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Appendix five – Acquittals and other opinions

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

13 April 2022

Published

Building regulation: combustible external cladding

Finance

Local Government

Planning

Compliance

Infrastructure

Regulation

Risk

What the report is about

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

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

What we found

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

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

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

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

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

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

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

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

What we recommended

DCS and DPE should:

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

Fast facts

Authority responsible for ensuring that owners make their buildings safe	Approximate number of buildings referred for further investigation*	Approximate percentage of buildings remediated or assessed to be safe
Local councils	1,200	40%
NSW Government owned	66	50%
DPE under delegation from the Minister for Planning	137	90%

*After initial inspection by Fire and Rescue NSW, and/or preliminary inquiries by the consent authority, it was identified that the building may be at high-risk of
fire from combustible external cladding.

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

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

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

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

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

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

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

Commissioner for Fair Trading's building product use ban

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

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

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

Project Remediate

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

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

About this audit

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

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

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

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

Auditees

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

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

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

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

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

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

Terminology

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

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

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

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

Conclusion

At July 2017, immediately after the Grenfell Tower fire, there was no reliable source to identify buildings that may have had combustible external cladding. However, it is now likely that most high-risk buildings have been identified.

Following the 2014 Lacrosse Tower fire in Melbourne, the NSW Government recognised that there was a need to be able to identify buildings in NSW that could have combustible external cladding.

The process of identifying buildings that could have combustible external cladding has been complex, resource-intensive, and inefficient principally due to the lack of centralised and coordinated building records in NSW. In total, approximately 1,200 BCA class 2, 3 and 9 buildings have been brought to the attention of councils by either Fire and Rescue NSW (FRNSW), the Cladding Taskforce, or through councils' own inspection for possible further action. In addition, approximately 2,000 more buildings were inspected by FRNSW but not referred to local councils because they either had no combustible external cladding or had combustible external cladding not assessed as being high-risk.

A multi-pronged approach to identifying buildings has been used by the DCS and DPE, through the Cladding Taskforce. While it is impossible to know the full scope of potentially affected buildings, the approach appears thorough in having identified most relevant buildings.

The process of clearing buildings with combustible external cladding has been inconsistent.

In the more than four years since the NSW Government's ten-point plan was announced, around 40 per cent of the buildings brought to the attention of councils have been cleared by either rectification or being found not to pose an unacceptable fire risk. Also, around 50 per cent of NSW Government-owned buildings identified with combustible external cladding and almost 90 per cent of identified buildings for which DPE is consent authority have been cleared or remediation is underway.

While DCS and DPE did seek to work cooperatively with councils and provided high-level guidance on the NSW Government’s fire safety reforms, it took until September 2019 before a model process and other detailed advice was provided to councils to encourage consistent processes. DCS and DPE advice to councils and NSW Government-building owners should have been more timely on two key issues:

the use of experts in the process of assessing and remediating existing buildings, and
the implementation of the product use ban on aluminium composite panels with polyethylene content 30 per cent or greater.

Clarifying the application of the product use ban may require consent authorities and building owners to revisit how some buildings have been cleared.

The management of buildings assessed as low-risk by FRNSW, estimated to be over 500, has not been a priority of the Cladding Taskforce to date, despite those buildings potentially posing unacceptable fire risks.

Information management by the Cladding Taskforce is inadequate to provide a high-level of assurance that all known affected buildings have been given proper attention.

While most high-risk buildings have likely been identified, information management is not sufficiently robust to reliably track all buildings through the process from identification, through to risk assessment and, where necessary, remediation.

Reforms to certifier registration schemes are limited to new buildings and do not apply to the existing buildings covered by this audit.

While reforms are limited in application to new buildings, some consent authorities took steps to obtain greater assurance on the quality of the work done by fire safety experts regarding combustible external cladding on existing buildings. For example, by requiring fire safety experts to be appropriately qualified and requiring peer review of cladding risk assessments and proposed remediation plans.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Reforms impact on regulated experts doing work on new buildings

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

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

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

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

Appendix one – Response from agencies

Appendix two – About the audit

Appendix three – Performance auditing

Copyright notice

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

9 February 2022

Published

State Finances 2021

Whole of Government

Finance

Asset valuation

Compliance

Financial reporting

Internal controls and governance

Management and administration

What the report is about

The results of the consolidated General Government Sector (GGS) and Total State Sector (TSS) financial statements audits for the year ended 30 June 2021.

What we found

The Independent Auditor’s Report on the 2020–21 GGS and TSS financial statements was unqualified but contained an emphasis of matter. The resolution of significant issues delayed signing until 24 December 2021.

The emphasis of matter draws attention to significant uncertainties associated with key assumptions related to the recognition by the GGS of a $2.4 billion investment in the Transport Asset Holding Entity (TAHE).

The Audit Office advised NSW Treasury that it intended to issue a qualified audit opinion, but actions by the NSW Government avoided this outcome. All evidence provided prior to 14 December indicated that the GGS’s return on the $2.4 billion cash contributed to TAHE was insufficient to support accounting for it as an investment. Projected returns were below the long term inflation rate and were insufficient to recover:

TAHE's revaluation loss of $20.3 billion in 2020–21
an average rate of return of at least 2.5 per cent of equity invested in TAHE.

In these circumstances, the $2.4 billion contributed to TAHE should have been expensed. This could have impacted the GGS’s budget result.

The NSW Government’s actions to avoid a qualified audit opinion included:

a government decision made on 14 December approving TAHE’s shareholding ministers communicating that their expectation of a return had increased to 2.5 per cent
reflecting the revised shareholding ministers’ expectations in the 2021–22 ‘NSW Half-Yearly Review’ on 16 December. The NSW Government provided an additional $1.1 billion to fund increased access and license fees to TAHE from the public sector operators (Sydney Trains and NSW Trains)
signing a Heads of Agreement (HoA) on 18 December between Transport for NSW (TfNSW),TAHE and the public sector operators. The HoA reflected the parties’ intent to renegotiate contracts to increase TAHE’s licence and access fees by $5.2 billion.

The uncertainty raised in our emphasis of matter relates to:

TAHE’s future estimated access and licence fees, which remain subject to re-negotiation and must meet or exceed the indicative future access and licence fees set out in the HoA
continued funding for TAHE's key customers (Sydney Trains and NSW Trains) to meet the price increases outlined in the HoA
the 2021–22 'NSW Budget Half Yearly Review', which provides for $1.1 billion of the additional funding over the forward estimates period to 2024–25. A further $4.1 billion is required over the following six years (2026–31), which are outside the forward estimates period
further significant cash flows required to support the funding model are outside the 10-year contract period. That is, beyond 30 June 2031.

There remains a risk that:

TAHE will not be able to re-contract with the rail operators for access and licence fees at a level that is consistent with current projections
future government's funding to TAHE’s key customers, the rail operators, may not be consistent with the current shareholding ministers’ expectations
TAHE will be unable to grow its non-government revenues.

The audit found a risk of undue reliance on consultants, a need to improve quality controls on materials submitted to audit and an extreme risk finding raised with respect to providing key information on a timely basis.

The GGS Budget Result for the 2020–21 financial year was a deficit of $7.1 billion compared to an original forecast budget deficit of $16 billion.

The State did not achieve its fiscal target of maintaining annual expenditure growth below the long-term revenue growth target of 5.6 per cent. In 2020–21, the GGS expenditure grew by 6.9 per cent mainly due to grants and subsidies paid from the COVID-19 stimulus packages received from the Commonwealth.

What we recommended

Significant matters concerning TAHE

We recommend NSW Treasury:

implement effective quality review processes over key accounting information
establish a policy to determine the minimum expected rate of return on its equity injections into public sector entities
report on the performance of investments in TAHE and all other public sector entities
ensure the revised commercial agreements between TAHE and NSW rail operators reflect access and licence fees set out in the Heads of Agreement
with TAHE, prepare robust projections and business plans to support returns beyond FY2031
liaise with the Australian Bureau of Statistics (ABS) and reconfirm the sector classifications of TAHE, NSW Trains and Sydney Trains
with TAHE, monitor the risk that control of TAHE assets could change in future reporting periods
significantly improve its processes to ensure all key information is identified and shared on a timely basis
consider whether there is sufficient competent oversight of its use of consultants and assess the risk of an overdependence on consultants at the cost of internal capability.

A number of other non-TAHE related recommendations have been raised in Section 6 ‘Key Audit Findings’.

Fast facts

The Total State Sector comprises the General Government Sector, the Public Non-Financial Corporation (PNFC) Sector and the Public Financial Corporation (PFC) Sector.

The 2020–21 consolidated financial statements of the General Government and Total State Sectors provide the financial performance and position of the NSW Government.

$391b government property, plant and equipment in the Total State Sector as at 30 June 2021
$3.3b government net contributions to other public sectors in 2020–21. $2.4 billion was contributed to TAHE
$19.3b net holding losses from the GGS's investment in other public sector entities recognised outside of the 2020–21 budget result
$7.1b budget deficit of the General Government Sector in 2021
7 - six high risk and one extreme risk management letter findings related to the General Government Sector's investment into TAHE
24 monetary misstatements exceeding $20 million were identified in agencies financial statements in 2020–21

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Margaret Crawford, Auditor-General for New South Wales

Pursuant to the Government Sector Audit Act 1983 I present my report on State Finances 2021. My independent auditor’s opinion on the State’s consolidated financial statements, albeit delayed, is unqualified. My independent auditor’s report however, does include an emphasis of matter drawing attention to significant uncertainties remaining in relation to the State’s equity investment in the Transport Asset Holding Entity (TAHE).

The 2020–21 year was challenging from many perspectives, not least being the continuing impact of and response to the COVID-19 pandemic. Once again, NSW Treasury provided government agencies extensions of time to submit financial statements for audit. Finance staff and management right across government must be congratulated for their responsiveness in meeting their financial reporting obligations in such challenging circumstances.

The General Government’s 2020–21 budget result, reflected within the Total State Sector Accounts, was a deficit of $7.1 billion. This compares with the original budgeted deficit of $16 billion. The factors that contributed to this outcome are presented in this Report to Parliament along with other significant matters related to the audit of the Total State Sector Accounts.

One section of my report is dedicated to issues related to the accounting for TAHE. This year’s audit was significantly delayed by protracted disagreement over the treatment of the government’s cash contribution to TAHE. This matter was further frustrated by the fact that information was withheld and not shared with my Office on a timely basis. This has warranted an extreme risk finding for NSW Treasury to significantly improve governance processes to ensure complete and timely sharing of information. This is key to preserving trust, which is one of the foundations that underpins my Office’s engagement with agencies in the conduct of their audits.

The challenges encountered in completing this year’s audit were extraordinary and tested the constructive partnership between the Audit Office and NSW Treasury. I want to acknowledge the enormous efforts of staff of both agencies to correct material errors and ultimately achieve my unmodified audit opinion. I saw first-hand the professionalism, resilience and dedication of my staff. A commitment to accurate and transparent financial reporting is a key basis upon which confidence in the financial management of New South Wales’ resources can be assured.

Margaret Crawford

Auditor-General for New South Wales

9 February 2022

The Independent Auditor's Report, which includes an emphasis of matter was issued on 24 December 2021

While the audit opinion on the State's 2020–21 financial statements was ultimately unmodified, NSW Treasury delayed signing the NSW Total State Sector Accounts (TSSA) in order to resolve significant accounting issues that were material to the TSSA, in particular the treatment of the General Government Sector's (GGS) investment in the Transport Asset Holding Entity (TAHE) during 2020–21.

The Treasurer and NSW Treasury signed the consolidated financial statements on 24 December 2021, eleven weeks later than the 2018–19 pre-pandemic timetable.

The Audit Office advised NSW Treasury that the 2020–21 TSSA would be qualified with respect to TAHE

Our review of all evidence received prior to 14 December indicated the GGS's expected returns were below the long-term inflation rate and that there was no expectation it should recover a significant asset revaluation loss. The levels of projected returns did not support the accounting treatment of the GGS's cash contribution of $2.4 billion to TAHE as an equity injection.

The TSSA are prepared in accordance with Australian Accounting Standards and particularly AASB 1049 ‘Whole-of-Government and General Government Sector Financial Reporting’. This standard requires contributions from owners to comply with the Australian Bureau of Statistics (ABS) Government Finance Statistics Manual 2015¹ (GFSM) where it would not conflict with Australian Accounting Standards.

The ABS GFSM states that an equity contribution is recognised unless there is no reasonable expectation that a sufficient rate of return can be generated by that investment, in which case the transfer is expensed. A realistic rate of return is defined in the ABS GFSM as the intention to earn a rate of return that is sufficient to generate dividends (including income tax equivalents) and holding gains or losses at a later date. Holding losses include the final asset revaluation decrement of $20.3 billion, which TAHE incurred on its property plant and equipment assets when it became a for-profit entity and was required to value its assets on the basis of the cash flows they are expected to generate. The lower the commercial returns (cashflows), the greater the potential valuation losses of a for-profit entity's assets. This $20.3 billion valuation loss is disclosed within notes 1 'Significant Accounting policies - TAHE Reform in 2020–21', Note 11 'Equity Investments in Other Public Sector Entities' and Note 14 'Property, Plant & Equipment of the Total State Sector and GGS' financial statements.

Multiple versions of models estimating the GGS's expected rate of return were submitted to the Audit Office by NSW Treasury attempting to demonstrate the commerciality of the GGS's investment in TAHE. Until 14 December 2021, our review of all calculations indicated the existing access and licence fees set up under commercial arrangements effective 1 July 2021 did not support a reasonable expectation that a sufficient rate of return would be earned on the equity injections to TAHE. The existing revenue arrangements reflected a shareholders' expected rate of return of only 1.5 per cent per annum of contributed equity and did not include recovery of the revaluation loss of $20.3 billion incurred in 2020–21.

Having reviewed all evidence provided, the Audit Office communicated to NSW Treasury that unless corrected, the State's accounts would be qualified as the $2.4 billion transfer made by the GGS to TAHE should have been reported as a grant expense instead of an investment. The GGS's estimated rate of return was not sufficient to cover:

TAHE's final revaluation loss of $20.3 billion in 2020–21
a dollar value equal to, or exceeding a 2.5 per cent rate of return on the equity invested in TAHE (ie: at least equal to the long term inflation rate).

Action was required by the NSW Government to avoid a qualified audit opinion

NSW Government actions avoided a qualified audit opinion related to the GGS’s cash contribution of $2.4 billion to TAHE. To support the TAHE structure as a commercial arrangement earning a sufficient rate of return, the NSW Government agreed to provide additional future funding to TAHE's key government customers (Sydney Trains and NSW Trains) to support increases in access and licence fees to be paid to TAHE.

Shareholding ministers increased their expectations as to TAHE's target average return to the expected long-term inflation rate of 2.5 per cent

On 14 December 2021, a government decision was made resulting in the TAHE shareholding ministers requesting that TAHE re-negotiate the access fees and license fees payable under the Operating Agreements between TAHE and the public operators (Sydney Trains and NSW Trains). The renegotiation was to target an average return to the GGS of 2.5 per cent on the equity contributed. TAHE's existing ten year agreements with the operators provide a mechanism by which the parties meet annually and consult in order to determine the amount of the access fees and licence fees that will be payable in the following financial year.

The revised shareholder expectations for TAHE were published in the 2021–22 'NSW Budget Half Yearly Review' on 16 December 2021. The revised expectations changed the basis of the expected returns on equity from the 10-year Commonwealth bond rate of only 1.5 per cent, to the expected long-term inflation rate of 2.5 per cent. This is consistent with the Reserve Bank's target band and the Commonwealth's Department of Finance's expected return on government investments in other sectors.

The revised shareholder expectations were confirmed in a signed Heads of Agreement

On 18 December 2021, Transport for NSW (TfNSW), TAHE and the operators, Sydney Trains and NSW Trains entered into a Heads of Agreement (HoA). This HoA forms the basis of negotiations to revise the pricing within the existing 10-year contracts and deliver upon the shareholders' expectation of a return of 2.5 per cent per annum of contributed equity. This revised return includes:

income earned over the estimated weighted average remaining useful lives of TAHE’s assets
recovery of the revaluation losses in 2020–21 on TAHE’s property, plant and equipment assets incurred when TAHE commenced operations as a for-profit entity, albeit the recovery of the revaluation loss is projected to take up to 2052.

The HoA reflects an intention between all parties to revise the contractual agreements to increase future access and license fees by $5.2 billion. This included $1.1 billion for the period FY2023–25, which is reflected in the 2021–22 'NSW Budget Half Yearly Review'. Further detail on the HoA is reported in Section 3 of this report ‘Investment in the Transport Asset Holding Entity’.

NSW Treasury revised its calculations to reflect the increased future returns

Following these changes, NSW Treasury revised its calculations of estimated returns to reflect a cumulative return equivalent to the expected long-term inflation rate, and recovery of the 2021 valuation loss by 2052. The rate of return period is consistent with the weighted average remaining useful life of TAHE's assets. The changes supported the financial reporting treatment of the $2.4 billion transfer from the GGS to TAHE as an investment rather than an expense, even though TAHE is currently heavily reliant on revenues from the public rail operators, Sydney Trains and NSW Trains. If the cash contribution had to be treated as a capital grant expense, it would have reduced the GGS's budget result by $2.4 billion.

The Independent Auditor’s Report includes an emphasis of matter drawing attention to uncertainty relating to the General Government Sector's investment in the Transport Asset Holding Entity (TAHE)

Despite the investment in TAHE being better supported, and the independent auditor's opinion being unqualified, the Independent Auditor’s Report includes an emphasis of matter, which draws attention to the significant uncertainties remaining in relation to the GGS’s equity investment in TAHE. The significant uncertainty is associated with key assumptions that support the recognition by the GGS of its $2.4 billion investment in TAHE during 2020–21.

As at the time of signing the Independent Auditor's Report, there was significant uncertainty with regards to judgements around the commerciality of TAHE's operations because:

TAHE’s future estimated access and licence fees, which are critical to its ability to earn a realistic rate of return, remain subject to re-negotiation and re-signing of the current access agreements. The proposed indicative future access and licence fees, which are set out in the HoA are intended to form the basis of the re-negotiation.
$1.1 billion in additional funding for TAHE's key customers, Sydney Trains and NSW Trains, was provided in the 2021–22 'NSW Budget Half Yearly Review' consistent with the terms in the HoA. However, this funding only extends to the end of the forward estimates period in 2024–25. There is an additional $4.1 billion required over the following six years, which falls outside of the forward estimates period (up to the end of the 10-year contract period). While this has been communicated to the government's Expenditure Review Committee, it is yet to be provided for in government's budget figures. As TAHE's projections are currently highly dependent on its government customers, it is critical that the government continue to provide sufficient funding to the GGS to support increases in the prices government customers will pay for access to TAHE's assets.
A further significant portion of the required returns is earned outside of the 10-year contract period (terminating 30 June 2031). NSW Treasury has estimated $37.9 billion in returns from its investment in TAHE over the period from 1 July 2022 to 30 June 2052, but has not identified the source or means of these returns beyond 2031. Currently, TAHE derives the majority of its revenue from access and licence fee agreements with Sydney Trains and NSW trains, who in turn are both funded by grants to Transport for NSW from the GGS. The projected returns calculated by NSW Treasury beyond 2031 are calculated by assuming a 2.5 per cent growth rate. About 87 per cent of these estimated returns are being earned beyond the ten years, with $32.9 billion estimated over the period 2032–52. There remains risk that:
- TAHE will not be able to re-contract for access and licence fees at a level that is consistent with current projections
- future governments' funding to TAHE's key customers will not be sufficient to fund payment of access and licence fees at a level that is consistent with current projections
- TAHE will be unable to grow its non-government revenues.

Significant accounting issues relating to TAHE are detailed in Section 3 to this report titled ‘Investment in the Transport Asset Holding Entity’. Other significant matters related to the TSSA audit are covered in section 6 to this report titled ‘Key Audit findings’.

Other financial reporting matters

The State extended the date for submission of agency financial statements for audit to provide relief to agencies impacted by the New South Wales' COVID-19 lockdowns

All agencies were given a one-week extension (two weeks in 2019–20) to prepare their financial statements and submit them for audit by 2 August 2021. Further extensions were subsequently approved for the following ten agencies and funds (11 in 2019–20) to submit completed financial statements for audit:

Department of Communities and Justice (9 August 2021 for disclosures related to cloud computing costs)
Investment NSW (13 August 2021)
Jobs for NSW (13 August 2021)
TCorp IM Funds (19 August 2021)
Lord Howe Island Board (22 October 2021)
Department of Customer Service (31 August 2021 for disclosures related to AASB 1059 'Service Concession Arrangements: Grantors')
Department of Transport (20 August 2021)
Sydney Olympic Park Authority (12 August 2021)
Planning Ministerial Corporation (12 August 2021)
Transport Asset Holding Entity (16 August 2021).

Additional extensions provided agencies with more time to resolve accounting issues relating to:

asset valuations
first time implementation of AASB 1059
asset transfers and treatment of software as service costs.

The extensions outlined above resulted in a two-week delay submitting the State’s draft consolidated financial statements for audit.

In 2020–21, agency financial statements presented for audit contained 24 errors exceeding $20 million (19 in 2019–20). The total value of these errors was $6.6 billion, a significant increase from the previous year ($1.4 billion in 2019–20)

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

The errors resulted from:

incorrect application of Australian Accounting Standards and NSW Treasury Policies
incorrect judgements and assumptions when valuing non-current physical assets and liabilities
human error or lack of oversight.

The completion of the 2020–21 Total State Sector Accounts was significantly delayed as material accounting issues were resolved. These issues related to how the General Government Sector’s (GGS)² investment in the Transport Asset Holding Entity was accounted for. The key areas of audit concern, which required considerable effort to satisfactorily resolve, included our assessment of:

the accounting treatment of funds transferred to TAHE from the GGS, specifically:
- whether funds transferred to TAHE from the GGS should be considered an equity investment or capital grant expense, with the latter having implication to the presentation of the NSW Government Budget positions. Funds are expensed unless, as an investment, there is a reasonable expectation to generate a sufficient rate of return
- forming a view as to what a ‘reasonable expectation of a sufficient rate of return on investment³’ should be with respect to the Australian Bureau of Statistics' Government Finance Statistics Manual 2015 (GFSM)
- the valuation of TAHE’s property, plant and equipment at 30 June 2021
whether TAHE was correctly classified as a Public Non-Financial Corporation (PNFC) entity
whether, under the agreements in place for the use and price of TAHE's assets, TAHE controlled its property, plant and equipment.

Our assessments were hindered by errors and omissions in information and models provided by NSW Treasury to demonstrate expected returns from TAHE, as well as a lack of timeliness and completeness in their responses to requests for documentation to support NSW Treasury's proposed accounting of government's contributions to TAHE.

Up until 13 December 2021, evidence provided by NSW Treasury to support the treatment of a $2.4 billion equity transfer from the GGS to TAHE did not demonstrate a sufficient rate of return on the State's investment. Instead, the evidence suggested the transfer was of the nature of a capital grant expense, which would impact the GGS budget result. Unless corrected, by either reversing the equity investment to a capital grant expense (impacting the GGS budget result) or providing additional resources to the rail operators to support additional TAHE access and licence fees (adding additional expenses to future GGS budget results), this matter would have caused the State's accounts to have been qualified.

After the Audit Office communicated the likely audit outcome to NSW Treasury, significant changes were made by government from 14 December 2021. Government decisions that avoided qualification of the TSSA included:

On 14 December, a government decision approved communicating revised shareholders' expectations of rate of return of 2.5 per cent being the long-term inflation rate, and increased grants to Transport for NSW for the rail operators to pay increased access and licence fees to TAHE to support of the new rate of return (previously 1.5 per cent).
On 16 December, the 2021–22 'NSW Budget Half Yearly Review' included an increase in expected returns to be derived through higher access and license fees charged by TAHE. To facilitate these returns, an increased allocation of funds of $1.1 billion was made to Transport for NSW (TfNSW) from 1 July 2022 as part of the forward estimates for the period 2022–25. This was to pay for the proposed increased access and licence fees the operators would be required to pay TAHE.
On 18 December, TfNSW, TAHE and the operators Sydney Trains and NSW Trains signed a Heads of Agreement (HoA) forming the basis of negotiations to revise annual operating agreements to facilitate the shareholders’ expected returns of 2.5 per cent of contributed equity. The HoA included indicative access and licence charges to be used as a basis of renegotiation, increasing access fees and licence fees to be paid by Sydney Trains and NSW Trains over the 10-year period from 2022–2031 by a further $5.2 billion. Most of this increase occurs outside the forward estimates. The majority of the additional funding may need to be funded by future governments.

NSW Treasury has projected returns to be earned to 2052 (a period covering the weighted average remaining useful lives of TAHE's assets) as sufficient to recover the revaluation loss of $20.3 billion which arose when TAHE revalued its assets under the income approach. These assets were valued on a discounted cash flow basis as at 30 June 2021.

These key decisions and the circumstances leading up to these changes are detailed later in this section.

Background

On 1 July 2020, the former Rail Corporation of New South Wales (RailCorp), a not-for-profit entity, was renamed the Transport Asset Holding Entity of New South Wales (TAHE) transitioning to a for-profit statutory State-Owned Corporation under the Transport Administration Act 1988. There was no change in the structure of TAHE as a new entity was not created. Ownership remains fully with the government. TAHE, and the former RailCorp, were both classified as Public Non-Financial Corporation (PNFC) entities within the Total State Sector Accounts. TAHE was not a newly created entity, nor was it the result of a change in administrative re-arrangements (such as Machinery of Government change).

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

From 1 July 2015, the government announced the creation of TAHE (a dedicated asset manager). Funding for new capital projects was to be provided through equity injections, even though the business model was yet to be determined. NSW Treasury initially set a timetable for finalising the business model, operating model and contracts for the use of TAHE's assets of 1 July 2019.

Contributions paid to TAHE by the GGS were treated as equity investments from July 2015 forward. This treatment continued, despite delays in settling the business model. In 2020, the Audit Office raised a high risk finding due to the significance of the financial reporting impacts and business risks for NSW Treasury and TAHE.

The business model eventually adopted was one whereby:

The GGS invests in TAHE with an expectation of a sufficient rate of return.
TAHE charges the operators (predominantly Sydney Trains and NSW Trains) to use network and rolling stock to deliver services. The operators remain responsible for both the delivery of the services and the maintenance and safe operation of the assets. The operators are primarily funded by TfNSW through grants.
The GGS grants funds to operators, which allows them to pay access fees to TAHE. The amount of these grants impacts the budget result.
TAHE pays a return back to GGS by way of dividends and tax equivalents. The return may also include holding gains and losses on the fair value of the net assets of TAHE.

TAHE earns relatively small amounts of income from transactions with the private sector. While the TAHE Board envisages that, over time, they will enhance the commerciality of TAHE’s operations, it is currently highly dependent on revenues from government contracts (over 80 per cent). The circularity in flow of funds between transport agencies in the GGS and PNFC sectors is shown in the diagram below:

The government continues to respond to the impacts of the COVID-19 pandemic on New South Wales through its economic stimulus measures

The COVID-19 pandemic continues to significantly impact the State’s finances, reducing revenue and increasing expenses especially in sectors directly responsible for responding to the COVID-19 pandemic, such as Health. Over 2020–21, the government allocated an additional $5.6 billion to agencies as part of its economic stimulus and pandemic response. Measures included:

$1.8 billion in health measures including essential medical equipment purchases, vaccine distribution, quarantine, contract tracing and maintaining clinical health capacity (such as intensive care units)
$508 million in additional cleaning services primarily to the Department of Education and Transport for NSW
$500 million as part of the ‘Dine & Discovery NSW’ voucher program to the Department of Customer Service
$350 million in combined land tax relief and small business recovery grants to Department of Customer Service and NSW Treasury respectively.

Around $4.5 billion of this package was spent in 2020–21, leaving $1.1 billion unspent and carried forward into 2021–22. The graph below shows the total allocation and spend by cluster for 2021 compared to their target spend.

Deficit of $7.1 billion compared with a budgeted deficit of $16 billion

The outcomes of the government’s overall activity and policies are reflected 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 204 entities, generally provides goods and services funded centrally by the State.

In addition to the 204 entities within the General Government Sector, a further 98 government controlled businesses are included within the consolidated Total State Sector financial statements. These businesses generally provide goods and services, such as water, electricity and financial services for which consumers pay for directly.

The Budget Result for the 2020–21 financial year was a deficit of $7.1 billion compared to an original forecast of a budget deficit of $16 billion.

Revenues increased $5.6 billion to $91.8 billion

In 2020–21, the State’s total revenues increased by $5.6 billion to $91.8 billion, 6.5 per cent higher than previous year. A decrease of 0.3 per cent was recorded in 2019–20. The main contributors to the increase in the State's revenues were an increase in taxation revenue of $4.6 billion and an increase in grants and subsidies of $1.4 billion when compared to the prior financial year.

Taxation revenue increased by 15.3 per cent

Taxation revenue increased by $4.6 billion, mainly due to:

$2.9 billion higher stamp duties collected from property sales driven by:
- $2.7 billion increase in contracts and conveyance duties (transfer duties) from both higher transaction volumes and strong property price growth during 2020–21
- $200 million increase in motor vehicle registration duty driven by increases in new vehicle sales
$520 million higher Gambling and Betting Taxes was earned as 2019–20. The previous year's revenues were impacted by club and hotel closures due to COVID-19. The operation of these venues in 2020–21 returned to normal for most of the year resulting in higher club gaming tax revenue of $216 million and hotel gaming taxes of $265 million
$439 million higher collections of payroll taxes. The previous year's revenues were impacted by tax relief measures implemented by the government in response to COVID-19. Lower payroll tax was collected in 2019–20 as employment levels dropped during the State’s first lock down
$416 million higher land tax revenues, driven by an average 3.2 per cent increase in valuer general land values, which are the basis for determining land tax values.

Stamp duties of $11.7 billion remains the largest source of taxation revenue, $2.9 billion higher than payroll tax of $8.8 billion, the second-largest source of taxation revenue.

Expenses increased $4.1 billion to $101 billion

The State’s expenses increased 4.3 per cent compared with 2019–20. Most of the increase was due to higher employee expenses, depreciation and amortisation, other operating costs and grants and subsidies expense.

Employee expenses, including superannuation, increased 3.6 per cent to $44.1 billion

Salaries and wages increased to $36.3 billion ($34.8 billion in 2019–20). This was mainly due to increases in staff numbers and an average increase of approximately three per cent in the cost of NSW's employees across the sector. Salaries and wages for the Education and Health sectors increased by $511 million and $619 million respectively.

The Health sector employed an additional 4,893 full time staff in 2020–21 (2,763 in 2019–20) and incurred an extra $28 million in overtime mainly in response to COVID-19. Education increased staff numbers by 2,418 full time equivalents in 2020–21 (4,866 in 2019–20). This year, the health and education sectors received a 0.3 per cent award increase in pay rates.

The Public Service Commission (PSC) noted in the ‘State of the NSW Public Sector Report, 2021’ that the government sector senior executive headcount increased by 347 to 3,680 (3,333 in 2019–20). The Transport cluster represented the majority of the increase in the government sector's senior executive headcount, with an increase of 182. The PSC report noted the increase was due to the growing portfolio of major transport infrastructure projects.

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.

Depreciation and amortisation expense increased 7.6 per cent to $10.3 billion

Depreciation and amortisation increased to $10.3 billion in 2020–21 ($9.6 billion in 2019–20). This increase was mainly driven by the depreciation of completed infrastructure projects including the State’s WestConnex M8 and M5 East Motorways, and other road projects such as Woolgoolga to Ballina project. This year also includes twelve months of depreciation relating to the CBD and South-East Light Rail versus six months in the previous financial year.

Furthermore, the first time adoption of AASB 1059 ‘Service Concession Arrangements’ resulted in the State recognising $45.4 billion of service concession assets in its capacity as grantor under arrangements with operators. More than 87 per cent of this balance was recognised by the Transport cluster. These assets are valued at current replacement cost and are depreciated on an annual basis. A service concession arrangement is an arrangement whereby the government as grantor, contracts with an operator to develop (or upgrade), operate and maintain the grantor's public service assets such as roads, bridges or hospitals. The grantor controls or regulates what services the operator must provide using the assets, to whom, and at what price. The grantor also retains any significant residual interest in the assets at the end of the arrangement. Further details about AASB 1059 are included in the ‘Implementation of new accounting standards’ section of this report.

Grants and subsidies increased $1.5 billion to $15.6 billion

The increase in grants and subsidies is due to payments made by the State in supporting businesses and local communities in response to COVID-19. These mainly included $240 million in Dine & Discover voucher payments, $156 million in land tax relief assistance, $160 million increase in grants to non-government schools (including $31 million to support Covid intensive learning support programs), and $109 million relating to small business grant payments.

The State also transferred $592 million in newly constructed assets to local councils. These mainly related to $378 million in assets transferred following completion of WestConnex stage 2 and $180 million from Northern Roads.

Other operating expenses increased two per cent to $27.5 billion

Operating expenses increased to $27.5 billion in 2020–21 ($26.9 billion in 2019–20) due to higher operating activities as agencies responded to the pandemic.

Supplies and Other Services increased by $1.7 billion. This was mainly due to funding of $533 million in hotel quarantine and associated services, and $495 million in medical equipment for the health sector.

Inventories consumed increased by $266 million. This included $217 million in COVID-19 medical equipment that was written off because it had expired or did not meet the TGA regulatory standards. Contractor expenses increased by $306 million because of increased capital works activity, primarily in the Transport sector.

The increase was offset by $1.6 billion in lower insurance claims expense. In 2019–20 financial year, higher claims were made in respect to natural disaster events, including bush fires.

Health costs remain the State’s highest expense

Total expenses of the State were $101 billion ($96.4 billion in 2019–20). In 2020–21, Health remains the highest contributor of expenses for the State with $25.7 billion ($24.2 billion in 2019–20). Education remains the second highest contributor of expenses reporting $18.4 billion in 2020–21 ($17.5 billion in 2019–20).

The following sectors have the highest expenses as a percentage of total State expenses:

Health – 25.6 per cent (25.1 per cent in 2019–20)
Education – 18.3 per cent (18.2 per cent in 2019–20)
Transport – 14.5 per cent (13.3 per cent in 2019–20).

Assets grew by $12.3 billion to $526 billion

The State’s assets 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 $12.3 billion to $526 billion. This was a 2.4 per cent increase compared with 2019–20, mostly due to changes in asset carrying values.

Valuing the State’s physical assets

State’s physical assets valued at $391 billion

The value of the State’s physical assets increased by $1.7 billion to $391 billion in 2020–21 ($37.9 billion increase in 2019–20). The State’s physical assets include land and buildings ($172 billion), infrastructure systems ($202 billion) and plant and equipment ($16.7 billion).

The movement in physical asset values between years includes additions, disposals, depreciation and valuation adjustments. Other movements include assets reclassified to held for sale and other opening balance adjustments.

Liabilities increased $16.4 billion to $291 billion

The State borrowed additional funds in response to COVID-19

The State’s borrowings rose by $15.8 billion to $134 billion at 30 June 2021. This accounted for most of the increase in the State’s total liabilities.

The value of TCorp bonds on issue increased by $16.8 billion to $114 billion, which largely funded the State's capital expenditure and response to the COVID-19 pandemic.

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

Over 2020–21, 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.

The State’s fiscal objective published in the 2021–22 Budget Papers is to repair the operating position by returning the budget to surplus by 2024–25 and rebuilding balance sheet capacity by bringing net debt down towards seven per cent of Gross State Product (GSP) over the medium-term. The State measures net debt as the sum of deposits held, government securities, loans payable and other borrowings, less the sum of cash and deposits, advances paid and investments, loans receivable and placements.

The chart below shows the actual net debt to GSP for NSW compared to the Commonwealth net debt to Gross Domestic Product (GDP) over the past six years. The trend shows an increase in net debt, particularly in the past two years, which is mainly driven by additional borrowings needed to fund stimulus measures when responding to COVID-19 and natural disaster relief.

GSF Act and GSF Regulation

Financial reporting provisions in the Government Sector Finance Act 2018 (GSF Act) have now commenced

From 1 July 2021, the Public Finance and Audit Act 1983 (PF&A Act) financial reporting provisions were repealed. Agencies prepared their 2020–21 financial statements under Part 7 of the GSF Act. They were audited under the Government Sector Audit Act (GSA Act). The GSF Act requires the timeframe for annual financial statement submission be specified in the Treasurer’s Directions.

Under the GSF Act, all reporting GSF agencies are required to prepare annual financial statements, unless exempt from the definition of a reporting agency under the Government Sector Finance Regulation 2018 (GSF Regulation). Those agencies exempt from preparing financial statements include certain small agencies, Crown Land Managers, special purpose staff agencies and retained State interests. These agencies must meet prescribed requirements or thresholds and self-assess each year to determine whether they remain exempt against the criteria in the GSF Regulation.

Most of the financial reporting provisions of the GSF Act have now commenced except for requirements concerning special deposit accounts (SDA) and special purpose financial reports, which are scheduled to commence on 1 July 2023, subject to approval from the Governor.

The GSF Act now includes most of the provisions applicable to GSF agencies, as requirements for appropriations, expenditure, financial services, and other matters were enacted on 1 December 2018 and 1 July 2019.

Once fully commenced, the GSF Act will consolidate and replace reporting provisions of four Acts:

PF&A Act
Public Authorities (Financial Arrangements) Act 1987
Annual Reports (Departments) Act 1985
Annual Reports (Statutory Bodies) Act 1984.

GSA Act and GSA Regulation

The PF&A Act was renamed the GSA Act on 1 July 2021 and now only contains provisions relating to the Auditor-General and the Audit Office, the audit of government sector finances and governance of the Public Accounts Committee.

Of note in the renamed GSA Act is that:

a new principal object was added that specifically provides the Auditor-General is an independent and accountable statutory officer
the previous financial reporting provisions in the PF&A Act were repealed as the financial reporting provisions are contained in Part 7 of the GSF Act. As a result, there are no longer financial reporting provisions in the GSA Act
a new section 34 was added, which contains the requirements for the audit of State sector agencies’ financial statements. These were previously contained in two separate sections.

The GSA Regulation commenced on 1 July 2021, replacing the Public Finance and Audit Regulation 2015 (PF & A Regulation). The GSA Regulation contains the list of entities, funds and accounts prescribed for the purpose of audits under the GSA Act.

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

There are inconsistencies between key statutory timeframes imposed on the Treasurer and Auditor-General in the GSF Act and GSA Act which has been brought to the attention of NSW Treasury. The inconsistencies identified include:

Section 34(3)(a) of the GSA Act defines the audit period for the Statements be as soon as practicable after the Auditor-General is given the Statements. This appears to be inconsistent with section 49(3) of the GSA Act, which requires that the Auditor-General, on or before 22 October transmit the Statements and audit report to the Treasurer. Neither provision is a paramount provision.
Section 49(3) of the GSA Act also appears to be inconsistent with section 52(1) of the GSA Act which provides that the Statements are to be given to the Auditor-General in accordance with section 7.17 of the GSF Act. Section 7.17 of the GSF Act requires that the Statements are to be prepared and given to the Auditor-General by an agreed date to enable the audit of the Statements. Part 7 of the GSF Act is a paramount provision under section 1.8 of the GSF Act, which means the requirements in section 7.17 of the GSF Act prevail.

There are also inconsistencies in key statutory reporting timeframes imposed on the Treasurer under the GSF Act.

The audited Statements are a key accountability mechanism that provides information on the State’s financial performance and position. Ambiguity in the statutory reporting timeframes could impact on the future timely provision of this information to Parliament. As noted at the beginning of this report, the delay in issuing the audit report for the 30 June 2021 Statements was due to NSW Treasury’s resolution of accounting issues that were material to the Statements, in particular the treatment of the General Government Sectors investment in TAHE during 2020–21. NSW Treasury's management letter will include a high risk finding with regards to the inconsistencies between the GSF Act and GSA Act.

Recommendation

NSW Treasury should seek legislative amendments in Parliament to resolve the inconsistencies in the GSF Act and GSA Act relating to key statutory reporting time frames.

Appropriations framework

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

The GSF Act requires that money not be paid out of the Consolidated Fund except under the authority of an Act, such as the annual Appropriation Act or GSF Act. This means a minister is only authorised to spend out of the Consolidated Fund the amount they have been appropriated by the relevant Act(s).

Generally, money is authorised to be paid out of the Consolidated Fund either through:

The Annual Appropriation Act - this is an act to appropriate out of the Consolidated Fund sums for the services of the government for the relevant financial year. These appropriations are made to the responsible ministers of principal departments, Special Offices and certain SDAs.
The GSF Act - this act allows the responsible minister of a GSF agency to be given an appropriation out of the Consolidated Fund, at the time the agency receives or recovers any deemed appropriation money. Deemed appropriation money is defined in section 4.7(3) of the GSF Act.

Ministers can delegate and sub-delegate appropriation expenditure functions to accountable authorities and officers of GSF agencies. Any spending by accountable authorities and officers of GSF agencies in excess of the amount appropriated to their relevant minister would be made contrary to section 4.6(1) of the GSF Act.

The Budget Papers are an additional mechanism by which the government controls the level of expenditure by agencies both at the individual and departmental administrative cluster level. The Budget Papers set an administrative limit imposed by the government. Separately, the Treasurer can issue a Budget control authority under section 5.1 of the GSF Act. A Budget control authority can regulate expenditure of money by GSF agencies in a variety of ways, as set out in section 5.1(2) of the GSF Act.

In July 2021, NSW Treasury advised the Audit Office that it had received advice from the Crown Solicitor's Office, in January 2021, that payments between agencies in different administrative clusters would not meet the definition of a 'deemed appropriation' under the GSF Act by the receiving agency. This applies to money paid and received by two agencies across different administrative clusters that continue to hold the money in the Consolidated Fund. These intra-government receipts increase the amount an agency has available to spend, without there being a corresponding increase in the responsible minister’s appropriated expenditure limits, thus increasing the risk an agency’s expenditure could cause a minister to exceed their appropriated expenditure authority.

After being made aware of the issue, the Audit Office worked with NSW Treasury officers to clarify potential implications. The Audit Office also obtained further advice from the Crown Solicitor’s Office to clarify certain aspects of the appropriations framework more broadly. In the advice to the Audit Office, the Crown Solicitor advised that an agency is not subject to its own legally appropriated expenditure limit (assuming it is not subject to any annual spending limit imposed through an instrument of delegation or a budget control authority issued by the Treasurer under section 5.1 of the GSF Act). In effect, because responsible ministers are given appropriations, these legal expenditure limits, rest in aggregate, with the principal department and agencies the minister is responsible for. The advice also confirmed:

a deemed appropriation for the services of an agency would ordinarily be available for the services of other agencies, if the officers of the other agencies had a delegation from the minister(s) to expend the deemed appropriation and funds remained available under those deemed appropriations
that the ‘exhaustion’ of a minister’s appropriation may be precipitated by one agency’s level of expenditure in the financial year, but the effect is that the relevant appropriation is exhausted for all agencies (and their officers) that may otherwise rely on it
whether expenditure by an agency occurred beyond the scope of its authority would require a progressive examination of the total amounts expended from the minister’s appropriation
amounts expended from the Consolidated Fund without the authority of an appropriation are spent contrary to section 4.6(1) of the GSF Act
a minister is responsible to Parliament for (i) the manner in which appropriations are expended, and (ii) any ‘overspends’ (that is, expenditure without authority) by agencies for which they are responsible.

Determining whether expenditure has occurred without the authority of an appropriation is complex and it is not possible for an individual agency to monitor or determine at what ‘point in time’ expenditure has been incurred in excess of the minister’s appropriation authority. As noted earlier, there are mechanisms in place to manage agencies' administrative expenditure limits set by the Budget Papers, but there is no mechanism in place to ensure expenditure by agencies does not exceed a minister’s appropriation authority received under the annual Appropriations Act and GSF Act.

Recommendation

NSW Treasury should ensure a framework exists to monitor and provide assurance to ministers that expenditure incurred across a financial year by agencies under the relevant minister’s coordination does not exceed the appropriation authority conferred by the annual Appropriation Act and the GSF Act.

In addition, principal departments and agencies that hold money in the Consolidated Fund are required by Australian Accounting Standard AASB 1058 'Income of Not-for-Profit Entities' and NSW Treasury Circular TC20/08 'Mandates of options and major policy decisions under Australian Accounting Standards' to prepare a Summary of Compliance in their financial statements. The Summary of Compliance applies to agencies that obtain part or all of their spending authority from a Parliamentary appropriation. It is intended to provide information on the amounts appropriated or authorised for an agency’s use and whether those expenditures were authorised. There remains uncertainty around how the Crown Solicitor’s Office advice received by the Audit Office impacts these disclosures, as the total spending authority given by Parliamentary appropriations and expenditure against these appropriations cannot generally be attributed to an individual agency. Such a scenario is not contemplated by the relevant Australian Accounting Standard. NSW Treasury's management letter will include high risk findings about improving mechanisms in place to manage agencies administrative expenditure limits, uncertainties related to appropriation spending authority on agencies summary of compliance disclosures.

Recommendation

NSW Treasury should assess how the requirement to prepare a Summary of Compliance under Australian Accounting Standards impacts relevant principal departments and agencies' financial statement disclosures.

Delegations to incur expenditure

Further to last year's reporting, some agencies have again spent monies without an authorised delegation

The delegation to incur expenditure is an important accountability mechanism of responsible government.

Last year’s Report on State Finances reported instances where government agencies did not understand or correctly apply the requirements of the GSF Act for deemed appropriations, resulting in some agencies spending deemed appropriations money without an authorised delegation from the relevant minister(s) as required by sections 4.6(1) and 5.5(3) of the GSF Act.

This year’s financial audits identified that further agencies: TAFE Commission, Multicultural NSW and the Office of the Ageing and Disability Commissioner spent money received from an annual Appropriation and/or deemed appropriation money without an authorised delegation from the relevant minister(s), as required by sections 4.6(1) and 5.5(3) of the GSF Act. NSW Treasury's management letter will include high risk issues about improving mechanisms in place to ensure agencies have appropriate delegations in place to spend Appropriation and/or deemed appropriation money.

In addition, the audit of the Jobs for NSW Fund (the Fund) special purpose statements identified that five payments from the Fund were authorised by an officer without the necessary delegation from the minister as required by section 14 of the Jobs for NSW Act 2015 and sections 5.5(2) and 5.5(3) of the GSF Act.

Recommendation

Given the continued instances of non-compliance, NSW Treasury needs to promptly improve the guidance it provides agencies to ensure that expenditure of public monies is properly supported by authorised delegations.

Implementation of new accounting standards

This year, the State implemented the requirements of AASB 1059

AASB 1059 ‘Service Concession Arrangements: Grantors’

AASB 1059 is an Australian Accounting Standard that requires public sector entities (grantors) that enter service concession arrangements with private sector operators for the delivery of public services recognise service concession assets and liabilities in their financial statements. The standard was effective from 1 July 2020.

AASB 1059 requires a grantor to:

recognise an asset provided by the operator as a service concession asset if the grantor controls the asset
initially measure the service concession asset at current replacement cost (CRC) in accordance with AASB 13 ‘Fair Value Measurement’
recognise a corresponding liability measured initially at the fair value (CRC) of the service concession asset, adjusted for any consideration between the grantor and the operator
make sufficient disclosure in the financial statements so that users can understand the nature, amount and timing of assets, liabilities, revenue and cash flows arising from these.

The adoption of AASB 1059 increased the State’s total assets and liabilities by $19.5 billion and $19.6 billion respectively, with net worth reducing by $131 million at 1 July 2019

The State adopted a modified retrospective approach when adopting AASB 1059 and recognised and measured service concession assets and liabilities at the date of initial application of 1 July 2019, with any net adjustments recognised in accumulated funds at that date. This means comparatives were restated to reflect the impact of AASB 1059.

Most of the service concession assets recognised by the State related to Property, Plant & Equipment, in particular infrastructure assets.

Agencies had to devote significant effort to implement AASB 1059 and ensure their 2020–21 financial statements materially complied with the standard's requirements. Last year, the Audit Office highlighted advance preparation was key to ensuring agencies effectively transitioning to this new standard. Despite the new standard being issued well in advance of its commencement date, Sydney Water Corporation, Department of Customer Service, Transport for NSW (TfNSW) and TAHE did not prepare sufficiently for their respective implementations.

Whilst most agencies in 2019–20 had commenced assessing their existing commercial arrangements to determine whether they were within the scope of AASB 1059, calculating and posting the accounting entries to support the implementation of this standard was delayed for TfNSW. TfNSW had not finalised its opening balance adjustments in time for the Audit Office’s early close review. Critical assessments of AASB 1059 to identify the accounting implications for the Transport sector, in particular TfNSW and TAHE were still being considered as late as 30 September 2021.

Restart NSW

Restart NSW was established in 2011 to fund the State’s major infrastructure projects

Restart NSW funds Rebuilding NSW, the government’s 10-year plan to invest $23 billion in new infrastructure. Its infrastructure projects, including Sydney Metro West and Parramatta Light Rail, are primarily funded by proceeds from the government’s asset recycling program. The Restart Fund had a balance of $12.4 billion at 30 June 2021 ($15 billion in 2019–20).

The Fund paid $3.8 billion for infrastructure projects in 2020–21 ($4.3 billion in 2020–21). The largest payments were for transport projects, including Sydney Metro West, Parramatta Light Rail, and contributed $319 million of the $2.4 billion equity contribution to the Transport Asset Holding Entity (TAHE).

The funds are invested in the NSW Infrastructure Future Fund (NIFF), which is allowed under the Restart NSW Fund Act 2011 (Restart Act). The NIFF is an investment vehicle for the fund to help the NSW Government meet its infrastructure objectives and this fund is managed by TCorp. In 2020–21, the fund earned a net return of 7.9 per cent, higher than its annual benchmark return of 4.2 per cent, benefiting from improved returns in financial markets over 2020–21.

The fund directed 30.1 per cent of its payments towards rural and regional infrastructure projects in 2020–21

The Restart Act requires the fund to report on the percentage of payments directed to rural and regional infrastructure projects and whether this represents at least 30 per cent of the total payments from the fund. The Restart NSW Fund Amendment (Rural and Regional Infrastructure Funding) Bill 2020 introduced in Parliament in 2020 would amend the Restart Act by requiring at least 30 per cent of the total payments each financial year and for the life of the Restart NSW Fund be made on infrastructure projects in rural and regional areas.

This year the fund exceeded its target of directing at least 30 per cent of funding towards rural and regional infrastructure projects. However, since the funds’ commencement, only 23 per cent of total payments went towards rural and regional infrastructure projects. Current projections for the life of the fund indicate only 27.5 per cent of funding will be spent on rural and regional projects, which is below the funds target of 30 per cent target for the life of the fund.

Audit Office’s work plan for 2021–22

The Audit Office’s 2021–22 work plan focuses on the State’s response, recovery and impact from the COVID-19 pandemic and natural disaster emergencies

The COVID-19 pandemic continues to have a significant impact on the people and the public sector of New South Wales. Government continues to assist communities in their recovery from the 2019–20 bushfires and subsequent flooding. The scale of government responses to these events has been significant and has required a wide-ranging response involving emergency response coordination, service delivery, governance and policy.

Significant resources have been directed toward these responses, and in assisting rebuilding and economic recovery. Some systems and processes have changed to reflect the need for quick responses to immediate needs. The increasing and changing risk environment presented by these events has meant that we have recalibrated and focused our efforts on providing assurance on how effectively aspects of these emergency responses have been delivered. This includes financial and governance risks arising from the scale and complexity of government responses to these events.

While these emergencies are having a significant impact today, they are also likely to continue to have an impact into the future. We will take a phased approach to ensuring that our work addresses the following elements of the emergencies and government responses:

Appendix one – Prescribed entities

Appendix two – Legal opinions

Appendix three – TSS sectors and entities

Copyright notice

17 December 2021

Published

Planning, Industry and Environment 2021

Environment

Industry

Local Government

Planning

Asset valuation

Financial reporting

Information technology

Internal controls and governance

Risk

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

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

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

What the report is about

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

What we found

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

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

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

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

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

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

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

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

What the key issues were

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

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

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

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

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

What we recommended

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

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

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

Fast facts

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

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

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

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

financial reporting
audit observations.

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

This chapter outlines our audit observations related to the financial reporting of agencies in the Planning, Industry and Environment cluster (the cluster) for 2021.

Section highlights

Unmodified audit opinions were issued for all completed 30 June 2021 financial statements audits of cluster agencies. Three audits are ongoing.
An 'Other Matter' paragraph was included in the Independent Planning Commission’s (the IPC) audit opinion because the prior year comparative figures were not audited. Prior to 2020–21, the IPC was not required to prepare separate financial statements under the Public Finance and Audit Act 1983. From 2020–21, the IPC is required to prepare financial statements under the Government Sector Finance Act 2018.
The 2010–11 to 2019–20 audits of the Water Administration Ministerial Corporation’s (the Corporation) financial statements were incomplete due to insufficient records and evidence to support the transactions of the Corporation, particularly for the earlier years. These audits are currently underway, and the 2020–21 audit will commence shortly.
The Department of Planning, Industry and Environment's (the department) preliminary assessment indicates that 60 State controlled Crown land managers (CLMs) are required to prepare financial statements in 2020–21. To date, no CLMs have prepared and submitted financial statements for audit in 2020–21. All 120 common trusts have never submitted their financial statements for audit. The department needs to do more to ensure that the CLMs and common trusts meet their statutory reporting obligations.
Nine agencies that were required to perform early close procedures did not complete a total of 20 mandatory procedures. The most common incomplete early close procedures include the revaluation of property, plant and equipment, documenting all significant management judgments and assumptions, and the implementation of new and updated accounting standards.

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

This chapter outlines our observations and insights from our financial statements audits of agencies in the Planning, Industry and Environment cluster.

Section highlights

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

Appendix one - Misstatements in financial statements submitted for audit

Appendix one – Misstatements in financial statements submitted for audit

Copyright notice

17 December 2021

Published

Customer Service 2021

Finance

Asset valuation

Cyber security

Financial reporting

Information technology

Internal controls and governance

Shared services and collaboration

This report analyses the results of our audits of the Customer Service 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 Customer Service 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 Customer Service cluster agencies' financial statement audits for the year ended 30 June 2021.

What we found

Unmodified audit opinions were issued for all Customer Service cluster agencies.

The number of monetary misstatements decreased from 48 in 2019–20 to 46 in 2020–21.

Seven out of eight agencies did not complete all mandatory early close procedures.

What the key issues were

Upon the implementation of AASB 1059 'Service Concession Arrangements: Grantors', the Department of Customer Service (the department) recognised a service concession asset, the land titling database, totalling $845 million for the first time at 1 July 2019.

The department reported several retrospective corrections of prior period errors.

The 2020–21 audits identified three high-risk and 59 moderate risk issues across the cluster. The high-risk issues were related to:

the Department of Customer Service – internal control qualifications and control deviations in GovConnect service providers
the Department of Customer Service – significant control deficiencies in information technology change management controls
Rental Bond Board – uncertainties in the accounting treatment of rental bonds.

The percentage of repeat issues we report to management and those charged with governance in management letters increased from 29 per cent in prior year to 42 per cent in 2020–21 while the number of items decreased from 94 to 93.

The magnitude and number of internal control exceptions in GovConnect service providers increased resulting in additional audit procedures to address the risks of fraud and errors in the financial statements.

What we recommended

The department should improve the validation process of key valuation assumptions and inputs provided by the private operator NSW Land Registry Services. It should revisit its accounting treatment of new land titling records.

The department should ensure GovConnect service providers prioritise the remediation of control deficiencies in information technology services.

The department should continue to improve controls in cyber security management.

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

The New South Wales Government Telecommunications Authority should improve its fixed assets management and financial reporting process to accommodate its growing fixed assets profile.

Fast facts

The Customer Service cluster aims to plan, prioritise, fund and drive digital transformation and customer service across every cluster in the NSW Government.

$3.9b total expenditure incurred in 2020–21
$34.1b total administered income managed on behalf of the NSW Government in 2020–21
100% unqualified audit opinions were issued on agencies' 30 June 2021 financial statements
3 high-risk management letter findings were identified
46 monetary misstatements were reported in 2020–21
42% of reported issues were repeat issues.

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

Section highlights

Unqualified audit opinions were issued on the financial statements of cluster agencies.
The number of reported misstatements has decreased from 48 in 2019–20 to 46 in 2020–21.
Agencies could do more work to improve the quality and timeliness of completing mandatory early close procedures.
The Department of Customer Service implemented the new accounting standard AASB 1059 'Service Concession Arrangements: Grantors', which resulted in recognition of a service concession asset of $845 million at 1 July 2019. The valuation of land titling database requires significant judgements and estimations.

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 Customer Service.

Section highlights

The 2020–21 audits identified three high-risk and 59 moderate risk issues across the cluster. Twenty-six moderate risk issues were repeat issues. The most common repeat issues related to information technology controls around user access management.
The magnitude and number of internal control qualification issues from GovConnect service providers have increased. Ineffective controls at service providers increase the risk of fraud, error and security to data. Urgent attention is required to remediate the internal control exceptions in information and technology services.
The NSW Public Sector's cyber security resilience needs urgent attention. Cyber Security NSW and NSW Government agencies need to prioritise improvements to their cyber security resilience as a matter of urgency.

Findings reported to management

Forty-two per cent of findings reported to management were repeat issues

In 2020–21, there were 93 findings raised across the cluster (94 in 2019–20). Forty-two per cent of all issues were repeat issues (29 per cent in 2019–20).

The most common repeat issues related to weaknesses in controls over information technology user access administration.

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

Risk rating	Issue
Information technology
High³ 1 new, 1 repeat	The financial audits identified the need for agencies to improve information technology processes and controls that support the integrity of financial data used to prepare agencies' financial statements. Of particular concern are issues associated with: internal control exceptions in information and technology services provided by GovConnect service providers inadequate change management controls poor user access administration and no monitoring of privileged user activities insufficient cybersecurity controls and processes. High-risk issues are discussed later in the chapter.
Moderate² 5 new, 8 repeat
Low¹ 7 new, 5 repeat
Internal control deficiencies or improvements
Moderate² 5 new, 3 repeat	The financial audits identified internal control weaknesses across key business processes, including: lack of documentation support for payroll transactions untimely removal of unused transaction negotiation authority facility and old bank signatories inadequate fixed asset management controls including timely capitalisation of project overhead costs.
Low¹ 3 new, 2 repeat
Financial reporting
High³ 1 new	The financial audits identified opportunities for agencies to strengthen financial reporting, including: uncertainties in legislation to support accounting of rental bonds as funds held in trust improvements required in lease accounting including the review of extension options, assessing indicators of impairment and reviewing the lease reports for completeness and accuracy the removal of fully depreciated assets in the fixed asset register was not timely the quality and timeliness of completing early close procedures required improvement. High-risk issues are discussed later in the chapter.
Moderate² 9 new, 8 repeat
Low¹ 7 new, 3 repeat
Governance and oversight
Moderate² 10 new, 3 repeat	The financial audits identified opportunities for agencies to improve governance and oversight processes, including: renewing or finalising service arrangement agreements between agencies were required lack of formalised documentation regarding arrangements with external providers for leasing and use of assets.
Low¹ 3 new
Non-compliance with key legislation and/or central agency policies
Moderate² 4 new, 4 repeat	The financial audits identified the need for agencies to improve its compliance with key legislation and central agency policies, including: non-compliance with contract and procurement management policy, including the use of purchasing cards non-compliance with TC 21-02 'Statutory Act of Grace Payments' annual leave in excess of 30 days where Circular 2020-12 requires agency heads to reduce employee recreation leave balances to 30 days or less.
Low¹ 1 repeat

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

³ High-risk from the consequence and/or likelihood of an event that has had, or may have a negative impact on the entity.

² Moderate risk from the consequence and/or likelihood of an event that has had, or may have a negative impact on the entity.

¹ Low risk from the consequence and/or likelihood of an event that has had, or may have a negative impact on the entity.

Note: Management letter findings are based on management letters issued to agencies.

2020–21 audits identified three high-risk findings

High-risk findings, including repeat findings, were reported at the following cluster agencies. One of the 2019–20 high-risk findings were not resolved.

Agency	Description
2020–21 findings
Department of Customer Service Repeat finding: Qualifications and control deviations in GovConnect NSW controls assurance reports	The GovConnect information technology general controls (ITGC) provided by the department, Infosys and Unisys were qualified in 2020–21. The key controls over user access, system changes and batch process failed in all ITGC reports. Most of these deviations were not mitigated or sufficiently mitigated to address the risk of unauthorised user access. The control deficiencies in ITGC increase: the risk of unauthorised transactions, system and configuration changes (workflow approvals, three-way match etc.) and modifications to the system reports incomplete, invalid and inappropriate system access, segregation of duties controls and system reports for the customers using the SAPConnect. The role of the department has changed significantly from a coordinating agency on behalf of GovConnect customers to a GovConnect IT service provider. It is leading a new IT operating model called ‘Service Integration and Application Management’ (SIAM) to strengthen governance and improve performance of GovConnect service providers. The Department is responsible for the remediation of control deficiencies and continuous improvement in the GovConnect environment. This matter was assessed as high-risk, if not adequately addressed, it had the potential to result in material fraud and error in the department's financial statements and reputation damages. This issue is further discussed later in this chapter.
2020–21 findings
Department of Customer Service New finding: Change management significant control deficiencies	Revenue NSW, a division of the department has a key role in managing the State’s finances. It administers State taxes, manages fines, recovers State debt and administers grants and subsidies. The audit team found significant control deficiencies in change management controls: appropriate system controls were not in place to restrict developers from releasing changes to the live business systems 8 developers had direct access to the business application servers used for calculating and administering State taxes. We have included this matter as a high-risk management letter finding, as the audit team could not identify mitigating controls. The system activity of these developers was also not being independently logged and monitored. This increases the risk of unauthorised system change. This can significantly affect the integrity of tax calculation, business process approvals, invalid changes to bank accounts, unauthorised refunds and write-offs. The audit team conducted a risk analysis over the relevant business processes affected by this issue and performed additional audit procedures to address the audit risk.
Rental Bond Board Repeat finding: Accounting treatment of rental bonds held in trust	The Rental Bond Board (the Board) holds rental bonds totalling $1.7 billion at 30 June 2021. The Board treated the rental bonds off-balance sheet and disclosed the rental bonds as ‘trust funds’. This treatment is based on management’s judgement that the Board does not have control of these funds. Previously the Board obtained advices from the Crown Solicitors who stated that in their view the rental bond funds held in the rental bond account were not moneys held in trust and the Residential Tenancies Act 2010 (the Act) should be reviewed and amended to better support its accounting treatment of rental bonds. The Board has initiated the need to amend the Act, however the implementation of the legislative amendments is still pending. This matter was assessed as high-risk, if not adequately supported, it had the potential to result in material misstatements in the Board's financial statements.

The number of moderate risk findings increased from prior year

Fifty-nine moderate risk findings were reported in 2020–21, which was a 11.3 per cent increase from 2019–20. Of these, 26 were repeat findings, and 33 were new issues.

Moderate risk findings include:

weaknesses in user access management, such as untimely access removal for terminated staff, and a lack of periodic user access review
accounting for leases such as the review of extension options, assessing indicators of impairment and reviewing the lease reports for completeness and accuracy
formalising arrangements between agencies including corporate service arrangements, funding arrangements, leases, use of SAP system and computer assets
use of purchasing cards where our data analytics performed indicated potential gaps and controls and non-compliance with government policies.

The magnitude and number of internal control exceptions in GovConnect service providers have increased

In 2015, the NSW Government selected Unisys Australia Pty Limited’s (Unisys) as an information technology (IT) outsourced service provider and Infosys Limited (Infosys) as a business process outsourced service provider. The outsourced services arrangement was branded GovConnect NSW (GovConnect). The Department of Customer Service (the department) is the contract authority for the NSW Government. In 2019, the NSW Government transitioned a number of Unisys’ IT services progressively to the department and ceased all Unisys's IT services in May 2021. In 2020-21, Infosys, Unisys and the Department were co-providers of business processes and information technology services that constitute the GovConnect environment.

The role of the department has changed significantly from a coordinating agency on behalf of GovConnect customers to a GovConnect IT service provider. The department is responsible for the remediation of control deficiencies and continuous improvement in GovConnect internal control environment.

The department leads the project management of GovConnect services, including the arrangement to provide internal control assurance reports to customers in 2020–21. It engages an independent service auditor (service auditor) from the private sector to perform annual assurance reviews of controls at GovConnect service providers in accordance with Australian Standard on Assurance Engagements 3402 'Assurance Reports on Controls at a Service Organisation' (ASAE 3402). The service auditor reports on the internal controls at a service organisation, which are relevant to a user entity's internal control environment.

The service auditor issued eight ASAE 3402 reports covering business processes controls and information technology general controls (ITGC) provided by the service providers. Four out of eight reports were qualified, a significant increase from previous years.

The table below shows the service auditor's ASAE 3402 opinions issued in various business processes and information technology services provided by service providers for the last five years.

ASAE 3402 controls report^#	2015–16^	2016–17	2017–18	2018–19	2019–20	2020–21
Infosys Accounts receivable	Qualified	Unqualified	Unqualified	Unqualified	Unqualified	Qualified
Infosys Accounts payable	Qualified	Qualified	Unqualified	Unqualified	Unqualified	Unqualified
Infosys Fixed assets	Qualified	Unqualified	Unqualified	Unqualified	Unqualified	Unqualified
Infosys General ledger	Qualified	Qualified	Unqualified	Unqualified	Unqualified	Unqualified
Infosys Payroll	Adverse	Qualified	Unqualified	Unqualified	Unqualified	Unqualified
Infosys ITGC	Qualified	Qualified	Unqualified	Unqualified	Unqualified	Qualified
Unisys ITGC	Qualified	Unqualified	Qualified	Qualified	Unqualified	Qualified
The department ITGC*	--	--	--	--	Qualified	Qualified
ServiceFirst**	Disclaimer	--	--	--	--	--

# The ASAE 3402 controls reports were issued by an independent private sector service auditor appointed by the Department of Customer Service.

* Information technology services were transitioned from Unisys to the department in phases from 2019–20 to 2020–21.

** ServiceFirst was the shared service centre and its last reporting period was from 1 July 2015 to 13 December 2015.

^ GovConnect first reporting period from 14 December 2015 to 30 June 2016.

In 2020–21, the information technology services controls reports issued to the department, Infosys and Unisys were qualified. Infosys' accounts receivable business process controls report was also qualified. The audit qualifications were because:

the service auditor did not get access to the complete set of records processed during the financial year for several ITGC controls. The system that stored these records was hosted at Unisys. From December 2019 to 28 May 2021, the services at Unisys were progressively migrated to the department's IT environment but this system could not be migrated to the department in the required format, resulting in audit scope limitation for service auditors
of the deviations identified during sample testing of ITGC controls
the monthly follow up of outstanding receivables was not performed regularly, which was the only key control to address the timely collection of accounts receivable.

Internal control exceptions in GovConnect information and technology services require urgent remediations

The relevant controls over user access, system changes and password controls failed in all three ASAE 3402 GovConnect ITGC reports. These control failures can lead to unauthorised system access, system and configuration changes (workflow approvals, three-way match, etc.) and modifications to key reports. It increases the risk of:

fraud and error in the financial statements
ineffective segregation of duties controls
accuracy and completeness of system generated reports for the agencies using the SAPConnect system.

The table shows the number of ITGC control deviations compared to prior year:

Year ended 30 June	2021		2020
	Total controls tested	Total number of control deviations and findings	Total controls tested	Total number of control deviations and findings
Infosys ITGC	41	16	35	8
Unisys ITGC	25	11	33	4
DCS ITGC	31	9	10	5

Most of these deviations were not mitigated or sufficiently mitigated to address the risk of unauthorised user access.

The service auditor identified significant areas for remediation:

governance arrangement of the IT services
user access management controls
SAP database controls
logical access
incident management.

In response to the internal control qualifications, the audit teams performed data analytics over payroll and accounts payable. The data analytics identified several terminated employees that were paid long after their termination dates which resulted in salary overpayments during 2020–21. While management had put processes in place to recover these overpayments, the payroll processing controls need to be improved to prevent such overpayments.

The Department of Customer Service advised that it established a ‘Control Reframe Project’ (the project) to address the internal control exceptions at GovConnect service providers. The objective of the project is to ensure the GovConnect assurance model is aligned with clear lines of responsibility and remediation actions are in place to support the delivery of services and achieve an improved outcome for future years.

Recommendation

We recommend the Department of Customer Service:

improve governance and internal control environment over the information technology services
ensure GovConnect service providers prioritise remediation actions to address internal control exceptions
perform a post-implementation review of the transition of the Unisys arrangement to identify lessons learnt and continuous improvement
develop data analytics to help analyse and identify high-risk patterns and anomalies in GovConnect key transaction systems, augmenting their existing monitoring and detective controls.

The NSW Public Sector's cyber security resilience needs urgent attention

The 2020 'Central Agencies' Report to Parliament highlighted the need for Cyber Security NSW, a business unit within the Department of Customer Service, and NSW Government agencies to prioritise improvements to their cyber security resilience as a matter of urgency. A status update of the 2020 recommendation is included in Appendix five of this report.

The Audit Office's Annual Work Program identifies cyber security as a focus area for the Audit Office in 2021–24. It outlines a three-pronged approach to auditing cyber security in this period:

considering how agencies are responding to the risks associated with cyber security across our financial audits across the NSW public sector
examining the effectiveness of cyber security planning and governance arrangements for large NSW state government agencies for our Internal Controls and Governance report
conducting deep-dive performance audits of the effectiveness of specific agency activities in preparing for, and responding to cyber security risks.

A performance audit 'Managing cyber risks' was tabled in Parliament in July 2021. The audit made several recommendations to audited agencies to uplift their cyber security management. It also recommended the Department of Customer Service to:

clarify the requirement of the NSW Cyber Security Policy (CSP) reporting to all systems
require agencies to report the target level of maturity for each mandatory requirement.

A compliance audit 'Compliance with the NSW Cyber Security Policy' was tabled in October 2021. The audit examined whether agencies are complying with the NSW Cyber Security Policy to ensure all NSW Government departments and public service agencies are managing cyber security risks to their information and systems.

The report found that key elements to strengthen cyber security governance, controls and culture are not sufficiently robust and not consistently applied. There has been insufficient progress to improve cyber security safeguards across NSW Government agencies. 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.

The report noted that the CSP was not achieving the objective of improved cyber governance, controls and culture. The compliance audit made several recommendations to Cyber Security NSW and other NSW Government agencies.

The 2021 maturity self-assessment results against the Australian Cyber Security Centre Essential 8 for the 25 largest NSW State Government agencies are reported in the 2021 'Internal Control and Governance' Report to Parliament.

Repeat recommendation

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

Management of cyber security risk

Our 2020-21 financial audit assessed whether cyber security risks represent a risk of material misstatement to the department's own financial statements. A request performance audit 'Service NSW's handling of personal information' was tabled on 18 December 2020. The audit followed two cyber security incidents that resulted in data breaches of customer information. As part of our audit procedures, we obtained an understanding of the controls the department has in place to address the risk of cyber security incidents and respond to any incidences which may have occurred during the year, including its impact on the audit.

Our assessment of the department’s own cyber risk management shows that:

an approved security incident response plan was not in place during the reporting period. There was a lack of testing over incident detection and monitoring process
a formal process over patch management that includes assessment, determining relevance and priority, timely rollout and escalation and reporting of long outstanding patches to senior management is being established.

The department provides information security services including cyber security management to cluster agencies. We found that there were insufficient communications within the Customer Service cluster over the controls and assurance over cyber security risk management. Some cluster agencies had put in place limited controls over cyber security risk management.

Recommendation

We recommend the Department of Customer Service:

establish an approved security incident response plan and formal process over patch management
improve communications with cluster agencies over the controls and assurance in cyber security management.

Appendix five – Status of 2020 recommendations

Copyright notice

15 December 2021

Published

Health 2021

Health

Asset valuation

Compliance

Cyber security

Financial reporting

Infrastructure

Internal controls and governance

Procurement

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

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

What the report is about

The results of Health cluster (the cluster) agencies' financial statements audits for the year ended 30 June 2021.

What we found

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

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

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

What the key issues were

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

The three new high-risk issues identified were:

Hotel Quarantine (HQ) fees

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

COVID-19 inventories

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

COVID-19 vaccines

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

What we recommended

Hotel Quarantine (HQ) fees

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

COVID-19 inventories

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

COVID-19 vaccines

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

Fast facts

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

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

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

financial reporting
audit observations.

Financial reporting is an important element of good governance. Confidence and transparency in public sector decision-making are enhanced when financial reporting is accurate and timely. This chapter outlines our audit observations related to the financial reporting of agencies in the Health cluster (the cluster) for 2021.

Section highlights

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

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

Section highlights

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

Findings reported to management

The number of findings reported to management has increased, with 47.4 per cent of all issues being repeat issues

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

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

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

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

⁴Extreme risk from the consequence and/or likelihood of an event that has had, or may have a negative impact on the entity.
³ High risk from the consequence and/or likelihood of an event that has had, or may have a negative impact on the entity.
² Moderate risk from the consequence and/or likelihood of an event that has had, or may have a negative impact on the entity.
¹ Low risk from the consequence and/or likelihood of an event that has had, or may have a negative impact on the entity.

Note: Management letter findings are based either on final management letters issued to agencies, or draft letters where findings have been agreed with management.

Complexities arising from the COVID-19 response

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

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

Expected rate of recovery of outstanding Hotel Quarantine invoices

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

Procurement, management and impairment of COVID-19 inventories

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

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

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

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

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

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

Emerging trends

Recognition of provisions without sufficient support

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

Treatment of Commonwealth funding

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

Key repeat issues

Management of excessive annual leave

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

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

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

Accurate time recording

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

Existence, completeness and accuracy of key agreements

Delivery of major capital projects

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

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

Cross border patient funding arrangements

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

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

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

Albury Base Hospital

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

Appendix one – Misstatements in financial statements submitted for audit

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

Copyright notice

2023-24

Planned

Water management and regulation

Planning

Environment

Compliance

Fraud

Internal controls and governance

Management and administration

Regulation

Service delivery

Water regulation aims to achieve sustainable environmental, economic and social outcomes from the management of water resources, consistent with the Water Management Act 2000. Following recommendations from reviews into water theft, reforms were made to strengthen water regulation, compliance and enforcement – including the establishment of the Natural Resources Access Regulator (NRAR) in 2018. The Department of Planning and Environment shares responsibility for issuing water access licences and approvals with the state-owned corporation, WaterNSW.

This audit could assess how effectively the Department, WaterNSW and NRAR are undertaking relevant planning, licensing and regulatory functions to ensure secure, sustainable and transparent water sharing in New South Wales. This topic could also consider how effectively the Department has implemented reforms to enhance water metering technology and rules, and the efficacy of NRAR’s activities to support this program.

10 December 2020

Published

Central Agencies 2020

Premier and Cabinet

Treasury

Financial reporting

Internal controls and governance

Management and administration

Risk

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

Audit opinions and timeliness of reporting	Unqualified audit opinions were issued on the 2019–20 financial statements of central agencies and the Legislature. The audit opinion on the Social and Affordable Housing NSW Fund's compliance with the payment requirements of the Social and Affordable Housing NSW Fund Act 2016 was qualified. All agencies met statutory deadlines for submitting financial statements.
Agencies were financially impacted by recent emergency events	The NSW Government allocated $1.4 billion to provide small business support and bushfire recovery relief, support COVID-19 quarantine compliance management, recruit more staff to respond to increased customer demand, and meet additional COVID-19 cleaning requirements. Agencies spent $901 million (64 per cent of the allocated funding) for the financial year ended 30 June 2020. NSW Self Insurance Corporation reported an increase of $850 million in its liability for claims related to emergency events.
AASB 16 'Leases' resulted in significant changes to agencies' financial position	The implementation of new accounting standards was challenging for many agencies. The New South Wales Government Telecommunications Authority was not well-prepared to implement AASB 16 'Leases' and had not completely assessed contracts that contained leases. This resulted in understatements of leased assets and liabilities by $56 million which were subsequently corrected.
Implementation of new revenue standards	NSW Treasury did not adequately implement the new revenue standard AASB 1058 ‘Income of Not-for-Profit Entities’ for the Crown Entity. This resulted in understatements of $274 million in opening equity and $254 million to current year revenue, which have been corrected in the final financial statements.

2. Audit observations

Management letter findings and repeat issues	Our 2019–20 audits identified nine high risk and 122 moderate risk issues across central agencies and the Legislature. The high risk issues were identified in the audits of: Insurance and Care NSW New South Wales Government Telecommunications Authority Rental Bond Board Independent Commission Against Corruption NSW Treasury Crown Entity Department of Premier and Cabinet. High risk findings include: Insurance and Care NSW (icare) allocates service costs to the Workers Compensation Nominal Insurer, and the other schemes it supports. The documentation supporting cost allocations does not demonstrate how these allocations reflect actual costs. There is a risk of the Workers Compensation Nominal Insurer being overcharged. New South Wales Government Telecommunications Authority's delay in capitalisation and valuation of material capital projects; and insufficient work performed to implement the new accounting standard AASB 16 ‘Leases’. NSW Treasury's four-year plan to transition RailCorp to a for-profit State Owned Corporation called Transport Asset Holding Entity of New South Wales (TAHE) by 1 July 2019, remains to be implemented. On 1 July 2020, RailCorp converted to TAHE. A large portion of the planned arrangements are still to be implemented. As at the time of the audit, the TAHE operating model, Statement of Corporate Intent (SCI) and other key plans and commercial agreements were not finalised. In the absence of commercial arrangements with the public rail operators, there is a lack of evidence to demonstrate TAHE’s ability to create a commercial return in the long term. This matter has been included as a high risk finding in our management letter as there may be financial reporting implications to the State if TAHE does not generate a commercial return for its shareholders in line with the original intent. NSW Treasury and TAHE should ensure the commercial arrangements, operating model and SCI are finalised in 2020–21. Of the 122 moderate risk issues, 36 per cent were repeat issues. The most common repeat issue related to weaknesses in controls over information technology user access administration, which increases the risk of inappropriate access to systems and records.
Grants administration for disaster relief	Service NSW delivers grants responding to emergency events on behalf of other NSW Public Sector agencies. Since the first grant program commenced in January 2020, Service NSW processed approximately $791 million to NSW citizens and businesses impacted by emergency events for the financial year ended 30 June 2020. A performance audit of grants administration for disaster relief is planned for 2020–21. It will assess whether grants programs administered under the Small Business Support Fund were effectively designed and implemented to provide disaster relief.
Internal controls at GovConnect NSW service providers require enhancement	GovConnect NSW provides transactional and information technology services to central agencies. It engages an independent service auditor (service auditor) from the private sector to perform annual assurance reviews of controls at service providers, namely Infosys, Unisys and the Department of Customer Service (DCS). The service auditor issued: unqualified opinions on information technology and business process controls at Infosys and Unisys, but there was an increase in control deficiencies identified in the user access controls at these service providers a qualified opinion on DCS's information technology (IT) security monitoring controls because security tools were not implemented and monitored for the entire financial year. Responsibility for IT security monitoring transitioned from Unisys to DCS in 2019–20. These control deficiencies can increase the risk of fraud and inappropriate use of sensitive data. These may impact on the ability of agencies to detect and respond to a cyber incident. Recommendation: We recommend DCS work with GovConnect service providers to resolve the identified control deficiencies as a matter of priority.
The NSW Public Sector's cyber security resilience needs to improve	The NSW Cyber Security Policy requires agencies to provide a maturity self-assessment against the Australian Cyber Security Centre (ACSC) Essential 8 to the head of the agency and Cyber Security NSW annually. Completed self-assessment returns highlighted limited progress in implementing the Essential 8. Repeat recommendation: Cyber Security NSW and NSW government agencies need to prioritise improvements to their cyber security resilience as a matter of urgency
Three Insurance and Care NSW (icare) entities had net asset deficiencies at 30 June 2020	The Workers Compensation Nominal Insurer, NSW Self Insurance Corporation and the Lifetime Care and Support Authority of NSW all had negative net assets at 30 June 2020. These icare entities did not hold sufficient assets to meet the estimated present value of all of their future payment obligations at 30 June 2020. The deterioration in net assets was largely due to increases in outstanding claims liabilities. Notwithstanding the overall net asset deficiencies, the financial statements for these entities were prepared on a going concern basis. This is because future payment obligations are not all due within the next 12 months. Settlement is instead expected to occur over years into the future, depending on the nature of the benefits provided by each scheme.
icare has not been able to demonstrate that its allocation of costs reflects the actual costs incurred by the Workers Compensation Nominal Insurer and other schemes	Costs are incurred by icare as the 'service entity' of the statutory scheme it administers, and then subsequently recovered from the schemes through 'service fees'. In the absence of documentation supported by robust supporting analysis, there is a risk of the schemes being overcharged, and the allocation of costs being in breach of legislative requirements. Recommendation: icare should ensure its approach to allocating service fees to the Workers Compensation Nominal Insurer and the other schemes it manages, is transparent and reflects actual costs.
icare did not comply with GIPA requirements	icare did not comply with the Government Information (Public Access) Act 2009 (GIPA) contract disclosure requirements in 2019–20 and has not complied for several years. A total of 417 contracts were identified by management as not having been published on the NSW Government’s eTendering website. The final upload of these past contracts occurred on 20 August 2020.
Implementation of Machinery of Government (MoG) changes	MoG changes impacted the governance and business processes of some agencies. Our audits identified and reported areas for improvement in the consolidation of corporate functions following MoG implementation processes at Infrastructure NSW and in the Customer Service cluster.

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.

Section highlights

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

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.

Section highlights

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

10 December 2020

Published

Health 2020

Health

Compliance

Financial reporting

Infrastructure

Internal controls and governance

Service delivery

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

Financial reporting

Unqualified financial audit opinions

The financial statements of NSW Health and its 25 controlled entities received unqualified opinions.

The number of corrected and uncorrected misstatements increased from the prior year. Misstatements related predominantly to the implementation of new accounting standards, asset revaluations and accounting for new revenue streams to cover the cost of HSW Health’s response to the COVID-19 pandemic.

Qualified compliance audit opinion

We issued a qualified audit opinion for the Ministry of Health’s Annual Prudential Compliance Statement for aged care facilities operated by NSW Health. We identified 18 instances of material non-compliance with the Fees and Payments Principles 2014 (No. 2) (the Principles) in 2019–20 (30 in 2018–19).

Financial performance

NSW Health received an additional $3.3 billion in funding to cover costs associated with its response to the COVID-19 pandemic.

The impacts of the COVID-19 pandemic on the cluster were significant for health entities and included changes to operations, increased revenues, expenditure, assets and liabilities. Cancellation of elective surgery and decreased emergency department presentations meant that despite the pandemic, activity levels at many health entities decreased. Health Pathology and HealthShare were notable exceptions.

In the period to the 30 June 2020, NSW Health reported that over 900,000 COVID-19 tests were conducted. Health Pathology conducted over 500,000 of these tests. Health Pathology's surge requirements were enhanced through arrangements with 13 private sector providers. HealthShare purchased $864.2 million of personal protective equipment.

Overall, NSW Health recorded an operating surplus of $3.1 billion in 2019–20, an increase of $2.0 billion from 2018–19. As in previous years, the surplus largely resulted from additional revenue received to fund capital projects including the construction of new facilities, upgrades and redevelopments. In 2019–20 additional Commonwealth and State funding for the purchase and stockpiling of personal protective equipment also contributed to the operating surplus.

Overtime payments

The Ambulance Service of NSW’s (NSW Ambulance) reduced their overtime payments to $79.7 million in 2019–20 ($83.1 million in 2018–19). Overtime payments in 2019–20 included $6.8 million related to the response to the 2019–20 bushfire season. NSW Ambulance overtime payments represent 16.8 per cent of total overtime payments in the cluster.

2. Audit observations

Internal control deficiencies

We identified more internal control deficiencies in 2019–20. The number of repeat issues from prior years also remains high.

NSW Health addressed 18 out of the 25 information system control deficiencies during the year.

Several key agreements lacked formal documentation. This included agreements between the Ministry and health entities, between health entities and agencies in other clusters and between the Ministry and health departments in other jurisdictions.

Infrastructure delivery

NSW Health had 44 ongoing major capital projects at 30 June 2020 with a total revised budget of $12.3 billion. The revised total budget of $12.3 billion is $2.0 billion more than the original budget. NSW Health revises budgets when it combines project stages.

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.

Section highlights

Unqualified audit opinions were issued for all health entities’ financial statements, although more misstatements were identified than last year.
NSW Health recorded an operating surplus of $3.1 billion, an increase of $2.0 billion from 2018–19. This is largely due to additional capital grants for new facilities, upgrades and redevelopments and additional Commonwealth and State funding for the purchase of personal protective equipment.
NSW Health’s expenses increased by 5.5 per cent in 2019–20 (7.0 per cent in 2018–19) despite the impact of the COVID-19 pandemic. The primary causes for the growth in expenses are increases in:
- employee related expenses due to higher employee numbers, increased overtime and a 2.5 per cent award increase
- payments to private health operators to maintain their viability during the COVID-19 pandemic and later to assist with public patient elective surgery waitlists
- payments to private health operators due to the first full year of operation of the Northern Beaches hospital.
The Ambulance Service of NSW (NSW Ambulance) continued to report higher overtime payments than other health entities. However, despite the response to the 2019–20 bushfire season, their overtime payments were lower than last year. NSW Ambulance paid $79.7 million in overtime payments in 2019–20 ($83.1 million in 2018–19).
A qualified audit opinion was issued for the Ministry of Health’s Annual Prudential Compliance Statement for aged care facilities operated by NSW Health. There were 18 instances of material non-compliance with the Fees and Payments Principles 2014 (No. 2) (the Principles) in 2019–20 (30 in 2018–19)

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.

Section highlights

The number of internal control deficiencies has increased since 2018–19. More than a third of control deficiencies are repeat issues.
Control deficiencies that relate to managing employees’ leave and employee’s time recording continue to be difficult for entities to resolve, particularly during the ongoing response to the COVID-19 pandemic.
Several key agreements were undocumented. These included agreements between the Ministry and the health entities, between health entities, and between the Ministry and entities in other clusters and jurisdictions. These related to:
- a loan arrangement between the Ministry and HealthShare for $319 million.
- Northern Sydney Local Health District's use of land and buildings owned by the Graythwaite Charitable Trust
- agreements for the treatment of New South Wales residents while they are interstate, and interstate residents receiving treatment while they are in New South Wales from Queensland, Victoria, South Australia and the ACT for both 2019–20 and 2018–19.
NSW Health reported that they completed nine major capital projects during 2019–20. As at 30 June 2020 there were 44 ongoing major capital health projects in NSW. The revised capital budget for these projects in total was $2.0 billion more than the original budget of $10.3 billion. NSW Health reported the budget revisions are largely the result of combining project stages.

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

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.

Local Health Districts	Target % (2019–20)	Actual % (2019–20)
Central Coast	77.0	59.9
Far West	90.2	86.6
Hunter New England	81.0	72.5
Illawarra Shoalhaven	79.0	60.2
Mid North Coast	82.0	76.7
Murrumbidgee	85.3	81.9
Nepean Blue Mountains	79.0	65.5
Northern NSW	81.0	78.2
Northern Sydney	79.0	73.9
South Eastern Sydney	78.0	70.3
South Western Sydney	78.0	61.2
Southern NSW	85.0	83.0
Sydney	76.0	70.9
Sydney Children’s Hospitals Network	80.0	72.1
Western NSW	85.9	81.0
Western Sydney	78.0	59.0
St Vincent's Health Network*	75.0	65.4

* St Vincent’s Health Network Sydney (SVHNS) comprises of St Vincent’s Hospital Sydney Limited as the affiliated health organisation in respect of four recognised establishments under the Health Services Act 1997 (NSW) (Health Services Act). Under the Health Services Act, St Vincent’s Hospital Sydney Limited, is treated as a Network for the purposes of the National Health Reform Agreement in respect of the three recognised establishments: St Vincent’s Hospital, Darlinghurst; Sacred Heart Health Service, Darlinghurst; St Joseph’s Hospital, Auburn; and St Vincent's Correctional Health, Parklea.

Source: NSW Health (unaudited)

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.

10 December 2020

Published

Transport 2020

Transport

Asset valuation

Cyber security

Financial reporting

Information technology

Infrastructure

Project management

1. Financial Reporting
Audit opinion	Unmodified audit opinions issued for the financial statements of all Transport cluster entities.
Quality and timeliness of financial reporting	All cluster agencies met the statutory deadlines for completing the early close and submitting the financial statements. Transport cluster agencies continued to experience some challenges with accounting for land and infrastructure assets. The former Roads and Maritime Services and Sydney Metro recorded prior period corrections to property, plant and equipment balances.
Impact of COVID-19 on passenger revenue and patronage	Total patronage and revenue for public transport decreased by approximately 18 per cent in 2019–20 due to COVID-19. The Transport cluster received additional funding from NSW Treasury during the year to support the reduced revenue and additional costs incurred such as cleaning on all modes of public transport and additional staff to manage physical distancing.
Completion of the CBD and South East Light Rail	The CBD and South East Light Rail project was completed and commenced operations in this financial year. At 30 June 2020, the total cost of the project related to the CBD and South East Light Rail was $3.3 billion. Of this total cost, $2.6 billion was recorded as assets, whilst $700 million was expensed.
2. Audit Observations
Internal control	While internal controls issues raised in management letters in the Transport cluster have decreased compared to the prior year, control weaknesses continue to exist in access security for financial systems. We identified 56 management letter findings across the cluster and 43 per cent of all issues were repeat issues. The majority of the repeat issues relate to information technology controls around user access management. There were three high risk issues identified - two related to financial reporting of assets and one for implementation of TAHE (see below).
Agency responses to emergency events	Transport for NSW established the COVID-19 Taskforce in March 2020 to take responsibility for the overall response of planning and coordination for the Transport cluster. It also implemented the COVIDSafe Transport Plan which incorporates guidance on physical distancing, increasing services to support social distancing and cleaning.
RailCorp transition to TAHE	On 1 July 2020, RailCorp was renamed Transport Asset Holding Entity of New South Wales (TAHE) and converted to a for-profit statutory State-Owned Corporation. TAHE is a commercial for-profit Public Trading Entity with the intent to provide a commercial return to its shareholders. A plan was established by NSW Treasury to transition RailCorp to TAHE which covered the period 1 July 2015 to 1 July 2019. A large portion of the planned arrangements were not implemented by 1 July 2020. As at the time of this report, the TAHE operating model, Statement of Corporate Intent (SCI) and other key plans and commercial agreements are not finalised. The State Owned Corporations Act 1989 generally requires finalisation of an SCI three months after the commencement of each financial year. However, under the Transport Administration Act 1988, TAHE received an extension from the voting shareholders, the Treasurer and Minister for Finance and Small Business, to submit its first SCI by 31 December 2020. In accordance with the original plan, interim commercial access arrangements were supposed to be in place with RailCorp prior to commencement of TAHE. Under the transitional arrangements, TAHE is continuing to operate in accordance with the asset and safety management plans of RailCorp. The final operating model is expected to include considerations of safety, operational, financial and fiscal risks. This should include a consideration of the potential conflicting objectives of a commercial return, and maintenance and safety measures. This matter has been included as a high risk finding in our management letter due to the significance of the financial reporting impacts and business risks for TAHE. Recommendation: TAHE management should: establish an operating model in line with the original intent of a commercial return finalise commercial agreements with the public rail operators confirm forecast financial information to assess valuation of TAHE infrastructure finalise asset and safety management plans. Resolution of the above matters are critical as they may significantly impact the financial reporting arrangements for TAHE for 2020–21, in particular, accounting policies adopted as well as measurement principles of its significant infrastructure asset base.
Completeness and accuracy of contracts registers	Across the Transport cluster, contracts and agreements are maintained by the transport agencies using disparate registers. Recommendation (repeat): Transport agencies should continue to implement a process to centrally capture all contracts and agreements entered. This will ensure: agencies are fully aware of contractual and other obligations appropriate assessment of financial reporting implications ongoing assessments of accounting standards, in particular AASB 16 ‘Leases’, AASB 15 'Revenue from Contract with Customers', AASB 1058 'Income of Not-for-Profit Entities' and new accounting standard AASB 1059 'Service Concession Arrangements: Grantors' are accurate and complete.

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

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

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

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

Section highlights

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

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

This chapter outlines our:

observations and insights from our financial statement audits of agencies in the Transport cluster
assessment of how well cluster agencies adapted their systems, policies and procedures, and governance arrangements in response to recent emergencies.

Section highlights

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

Appendix one – List of 2020 recommendations

Appendix two – Status of 2019, 2018 and 2017 recommendations

Appendix three – Management letter findings