we not disclose all information contained in this audit report to reduce the likelihood of an attack on their systems and resulting harm to the community. I have conceded to this request because the vulnerabilities identified have not yet been remediated and leave the agencies exposed to significant risk.

It should be stressed that the risks identified in the detailed report exist due to the continued presence of these previously identified vulnerabilities, rather than due to their potential publication. The audited agencies, alone, are accountable for remediating these vulnerabilities and addressing the risks they pose.

It is disappointing that transparency to the Parliament and the public on issues that potentially directly affect them needs to be limited in this way.

That said, the conclusions drawn in this report are significant in terms of risk and remain valid, and the recommendations should be acted upon with urgency.

Cyber security risk is an increasing area of concern for governments in Australia and around the world. In recent years, there have been a number of high-profile cyber security attacks on government entities in Australia, including in New South Wales. Malicious cyber activity in Australia is increasing in frequency, scale, and sophistication. The Audit Office of New South Wales is responding to these risks with a program of audits in this area, which aim to identify the effectiveness of particular agencies in managing cyber risks, as well as their compliance with relevant policy.

Cyber Security NSW, part of the Department of Customer Service (DCS) releases and manages the NSW Cyber Security Policy (CSP). The CSP sets out 25 mandatory requirements for agencies, including making it mandatory for agencies to implement the Australian Cyber Security Centre Essential 8 Strategies to Mitigate Cyber Security Incidents (the Essential 8). The Essential 8 are key controls which serve as a baseline set of protections which agencies can put in place to make it more difficult for adversaries to compromise a system. Agencies are required to self-assess their maturity against the CSP and the Essential 8, and report that assessment to Cyber Security NSW annually.

The CSP makes agencies responsible for identifying and managing their cyber security risks. The CSP sets out responsibilities and governance regarding risk identification, including making agencies responsible for identifying their 'crown jewels', the agency's most valuable and operationally vital systems. Once these risks are identified, agencies are responsible for developing a cyber security plan to mitigate those risks.

This audit focussed on two agencies: Transport for NSW (TfNSW) and Sydney Trains. TfNSW is the lead agency for the Transport cluster and provides a number of IT services to the entire cluster, including Sydney Trains. This audit focussed on the activities of TfNSW's Transport IT function, which is responsible for providing cyber security across the cluster, as well as directly overseeing four of TfNSW's crown jewels. Sydney Trains is one of the agencies in the Transport cluster. While it receives some services from TfNSW, it is also responsible for implementing its own IT controls, as well as controls to protect its Operational Technology (OT) environment. This OT environment includes systems which are necessary for the operation and safety of the train network.

To test the mitigations in place and the effectiveness of controls, this audit involved a 'red team' simulated exercise. A red team involves authorised attackers seeking to achieve certain objectives within the target's environment. The red team simulated a determined external cyber threat actor seeking to gain access to TfNSW's systems. The red team also sought to test the physical security of some Sydney Trains' sites relevant to the agency's cyber security. The red team exercise was conducted with the knowledge of TfNSW and Sydney Trains.

This audit included the Department of Customer Service as an auditee, as they have ownership of the CSP through Cyber Security NSW. This audit did not examine the management of cyber risk in the Department of Customer Service.

This audit assessed how effectively selected agencies identify and manage their cyber security risks. The audit assessed this with the following criteria:

• Are agencies effectively identifying and planning for their cyber security risks?
• Are agencies effectively managing their cyber security risks?

Following this in-depth portfolio assessment, the Auditor-General for NSW will also table a report on NSW agencies' compliance with the CSP in the first quarter of 2021–22.

Agencies have assessed their cyber risks as being above acceptable levels

An agency's risk tolerance is the amount of risk which the agency will accept or tolerate without developing further strategies to modify the level of risk. Risks that are within an agency's risk tolerance may not require further mitigation and may be deemed acceptable, while risks which are above the agency's risk tolerance likely require further mitigation before they become acceptable to the agency.

Both agencies have defined their risk tolerance and have identified risks which are above this level, indicating that they are unacceptable to the agency. TfNSW has defined 'very high' risks as generally intolerable and 'high' risks as undesirable. Its risk tolerance is 'medium'. Sydney Trains has four classifications of risk: A, B, C and D. A and B risks are deemed 'unacceptable' and 'undesirable' respectively, while C risks are considered 'tolerable'. This aligns with the TfNSW definition of a medium risk tolerance.

Transport IT reported five enterprise-level cyber security risks through its enterprise risk reporting tool in September 2020, all of which relate to cyber security or have causes relating to cyber security. These risks are in aggregate form, rather than relating to specific vulnerabilities. At the time of the audit, one of these risks was rated as very high and the other four rated as high. At this time, Transport IT had identified a further seven divisional-level risks which were above the agency’s risk tolerance.

Similarly, Sydney Trains has identified one main cyber security risk in its IT enterprise-level risk register and another with a potential cyber cause. Both of these IT risks are deemed to have a residual risk of ‘unacceptable’.

Similarly, two cyber-related OT risks have been determined to be above the agency's risk tolerance. One risk is rated as 'unacceptable'. Another risk, while not entirely cyber rated, is rated 'undesirable' and is deemed to have some causes which may stem from a cyber-attack.

Agencies have assessed their current cyber risk mitigations as requiring improvement

In addition to the risk ratings stated above, at the time of the audit neither agency believed that its controls were operating effectively. Transport IT had rated the control environments for its cyber security enterprise risks as 'requires improvement'. Mitigations were listed in the risk register for these risks but, in some cases, they were unlikely to reduce the risk to the target state or by the target date. For example, one risk had actions listed as 'under review' and no further treatment actions listed, but a due date of July 2021, while another risk was being treated by the CDP with a due date of July 2021. The CDP identified in May 2020 that while the average risk identified as part of that program will be reduced to a medium level by this date, ten high risks will still remain. Given the delays in the program, this number may be higher. As such, it seems unlikely that the enterprise risk will be reduced to below a 'high' level by July 2021.

Sydney Trains’ IT and OT risk registers cross-reference controls and mitigations against the causes and consequences. The IT cyber security risk identified in the register had causes with no mitigations designed for them. Further, some of these causes did not have future mitigations designed for them. This risk also had controls in place which are identified as partially effective. For the unacceptable OT risk noted above, while there was a control designed for each of the potential causes, Sydney Trains had identified all of the controls in place as either partially effective or ineffective. This indicates that Sydney Trains was not effectively mitigating the causes of its cyber risks and, even where it had designed controls or mitigations, these were not always implemented to fully mitigate the cause of the risk.

Additional information on gaps in cyber mitigations which were exposed in the course of this audit has been detailed to both agencies. The Foreword of this report provides information about why this detail is not included here.

Essential 8 maturity is low across TfNSW and Sydney Trains and little progress was made in 2020

CSP mandatory requirement 3.2 states that agencies must implement the ACSC Essential 8. Agencies must also rate themselves against each of the Essential 8 on a maturity scale from zero to three and report this to Cyber Security NSW. A full list of the Essential 8 can be found in Exhibit 1. Both agencies have a low level of maturity against the Essential 8 not just in comparison to the targets they have set, but also in relation to the risks and vulnerabilities exposed. Both agencies have set target maturity ratings for the Essential 8 but none of the Essential 8 ratings across either agency are currently implemented to this level. Having a low level of Essential 8 maturity exposes both agencies to significant risks and vulnerabilities. Little progress was made between the 2019 and 2020 attestation periods.

Transport IT has set a target rating of three across all of the Essential 8. Sydney Trains has set a target rating of three for its IT systems. Sydney Trains had an interim target of two for its OT systems in 2020 and advised that this has since increased to three. It should be noted that not all the Essential 8 are applicable to OT systems.

None of the Essential 8 ratings across either agency are currently implemented to the target levels. Given that the Essential 8 provide the controls which are most commonly able to deter cyber-attacks, having maturity at a low level potentially exposes agencies to a cyber security attack.

Some work is underway across both TfNSW and Sydney Trains to improve the Essential 8 control ratings. The CDP provided some resources to the Essential 8 over 2019–20, with uplift focusing on specific systems. The CDP work in 2019 and 2020 relevant to the Essential 8 largely focussed on determining the current state of the Essential 8 and creating a target state roadmap. As a result, there was little improvement between the 2019 and 2020 attestation periods. The CDP has a workstream for the Essential 8 in its FY 2020–21 funding allocation, however as noted above in Exhibit 6 this was delayed as resources were redeployed to Project La Brea. Regardless, work on some specific aspects of the Essential 8 remain part of the 2020–21 CDP allocation, with workstreams allocated to improving three of the Essential 8. In addition, some work from Project La Brea should lead to an improvement in the Essential 8.

Sydney Trains' Cyber Uplift Program included a workstream which had in scope the uplift in the Essential 8 in IT. There were also other workstreams which aimed to improve some of the Essential 8 for OT systems. Work is also ongoing as part of the CDP to uplift these scores in Sydney Trains.

TfNSW and Sydney Trains have not reached their target maturity across the CSP mandatory requirements and TfNSW has not evaluated its cluster-wide target to ensure it is appropriate

Cyber Security NSW allows each agency to determine its target level of maturity for the first 20 CSP mandatory requirements. Agencies can tailor their target levels to their risk profile. Not reaching the target rating of the CSP mandatory requirements risks information and systems being managed inconsistently or not in alignment with good governance principles.

Sydney Trains has set its target level of maturity for IT and OT. All of Sydney Trains' target maturity levels are at least a three (defined), with a target of four (quantitatively managed) for many of the mandatory requirements. While Cyber Security NSW does not currently mandate a minimum level of maturity, in 2019 there was a requirement for each agency to target a minimum level of three.

Sydney Trains has not met its target ratings across the mandatory requirements.

The Transport Cyber Defence Rolling Program has a program KPI to ensure that the entire cluster reaches a minimum maturity level of three against all the CSP requirements by 2023. TfNSW has not reviewed its CSP mandatory requirement targets to determine if a three is desirable for all requirements or if a higher target level may be more appropriate. It is important for senior management to set cyber security objectives as a demonstration of leadership and a commitment to cyber security.

TfNSW has not met its target ratings across the mandatory requirements for its Group IT ISMS, which was the focus of this audit.

Both agencies claimed progress in their implementation of the mandatory requirements between 2019 and 2020. The audit did not seek to verify the self-assessed results from either agency.

Both agencies operate ISMS in line with the CSP

CSP mandatory requirement 3.1 requires agencies to implement an Information Security Management System (ISMS) or Cyber Security Framework (CSF), with scope at least covering systems identified as the agency's ‘crown jewels’. The ISMS or CSF should be compliant with, or modelled on, one or more recognised IT or OT standard. As noted in the introduction, an ISMS ‘consists of the policies, procedures, guidelines, and associated resources and activities, collectively managed by an organisation, in the pursuit of protecting its information assets.’ Both agencies operate an ISMS compliant with the CSP requirement.

As noted in the introduction, TfNSW operates four ISMS. The Transport IT ISMS is certified against ISO27001, the most common standard for ISMS certification. Three of TfNSW’s six crown jewels are managed within this ISMS. The other ISMS are not certified to relevant standards, though TfNSW claims that they align with relevant controls. This is sufficient for the purposes of the CSP.

Sydney Trains operates two ISMS, one for IT and another for OT. Neither of these are certified to relevant ISMS Standards, however there have been conformance reviews of both IT and OT with relevant standards. These ISMS cover all crown jewels in the agency.

There are currently 11 ISMS in operation across the Transport cluster. TfNSW has proposed moving towards a holistic approach to these ISMS, with the CDP Board responsible for governing the available security controls and directing agency IT and OT teams to implement these.

Agencies are not routinely conducting audits of third-party suppliers to ensure compliance with contractual obligations

CSP mandatory requirement 1.5 makes agencies accountable for the cyber risks of their ICT service providers and ensuring that providers comply with the CSP and any other relevant agency security policies. The ACSC has provided advice on what organisations should do when managing third party suppliers of ICT. The ACSC advises that organisations should use contracts to define cyber security expectations and seek assurance to ensure that these contract expectations are being met. While both agencies usually include specific cyber security expectations in contracts, neither is routinely seeking assurance that these expectations are being met.

The NSW Government has mandated the use of the 'Core& One' contract template for low-value IT procurements and the Procure IT contract template for high-value IT procurements. Both of these contracts contain space for the procuring agency to include cyber security controls for the contractor to implement. The Procure IT contract template also includes a right-to-audit clause which allows agencies to receive assurance around the implementation of these controls. TfNSW and Sydney Trains used the mandated contracts for relevant contracts examined as part of this audit.

TfNSW included security controls in all the contracts examined as part of this audit. Compliance with ISO27001 was the most commonly stated security expectation. Of the contracts examined as part of this audit, only one contract did not have a right-to-audit clause. This contract was signed in October 2016. While these clauses are in place, TfNSW rarely conducted these audits on its third-party providers. Of the eight TfNSW contracts examined in detail, only two of these had been audited to confirm compliance with the stated security controls.

Sydney Trains included security controls in all but one of the contracts examined as part of this audit. Sydney Trains did not require contractors to be compliant with ISO27001, but only required compliance with whole-of-government policies. Sydney Trains does not routinely conduct audits of its third-party suppliers, however it did conduct deep-dive risk analyses of its top ten highest risk IT suppliers. This involved a detailed review of both the suppliers' security posture and also the contract underpinning the relationship with the supplier.

The CDP funding for 2020–21 includes a workstream for strategic third-party contract remediation. This funding is to conduct some foundational work which will allow the CDP to make further improvements in future years. While this funding will not address gaps in contract requirements or management across all contracts, this workstream aims to reduce the risks posed by strategic suppliers covering critical assets. Similarly, work is currently underway as part of the CDP to conduct OT risk assessments for key suppliers to Sydney Trains in a similar way to the work undertaken for IT suppliers.

Sydney Trains has risk assessed its third-party suppliers but TfNSW has not done so

It is important to conduct a risk assessment of suppliers to identify high-risk contractors. This allows agencies to identify those contractors who may require additional controls stated in the contract, those who require additional oversight, and also where auditing resources are best targeted.

Sydney Trains has risk assessed all its IT suppliers and, as noted above, has conducted a deep-dive risk analysis of its top ten highest risk suppliers. TfNSW has not undertaken similar analysis of its key suppliers, however it has identified risks attached to each of its strategic suppliers and has documented these. As a result of not risk assessing its suppliers, TfNSW cannot take a targeted approach to its contract management.

TfNSW demonstrated poor records handling relating to the contracts examined as part of this audit

TfNSW was not able to locate one of the contracts requested as part of the audit's sample. Other documentation, such as contract management plans, could not be located for many of the other contracts requested as part of this audit. These poor document handling practices limits TfNSW's ability to effectively oversee service providers and ensure that they are implementing agreed controls. It also limits public transparency on the effectiveness of these controls.

The Transport cluster is not effectively implementing cyber security awareness training

Agencies are responsible for implementing regular cyber security education for all employees and contractors under mandatory requirement 2.1 in the CSP. TfNSW is responsible for delivering this training to the whole Transport cluster, including Sydney Trains. The Transport cluster has basic cyber awareness training available for all staff. TfNSW also offers additional training provided by Cyber Security NSW targeted at executives and executive assistants. While TfNSW has training available to staff, it is not delivering this effectively. TfNSW does not make training mandatory for most staff nor does it require staff to repeat training regularly. Even among those staff who have been assigned the training, completion rates are low, meaning that delivery is not effectively monitored. Cyber security training is important for building and supporting a cyber security culture.

TfNSW is responsible for creating and rolling out all forms of training to agencies within the Transport cluster. Both TfNSW and Sydney Trains have the same mandatory cyber awareness training that is automatically assigned to new starters. At the time of the audit, this training was not mandatory for ongoing staff. TfNSW does make additional cyber security training available to staff who can choose to undertake the training themselves, or can be assigned the training by their manager. All TfNSW cyber security training is delivered via online modules and it is the responsibility of managers to ensure that it is completed.

Cyber security training completion rates for both TfNSW and Sydney Trains are low. Only 13.5 per cent of staff across the Transport cluster had been assigned the Cyber Safety for New Starters training as of January 2021. Although this course is mandatory for new starters, only 53 per cent of staff assigned the Cyber Safety for New Starters training module had completed the course by January 2021. As a result, only 7.2 per cent of staff across the entire Transport cluster had completed this training at that time. In Sydney Trains, less than one per cent of staff had completed this training as at January 2021 and a further 7.6 per cent of staff have completed the 'Cyber Security: Beyond the Basics' training. These low completion rates indicate that TfNSW is not effectively rolling out cyber security training across the cluster.

In October 2020, the Department of Customer Service released 'DCS-2020-05 Cyber Security NSW Directive - Practice Requirement for NSW Government', which made annual cyber security training mandatory for all staff from 2021. In line with this requirement, TfNSW has advised that it will be gradually implementing mandatory annual training from July 2021 for all staff.

The Transport cluster undertakes activities to build a cyber-aware culture in accordance with the CSP, but awareness remains low

Increasing staff awareness of cyber security risks and maintaining a cyber secure culture are both mandatory requirements of the CSP. While TfNSW does undertake some activities to build a cyber aware culture, awareness of cyber security risks remains low. This can be demonstrated by the low training rates outlined above, and the 'Spot the Scammer' exercise, described in Exhibit 7. TfNSW is responsible for delivering these awareness raising activities across the cluster.

TfNSW frequently communicates with staff across the Transport cluster about various cyber security risks through multiple avenues. Both agencies use the intranet, emails and other awareness raising activities to highlight the importance for staff to be aware of the seriousness of cyber risks. Advice given on the intranet includes tips for spotting scammers on mobile phones, promoting the cluster-wide training courses, as well as various advice that staff could use when dealing with cyber risks in the workplace.

In addition to these awareness raising activities, TfNSW has also undertaken a cluster-wide phishing email exercise called 'Spot the Scammer'. This is outlined in Exhibit 7. This exercise was carried out in 2019 and 2020 and allowed the Transport cluster to measure the degree to which staff were able to identify phishing emails. As can be seen in Exhibit 7, the results of this exercise indicate that staff awareness of phishing emails remains low.

Appendix one – Response from agencies

Appendix two – Cyber Security Policy mandatory requirements

Appendix three – About the audit

Appendix four – Performance auditing

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

Parliamentary reference - Report number #353 - released (13 July 2021).

The Auditor-General for New South Wales, Margaret Crawford, released a report today examining the effectiveness of Service NSW’s handling of customers’ personal information to ensure its privacy.

The audit found that Service NSW is not effectively handling personal customer and business information to ensure its privacy. Service NSW continues to use business processes that pose a risk to the privacy of personal information. This includes the routine emailing of personal information between Service NSW service centres and other agencies, which is one of the processes that contributed to the data breach earlier this year. The audit found that previously identified risks and recommended solutions had not been implemented on a timely basis.

The Auditor-General made eight recommendations aimed at ensuring improved processes, technologies, and governance arrangements for how Service NSW handles customers’ personal information.

The Hon. Victor Dominello, MP, Minister for Customer Service, requested this audit under section 27(B)(3)(c) of the Public Finance and Audit Act 1983 following public reports in May 2020 of a cyber security attack which had led to a breach of Service NSW customer information. This audit also included the Department of Customer Service which supports Service NSW with privacy, risk and governance functions.

Service NSW was established in 2013 with the intention that it would, over time, 'become the primary interaction point for customers accessing New South Wales Government transaction services'.

Service NSW's functions are set out in the Service NSW (One stop Access to Government Services) Act 2013. This legislation allows for other NSW Government agencies to delegate to and enter into agreements with the Chief Executive Officer of Service NSW in order for Service NSW to undertake service functions for the agency.

Service NSW now has agreements with 36 NSW Government client agencies to facilitate over 1,200 types of interactions and transactions for the community.

The nature of each agreement between Service NSW and its client agencies varies. Some client agencies have delegated authority to allow Service NSW staff to conduct transactions on their behalf in the agencies' systems. Other arrangements do not include the same degree of delegation. In these cases, Service NSW provides services such as responding to enquiries and validating documents.

In addition, Service NSW conducts transactions for its own programs, such as the Seniors Card. Personal information for these programs, as well as information for customers' MyServiceNSW accounts, are stored by Service NSW on its Salesforce Customer Relationship Management (CRM) system.

In March 2020, Service NSW suffered two cyber security attacks in short succession. Technical analysis undertaken by the Department of Customer Service (DCS) concluded that these attacks resulted from a phishing exercise through which external threat actors gained access to the email accounts of 47 staff members. These attacks resulted in the breach of a large amount of personal customer information that was contained in these email accounts. See Section 1.1 for further details.

This audit is being conducted in response to a request from the Hon. Victor Dominello, Minister for Customer Service, under section 27B(3)(c) of the Public Finance and Audit Act 1983. Minister Dominello requested that the Auditor General conduct a performance audit in relation to Service NSW's handling of sensitive customer and business information.

This audit assessed how effectively Service NSW handles personal customer and business information to ensure its privacy.

It addressed the following:

• Does Service NSW have processes and governance in place to identify and manage risks to the privacy of personal customer and business information?
• Does Service NSW have policies, processes and systems in place that support the effective handling of personal customer and business information to ensure its privacy?
• Has Service NSW effectively implemented its policies, processes and systems for managing personal customer and business information?

1. Key findings

Service NSW identifies privacy risks, but the controls and processes it put in place to mitigate these privacy risks were not adequate to prevent or limit the extent of the data breach that occurred in March 2020

Service NSW’s approach to risk management is framed by its Risk Management Guideline, which defines 'privacy and compliance' as one of the key types of risk for the agency. Service NSW's enterprise risk register identifies four strategic privacy related risks. Service NSW has set out a zero level appetite for privacy risk in its risk appetite statement.

Service NSW has assessed the adequacy of its controls for privacy risks as needing improvement. To be fully effective, the Risk Management Guideline says that these controls should have a focus that is ‘largely preventative and address the root causes’.

One of the business processes that was a key contributing factor to the data breach was the emailing of personal information by Service NSW staff to client agencies.

This process had been identified as a risk prior to the breach and some steps had been put in place to mitigate the risk. In particular, staff were required to manually delete emails that contained personal information. However, these measures were ineffective in preventing the breach, as the external threat actors still gained access to 47 staff email accounts that contained a large amount of personal information.

It is unclear why Service NSW did not effectively mitigate this risk prior to the breaches. However, Service NSW has advised that it implemented measures in June and October 2020 to automatically archive emails likely to contain personal information. This is expected to limit the quantity of information retained in email accounts for extended periods.

Service NSW has not put in place any technical or other solutions to avoid Service NSW staff having to scan and email personal information to some client agencies. Urgent action is needed to remove the requirement for staff to email personal information to client agencies, thereby mitigating the risk inherent in sending and storing this information using email.

There are weaknesses in the general IT and security controls implemented by Service NSW over its Salesforce CRM system, which holds the personal information of over four million customers

There are weaknesses in the general IT and security controls implemented by Service NSW over its Salesforce CRM system. These weaknesses include deficiencies in governance of role based access, monitoring and audit of staff access, and partitioning of program specific transaction information. These deficiencies create an increased risk of unauthorised access to the personal information of over four million customers which is stored in this system.

In addition, there is an absence of important controls to safeguard customers' privacy, such as multi factor authentication and reviewable logs of access history to their information. Such controls, when properly implemented, would enhance the control that customers are able to exercise over their personal information.

A privacy impact assessment conducted on Service NSW’s Salesforce CRM system in 2015 recommended that the system include the ability for customers to review access history to their personal information, as well as the option for customers to apply multi factor authentication to their accounts. While both these recommendations appeared positively received by Service NSW, neither have been implemented.

Since its inception, Service NSW’s use of Salesforce has extended to storing transaction data, particularly for transactions for which Service NSW is responsible, such as the Seniors Card. It also holds details of over four million MyServiceNSW account holders, including name, email address and phone number, and optional address details. It was not originally intended for the system to hold this volume and nature of customer information.

Lines of responsibility for meeting privacy obligations are unclear between Service NSW and its client agencies

Service NSW's privacy management plan does not clearly set out the privacy obligations of Service NSW and its client agencies. It sets out that 'compliance with the privacy principles will primarily be the responsibility of that [client] agency'. However, Service NSW has its own obligations under the security principles of the Privacy and Personal Information Protection Act 1998 (PPIP Act) to take reasonable steps to prevent unauthorised access to personal information, which is not made clear in the privacy management plan.

The agreements between Service NSW and client agencies reviewed for this audit only include general and high level references to privacy. Most do not include details of each parties' privacy responsibilities such as: which agency will provide the customer with a privacy notice explaining how their personal information will be handled, how personal information will be kept secure, how long Service NSW will retain information, what processes will be followed for internal reviews, and what specific planning is in place to respond to data breaches.

Service NSW's privacy management plan has not been updated to include new programs and governance changes

Service NSW's privacy management plan includes most of the matters required by law or good practice, with some exceptions. It does not explain any exemptions that the agency commonly relies on under the PPIP Act and does not address any health information that Service NSW may handle. It had also not been updated to reflect governance changes and the fact that, at the time this audit commenced, Service NSW was disclosing the content of internal review applications (the formal expression for 'complaints') to the Department of Customer Service (DCS). These governance changes were part of the centralisation of Service NSW's corporate support functions into DCS in late 2019, though internal review staff were seconded back into Service NSW during the course of this audit.

The current July 2019 privacy management plan has also not been updated since the rollout of a number of major new initiatives in 2020. These include 2019–20 bushfire emergency recovery initiatives (such as small business grants) and COVID 19 pandemic response initiatives (such as small business grants, border permits and the COVID safe check in app).

Service NSW routinely conducts privacy impact assessments for new initiatives, though privacy risks remain in legacy systems and processes

Service NSW routinely conducts privacy impact assessments for major new initiatives and the assessments reviewed for this audit largely accorded with good practice guidance.

Service NSW does not routinely review existing processes and systems to ensure that they are effective in ensuring the privacy of customer personal information. Business processes that create the highest risk to privacy, such as emailing of personal information, are more common in these longstanding legacy systems.

Service NSW's significant and rapid growth has outpaced the establishment of a robust control environment which has exacerbated privacy risks

Since it was established in 2013, Service NSW has experienced significant growth in the number and diversity of the types of transactions it provides, as well as the number of client agencies with which it works. The pace and extent of this growth has contributed to important controls not being properly implemented on a timely basis, which has heightened privacy risks, particularly in regard to existing, legacy systems and processes.

The pace of change and increasing demand for new program implementation has limited the opportunity for Service NSW, in collaboration with its client agencies, to revisit and redesign legacy business practices which pose a greater privacy risk. This includes the scanning and emailing of personal information.

While 2019–20 has seen additional demands placed on Service NSW in responding to the 2019–20 bushfire emergency and COVID 19 pandemic, it is the nature of the agency’s work that it operates in a fast paced and complex environment, where it is required to respond to multiple client agencies and stakeholders. Ensuring customer privacy should be integral to Service NSW’s business as usual operations.

2. Recommendations

Service NSW commissioned a number of external reviews and investigations stemming from the data breaches. The Auditor General's recommendations below have taken these other reviews into account. In order to offer assurance that it is appropriately protecting the privacy of its customers, Service NSW should address the full breadth of findings and recommendations made across all relevant reviews.

As a matter of urgency, Service NSW should:

1. in consultation with relevant client agencies and the Department of Customer Service, implement a solution for a secure method of transferring personal information between Service NSW and client agencies

2. review the need to store scanned copies of personal information and, if still required, implement a more secure method of storing this information and regular deletion of material.

By March 2021, Service NSW should:

3. ensure that all new agreements entered into with client agencies from 1 April 2021 address the deficiencies identified in this audit, including that they provide clarity on:

• the content and provision of privacy collection notices
• the terms by which personal information will be retained, stored, archived, and disposed of when no longer required
• steps that will be taken by each agency to ensure that personal information is kept secure
• the circumstances in which, and processes by which, applications for internal review will be referred by one agency to the other
• how identified breaches of privacy will be handled between agencies

4. in collaboration with the Department of Customer Service, review its privacy management plan to address the deficiencies raised in this audit, including:

• to clarify Service NSW's understanding of how responsibility for meeting privacy obligations are delineated between Service NSW and client agencies
• to better reflect the full scope and complexity of personal information handled by Service NSW
• to better explain how applications for internal review are handled between Service NSW and the Department of Customer Service
• to ensure regular ongoing review, either according to a schedule or when Service NSW experiences substantial change to its programs and handling of personal information

5. in consultation with the Department of Customer Service, review its policies and processes for the management of privacy risks, including to:

• ensure that there are appropriate mechanisms to escalate identified privacy risks from business units to the Executive Leadership Team
• ensure that there are action plans to address strategic privacy risks that are assessed as having ineffective controls.

By June 2021, Service NSW should:

6. address deficiencies in the controls over, and security for, its Salesforce customer relationship management and related systems that hold customer personal information, including:

• establish policies and processes for regular access reviews and monitoring of user activity in these systems, including for privileged users
• enable partitioning and role based access restrictions to personal information collected for different programs
• provide customers the choice to use multi factor authentication to further secure their MyServiceNSW accounts
• enable customers to view the transaction history of their personal information to detect possible mishandling.

By December 2021, Service NSW should:

7. ensure that all existing agreements with client agencies address the deficiencies identified in this audit, including that they provide clarity on:

• the content and provision of privacy collection notices
• the terms by which personal information will be retained, stored, archived, and disposed of when no longer required
• steps that will be taken by each agency to ensure that personal information is kept secure
• the circumstances in which, and processes by which, applications for internal review will be referred by one agency to the other
• how identified breaches of privacy will be handled between agencies

8. carry out a risk assessment of all processes, systems and transactions that involve the handling of personal information and undertake a privacy impact assessment for those that:

• are identified as high risk and have not previously had a privacy impact assessment
• have had major changes or updates since the privacy impact assessment was completed.

Appendix one – Responses from agencies

Appendix two – About the audit

Copyright notice

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

This report analyses the results of our audits of the financial statements of the Treasury, Premier and Cabinet, Customer Service cluster agencies (central agencies), and the Legislature for the year ended 30 June 2020. The table below summarises our key observations.

1. Financial reporting

2. Audit observations

This report provides Parliament and other users of NSW Government central agencies' financial statements and the Legislature's financial statements with the results of our financial audits, observations, analyses, conclusions and recommendations.

Emergency events, such as bushfires, floods and the COVID-19 pandemic significantly impacted agencies in 2019–20. Our findings on nine agencies that were most impacted by recent emergency events are included throughout this report.

Refer to Appendix one for the names of all central agencies and Appendix four for the nine agencies most impacted by emergency events.

Financial reporting is an important element of good governance. Confidence and transparency in public sector decision making are enhanced when financial reporting is accurate and timely. This chapter outlines our audit observations on the financial reporting of central agencies and the Legislature for 2020, including the financial implications from recent emergency events.

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 the financial statement audits of agencies in the central agencies and the Legislature
• our assessment of how well agencies adapted their systems, policies, procedures and governance arrangements in response to recent emergencies.

Appendix one – Timeliness of financial reporting by agency

Appendix two – List of 2020 recommendations

Appendix three – Status of 2019 recommendations

Appendix four – Agencies most impacted by recent emergency events

Appendix five – Management letter findings by agency

Appendix six – Financial data

This report analyses the results of our audits of financial statements of the Health cluster for the year ended 30 June 2020. The table below summarises our key observations.

1. Financial reporting

2. Audit observations

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.

The impacts of the COVID-19 pandemic on the cluster were significant and included changes to the operations of the health entities and increased revenue, expenditure, assets and liabilities.

As a part of this year's audits of health entities, we have considered:

• financial implications of the COVID-19 emergency at both health entity and cluster levels
• changes to agencies' operating models
• agencies' access to technology and the maturity of systems and controls to prevent unauthorised and fraudulent access to data.

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 response to the COVID-19 pandemic primarily impacted the financial reporting of NSW Health through:

• additional revenue from the State government in the form of grants and stimulus payments
• additional revenue from the Commonwealth government under the National Partnership Agreement for COVID-19 to cover part of the cost of responding to the COVID-19 pandemic
• increased expenses, largely due to increased payments to private health operators to maintain their viability during the COVID-19 pandemic and later to assist with public patient elective surgery waitlists and increased cleaning costs
• increased purchases of personal protective equipment.

Chapter one outlines the impacts of NSW Health’s response to the COVID-19 pandemic. This chapter outlines our other audit observations related to the financial reporting of agencies in the Health cluster for 2020.

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.

The primary impact of the COVID-19 pandemic on the effectiveness of the internal controls of NSW Health and health entities relates to the effectiveness of controls implemented by HealthShare relating to the stocktake of personal protective equipment inventories. Inventory managed by HealthShare increased by 2,746 per cent during 2019–20. HealthShare’s inventory controls did not maintain pace with the sudden, significant increase.

The impacts of NSW Health’s response to the COVID-19 pandemic are outlined in chapter one. This chapter outlines other observations and insights from our financial statement audits of agencies in the Health cluster.

Appendix one – List of 2020 recommendations 

Appendix two – Status of 2019 recommendations 

Appendix three – Financial data

Appendix four – Analysis of financial indicators 

Appendix five – Analysis of performance against budget

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.

Auditor-General’s Report to Parliament

Health 2020

11 December 2020

This corrigendum has been prepared to amend the following text within the Auditor-General’s Report to Parliament on Health 2020, dated 10 December 2020.

NSW Health emergency department treatment times

On page five the original text was as follows:

NSW Health also measures the percentage of patients whose clinical care in emergency departments is completed within four hours. The measure is used as an indicator of accessibility to public hospital services.

NSW Health aims to complete clinical care in the emergency department for 81 per cent of patients within four hours. In 2019–20 NSW Health reports it completed clinical care within four hours for 72.1 per cent of patients (a 7.3 per cent decrease from 2018–19).

At Western Sydney Local Health District, 59 per cent of patients were treated within the targeted timeframe. NSW Health attribute this to the profile of patients presenting in emergency departments and additional time taken processing COVID-19 patients to ensure staff safety.

The original text has now been changed to:

NSW Health also measures the percentage of patients with total time in the emergency department of four hours or less for each local health district. The measure is used as an indicator of accessibility to public hospital services.

The above changes will be reflected in the version of the report published on the Audit Office website and should be considered the true and accurate version.

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.

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.

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

© 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.

The Auditor-General for New South Wales, Margaret Crawford today released her report on the findings and recommendations from the 2019–20 financial audits that relate to internal controls and governance at 40 of the largest agencies in the NSW public sector.

The bushfire and flood emergencies and the COVID‑19 pandemic continue to have a significant impact on the people and public sector of New South Wales. The scale of the government response to these events has been significant. The report focuses on the effectiveness of internal controls and governance processes, including relevant agencies’ response to the emergencies. In particular, the report focuses on:

• financial and information technology controls
• business continuity and disaster recovery planning arrangements
• procurement, including emergency procurement
• delegations that support timely and effective decision-making.

Due to the ongoing impact of COVID‑19 agencies have not yet returned to a business‑as‑usual environment. ‘Agencies will need to assess their response to the recent emergencies and update their business continuity, disaster recovery and other business resilience frameworks to reflect the lessons learnt from these events’ the Auditor-General said.

The report noted that special procurement provisions were put in place to allow agencies to better respond to the COVID-19 pandemic. The Auditor-General recommended agencies update their procurement policies to reflect the current requirements of the NSW Procurement Framework and the emergency procurement requirements.

Read the PDF report

This report analyses the internal controls and governance of 40 of the largest agencies in the NSW public sector for the year ended 30 June 2020. These 40 agencies constitute an estimated 85 per cent of total expenditure for all NSW public sector agencies.

1. Internal control trends

2. Information technology controls

3. Business continuity and disaster recovery planning

4. Procurement, including emergency procurement

5. Delegations

6. Status of 2019 recommendations

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

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

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

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

This chapter outlines our audit observations, conclusions and recommendations, arising from our review of agency business continuity and disaster recovery planning arrangements.

This chapter outlines our audit observations, conclusions and recommendations, arising from our review of procurement agency procurement policies and procurement activity.

This chapter outlines our audit observations, conclusions and recommendations, arising from our review of agency compliance with financial and human resources delegations.

Appendix one – List of 2020 recommendations 

Appendix two – Status of 2019 recommendations

Appendix three – Cluster agencies

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.

The Auditor-General for New South Wales, Margaret Crawford, released her report today on State Finances for the year ended 30 June 2020.

‘I am pleased to once again report that I issued an unmodified audit opinion on the State’s consolidated financial statements,’ the Auditor-General said.

The report acknowledges this has been a challenging year, with New South Wales impacted by natural disasters and the COVID-19 pandemic.

The State’s Budget Result, reported in the financial statements, was a deficit of $6.9 billion. This is different to the 2019-20 budget forecast surplus of $1.0 billion and is an outcome of the government’s significant response to bushfires and COVID-19.

The report summarises a number of audit and accounting matters arising from the audit of the Total State Sector Accounts, a sector that comprises 291 entities controlled by the NSW Government with total assets of $495 billion and total liabilities of $256 billion.

Read full report (PDF)

Our audit opinion on the State’s 2019–20 financial statements was unmodified

An unmodified audit opinion was issued on the State’s 2019–20 consolidated financial statements.

The State extended signing its financial statements by six weeks.

Natural disasters, the COVID-19 pandemic and other factors impacted the State’s 2019–20 reporting timetable. The State extended signing its financial statements by six weeks, compared with 2018–19.

All agencies were also given a two-week extension to prepare their financial statements compared with 2018–19. Further extensions beyond two weeks were subsequently approved for the following 11 agencies (7 in 2018–19) to submit completed financial statements for audit:

• Department of Communities and Justice
• Department of Customer Service
• Department of Planning, Industry and Environment
• Department of Regional NSW
• Department of Transport
• Environment Protection Authority
• Infrastructure NSW
• Lord Howe Island Board
• NSW Crown Holiday Parks Land Manager
• Service NSW
• Water Administration Ministerial Corporation.

The extensions reflected that the COVID-19 pandemic impacted agencies’ work environments during the first six months of 2020. This was at a time when many were still implementing machinery of government changes and preparing to implement three significant new accounting standards:

• AASB 15 Revenue from Contracts with Customers (issued December 2014, effective 1 July 2019)
• AASB 16 Leases (issued February 2016, effective 1 July 2019)
• AASB 1058 Income of Not-for-profit entities (issued December 2016, effective 1 July 2019).

These new accounting standards were issued some years before they became effective, to allow reporting entities sufficient time to prepare for implementation. Notwithstanding this, some agencies had not fully implemented the new accounting standards in time for early close procedures, and the unforeseen impact of COVID-19 further complicated the year-end financial reporting processes for the State and its agencies.

The graph below shows the number of reported errors exceeding $20 million over the past five years in agencies’ financial statements presented for audit.

In 2019–20, agency financial statements presented for audit contained 19 errors exceeding $20 million (six in 2018–19). The total value of these errors increased to $1.4 billion ($927 million in 2018–19).

The errors resulted from:

• incorrectly applying Australian Accounting Standards and Treasury Policies
• incorrect judgements and assumptions when valuing noncurrent physical assets and liabilities
• incorrectly interpreting the accounting treatment for unspent stimulus funding.

Errors in agency financial statements exceeding $20m (2016–2020)

$4.1 billion in stimulus funding was allocated in 2019–20

The government implemented an economic stimulus package primarily to mitigate the impacts of the COVID-19 pandemic on New South Wales.

The COVID-19 pandemic and bushfires had a significant impact on the State’s finances, reducing its revenue and increasing its expenses especially in sectors directly responsible for responding to the COVID-19 pandemic, such as Health.

The government announced a $4.1 billion health and economic stimulus package in 2019–20. This primarily included:

• $2.2 billion in health measures including purchases of essential medical equipment and increasing clinical health capacity (like intensive care spaces)
• $1.0 billion in small business and land tax relief
• $355 million in extra cleaning services and quarantine costs.

Cluster agencies had spent $3.0 billion (just under 75 per cent) of the COVID-19 stimulus package by 30 June 2020.

The Health cluster incurred most of this expenditure.

Total spend relating to bushfires was $1.3 billion in 2019–20.

The graph below shows the total allocation and spend by cluster to 30 June 2020.

Economic stimulus allocation and spend by cluster to 30 June 2020

Deficit of $6.9 billion compared with a budgeted surplus of $1.0 billion

An outcome of the government’s overall activity and policies is its net operating balance (Budget Result). This is the difference between the cost of general government service delivery and the revenue earned to fund these sectors.

The General Government Sector, which comprises 199 entities, generally provides goods and services funded centrally by the State.

The Non-General Government Sector, which comprises 92 government businesses, generally provides goods and services, such as water, electricity and financial services that consumers pay for directly.

The Budget Result for the 2019–20 financial year was a deficit of $6.9 billion. The original budget forecast, set before the COVID-19 pandemic and bushfires, was a $1.0 billion surplus. The main driver of the change in result was:

• $1.3 billion of higher employee costs, mainly due to:
  • increased workers compensation claims
  • additional personnel required (mainly in the Health sector) to respond to the COVID-19 pandemic
• $2.3 billion of higher operating expenses, mainly due to:
  • $828 million from first time recognition of a child abuse claim liability
  • $507 million from additional insurance claims from the NSW bushfires
  • $343 million from COVID-19 claims by agencies for loss of revenue.
• $1.8 billion in higher grants and subsidy expenses, mainly due to:
  • small business grants
  • COVID-19 quarantine compliance measures
  • costs incurred in response to the 2019–20 bushfires, drought and disaster relief payments
  • third party-controlled assets that were subsequently transferred to councils and utility providers, mainly arising from construction of the CBD and South East Light Rail.

The deficit was further driven by:

• $1.9 billion less taxation revenue, mainly resulting from:
  • $1.3 billion less in payroll tax due to relief measures introduced by the government as part of its COVID-19 economic stimulus
  • $424 million less in gambling and betting taxes, due to venue closures required by COVID-19 public health orders
• $523 million less in dividends and income tax revenue from the Non-General Government Sector, due to lower dividends received from NSW Treasury Corporation and from the State’s other commercial government businesses
• lower fines, regulatory fees and other revenue, due to a $305 million decrease in mining royalties, largely driven by lower coal prices.

Main drivers of the 2019–20 actual vs. budget variance

Revenues increased $209 million to $86.3 billion

In 2019–20, the State’s total revenues increased by $209 million to $86.3 billion, 0.2 per cent higher than in 2018–19. COVID-19 impacted taxation revenue, which fell by $1.1 billion and revenue from the sale of goods and services, which fell by $1.1 billion. These falls were offset by a $2.5 billion (7.7 per cent) increase in grants and subsidies from the Australian Government, mainly in the form of additional stimulus funding.

Taxation revenue fell 3.5 per cent

Taxation revenue fell by $1.1 billion, mainly due to a:

• $861 million fall in payroll tax as a result of COVID-19 relief (reduced payroll tax payments for eligible small businesses)
• $430 million fall in stamp duty collections, driven by lower than expected growth in the property market
• $427 million decline in gambling and betting taxes, mainly due to venue closures driven by COVID-19 public health orders.

Stamp duties of $8.8 billion were the largest source of taxation revenue, $473 million higher than payroll tax, the second-largest source of taxation revenue.

Australian Government grants and subsidies

The State received $34.2 billion in grants and subsides which are mainly from the Australian Government, $2.4 billion more than in 2018–19.

The increase was driven by a $1.1 billion increase in Commonwealth Specific Purpose Payments to support the Health cluster respond to the COVID-19 pandemic. Commonwealth National Partnership Payments increased by a similar amount to provide the State with Natural Disaster relief.

Sales of goods and services

In 2019–20, sales of goods and services fell $1.1 billion. This was due to the COVID-19 pandemic reducing:

• patronage and related transport passenger revenue
• health billing activities with elective surgery being put on hold

Fines, regulatory fees and other revenues

Fines, regulatory fees and other revenues fell $505 million. This was mainly due to a $409 million decrease in mining royalties attributed to a drop in thermal coal prices during 2019–20.

Other dividends and distributions

Other dividends and distributions rose by $616 million due to higher distributions received from the State’s investments. This was due to an additional $1.3 billion held in the State’s investment portfolio compared with last year.

Expenses increased $8.2 billion to $96.0 billion

The State’s expenses increased 9.3 per cent compared with 2018–19. Most of the increase was due to higher employee expenses, other operating costs and grants and subsidies.

Employee expenses, including superannuation, increased 5.7 per cent to $42.6 billion.

Salaries and wages increased to $42.6 billion from $40.3 billion in 2018–19. This was mainly due to increases in staff numbers and a 2.5 per cent increase in pay rates across the sector. Salaries and wages for the Education and Health sectors increased by $659 million and $732 million in each sector respectively.

The Health sector employed an additional 2,763 full time staff in 2019–20. It also incurred more overtime in response to COVID-19. Education increased staff numbers by 4,866 full time equivalents and paid a one off 11 per cent pay rise to school administration staff in 2019–20. Historically, the government wages policy aims to limit growth in employee remuneration and other employee related costs to no more than 2.5 per cent per annum.

Operating expenses increased 8.7 per cent to $27.0 billion.

Operating expenses increased to $27.0 billion in 2019–20 ($24.8 billion in 2018–19) due to higher operating activities in Health. The higher level of activities and related costs is attributed to a full year of operations at the Northern Beaches Hospital (opened November 2018), and responding to COVID-19. The response to COVID-19 involved the State providing viability payments to private hospitals, higher visiting medical officer costs due to additional overtime hours and spending more on equipment to set up COVID-19 testing clinics.

Insurance claims increased by $2.0 billion. This was mainly due to NSW Self Insurance Corporation (SiCorp) recognising a liability for child abuse claims incurred but not reported for the first time, and claims for the 2019–20 bushfires, floods and COVID-19.

Health costs remain the State’s highest expense.

Total expenses of the State were $96 billion ($87.8 billion in 2018–19). Traditionally, the following clusters have the highest expenses as a percentage of total government expenses:

• Health – 24.3 per cent (25.8 per cent in 2018–19)
• Education – 17.6 per cent (19.3 per cent in 2018–19)
• Transport - 12.8 per cent (12.6 per cent in 2018–19).

General public service expenses as a percentage of total State expenses is higher due to a $2.0 billion increase in SiCorp’s accrued claim expenses.

Other expenses increased due to additional grant funding by the State for drought relief and COVID-19 stimulus spend.

Health expenses increased by $632 million compared with 2018–19 but fell as a proportion of total State expenses.

Education expenses remained stable compared with last year due to savings in student transportation costs primarily driven by COVID-19. This led to a decrease in the proportion of the State’s costs relating to education activities.

Grants and subsidies increased $2.5 billion to $14.1 billion.

The increase in grants and subsidies was due to payments the State made to support businesses and local communities in the face of COVID-19 and bushfires. In addition, the State transferred CBD and South East Light Rail assets to councils and utility providers during 2019–20 as it no longer controlled these.

Depreciation expense increased $1.0 billion to $9.2 billion.

Depreciation increased to $9.2 billion from $8.0 billion in 2018–19. At 1 July 2019, the State implemented the new leases standard recognising a right of use (ROU) asset and related lease liability in its financial statements. The value of ROU assets are amortised over the term of the lease. This contributed to $980 million of the increase in 2019–20 depreciation expense. Last year, these costs were previously reported within other operating expenses.

Assets grew by $28.0 billion to $495 billion

The State’s assets primarily include physical assets such as land, buildings and infrastructure, and financial assets such as cash, and other financial instruments and equity investments. The value of total assets increased by $28.0 billion to $495 billion. This was a six per cent increase compared with 2018–19, mostly due to changes in asset carrying values.

Of the State’s $28.0 billion increase in asset values, $9.3 billion was due to a new accounting standard requirement for operating leases to be valued and recorded on balance sheet for the first time.

AASB 16 Leases requires entities recognise values for right-ofuse assets (ROU) for the first time. An ROU asset is a lessee’s right to use an asset, the value of which is amortised over the term of the lease. This standard came into effect from 1 July 2019.

Valuing the State’s physical assets

The value of the State’s physical assets increased by $14.1 billion to $365 billion in 2019–20. The assets include land and buildings ($168 billion), infrastructure ($180 billion) and plant and equipment ($16.7 billion). A prior period error relating to the valuation of RMS infrastructure assets reduced the reported values by $1.0 billion from $352 billion to $351 billion at 30 June 2019.

The movement in physical asset values between years includes additions, disposals, depreciation and valuation adjustments. Other movements include reclassification of physical assets leased under finance leases to right of use assets upon adoption of AASB 16 Leases on 1 July 2019.

Movements in physical asset values

Liabilities increased $38.4 billion to $256 billion

The State borrowed additional funds in response to natural disasters and COVID-19.

The State’s borrowings rose by $33.9 billion to $113.8 billion at 30 June 2020. This accounted for most of the increase in the State’s total liabilities.

The value of TCorp bonds on issue increased by $25.2 billion to $97.0 billion to largely fund capital expenditure and costs associated with the bushfires, drought and COVID-19.

TCorp bonds are actively traded in financial markets and are guaranteed by the NSW Government.

Over 2019–20, TCorp continued to take advantage of lower interest rates, buying back short-term bonds and replacing them with longer dated debt. This lengthens the portfolio matching liabilities with the funding requirements for infrastructure assets.

With effect from 1 July 2019, AASB 16 Leases required the State to recognise liabilities for operating leases for the first time. This increased total lease liabilities from $5.3 billion at 30 June 2019 to $11.8 billion at 30 June 2020.

More than a third of the State’s liabilities relate to its employees. They include unfunded superannuation and employee benefits, such as long service and recreation leave.

Valuing these obligations involves complex estimation techniques and significant judgements. Small changes in assumptions and other variables, such as a lower discount rate, can materially impact the valuation of liability balances in the financial statements.

The State’s unfunded superannuation liability rose $300 million from $70.7 billion to $71.0 billion at 30 June 2020. This was mainly due to a lower discount rate of 0.87 per cent (1.32 per cent in 2018–19). The State’s unfunded superannuation liability represents the value of its obligations to past and present employees less the value of assets set aside to fund those obligations.

The State maintained its AAA credit rating

The object of the Fiscal Responsibility Act 2012 is to maintain the State’s AAA credit rating.

The government manages New South Wales’ finances in accordance with the Fiscal Responsibility Act 2012 (the Act).

The Act establishes the framework for fiscal responsibility and the strategy to maintain the State’s AAA credit rating and service delivery to the people of New South Wales.

The legislation sets out targets and principles for financial management to achieve this.

This year, the State’s credit rating from Standard & Poor’s changed from AAA/Stable to AAA/Negative. Moody’s Investors Service credit rating of Aaa/Stable did not change from the previous year.

The fiscal target for achieving this objective is that General Government annual expenditure growth should be lower than long term average revenue growth.

The State did not achieve its fiscal target of maintaining annual expenditure growth below the long-term revenue growth rate target of 5.6 per cent.

In 2019–20, General Government expenditure grew by 9.7 per cent (5.5 per cent in 2018–19).

Expenditure items that contributed most to the growth rate include:

• recurrent grants and subsidies (20.4 per cent)
• other operating expenses (9.5 per cent)
• employee costs (including superannuation) (5.6 per cent)

Recurrent grant and subsidy expenses increased by $2.8 billion in 2019–20 mainly due to the COVID-19 and natural disaster payments. Other operating expenses increased mainly due to a $2.0 billion increase in SiCorp insurance claims. This included the $828 million provision for child abuse claims incurred but not reported. The bushfires and COVID-19 pandemic also increased the number and cost of claims in 2019–20.

Superannuation funding position since inception of the Act - AASB 1056 Valuation

Appendix one - Prescribed entities

Appendix two - Legal opinions