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30 October 2018

Published

Internal Controls and Governance 2018

Education

Community Services

Finance

Health

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Justice

Planning

Premier and Cabinet

Transport

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Environment

Compliance

Cyber security

Financial reporting

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Project management

The Auditor-General for New South Wales Margaret Crawford found that as NSW state government agencies’ digital footprint increases they need to do more to address new and emerging information technology (IT) risks. This is one of the key findings to emerge from the second stand-alone report on internal controls and governance of the 40 largest NSW state government agencies.

This report analyses the internal controls and governance of the 40 largest agencies in the NSW public sector for the year ended 30 June 2018.

This report covers the findings and recommendations from our 2017–18 financial audits that relate to internal controls and governance at the 40 largest agencies (refer to Appendix three) in the NSW public sector.

This report offers insights into internal controls and governance in the NSW public sector

This is our second report dedicated to internal controls and governance at NSW State Government agencies. The report provides insights into the effectiveness of controls and governance processes in the NSW public sector by:

highlighting the potential risks posed by weaknesses in controls and governance processes
helping agencies benchmark the adequacy of their processes against their peers
focusing on new and emerging risks, and the internal controls and governance processes that might address those risks.

Without strong governance systems and internal controls, agencies increase the risks associated with effectively managing their finances and delivering services to citizens. The way agencies deliver services increasingly relies on contracts and partnerships with the private sector. Many of these arrangements deliver front line services, but others provide less visible back office support. For example, an agency may rely on an IT service provider to manage a key system used to provide services to the community. The contract and service level agreements are only truly effective where they are actively managed to reduce risks to continuous quality service delivery, such as interruptions caused by system outages, cyber security attacks and data security breaches.

Our audits do not review all aspects of internal controls and governance every year. We select a range of measures, and report on those that present heightened risks for agencies to mitigate. This report divides these into the following five areas:

Internal control trends
Information technology (IT), including IT vendor management
Transparency and performance reporting
Management of purchasing cards and taxis
Fraud and corruption control.

The findings in this report should not be used to draw conclusions on the effectiveness of individual agency control environments and governance arrangements. Specific financial reporting, controls and service delivery comments are included in the individual 2018 cluster financial audit reports, which will be tabled in Parliament from November to December 2018.

The focus of the report has changed since last year

Last year's report topics included asset management, ethics and conduct, and risk management. We are reporting on new topics this year. We plan to introduce new topics and re-visit our previous topics in subsequent reports on a cyclical basis. This will provide a baseline against which to measure the NSW public sectors’ progress in implementing appropriate internal controls and governance processes to mitigate existing, new and emerging risks in the public sector.

Agencies selected for the volume account for 95 per cent of the state's expenditure

While we have covered only 40 agencies in this report, those selected are a large enough group to identify common issues and insights. They represent about 95 per cent of total expenditure for all NSW public sector agencies.

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

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

This chapter outlines the overall trends for agency controls and governance issues, including the number of findings, level of risk and the most common deficiencies we found across agencies. The rest of this volume presents this year’s controls and governance findings in more detail.

Observation	Conclusions and recommendations
2.1 High risk findings
We found six high risk findings (seven in 2016–17), one of which was repeated from both last year and 2015–16.	Recommendation: Agencies should reduce risk by addressing high risk internal control deficiencies as a priority.
2.2 Common findings
We found several internal controls and governance findings common to multiple agencies.	Conclusion: Central agencies or the lead agency in a cluster can play a lead role in helping ensure agency responses to common findings are consistent, timely, efficient and effective.
2.3 New and repeat findings
Although internal control deficiencies decreased over the last four years, this year has seen a 42 per cent increase in internal control deficiencies.	The increase in new IT control deficiencies and repeat IT control deficiencies signifies an emerging risk for agencies.
IT control deficiencies feature in this increase, having risen by 63 per cent since last year. The number of repeat IT control deficiencies has doubled and is driven by the increasing digital footprint left by agencies as government prioritises on-line interfaces with citizens, and the number of transactions conducted through digital channels increases	Recommendation: Agencies should reduce IT risks by: assigning ownership of recommendations to address IT control deficiencies, with timeframes and actions plans for implementation ensuring audit and risk committees and agency management regularly monitor the implementation status of recommendations.

Government agencies’ financial reporting is now heavily reliant on information technology (IT). IT is also increasingly important to the delivery of agency services. These systems often provide the data to help monitor the efficiency and effectiveness of agency processes and services they deliver. Our audits reviewed whether agencies have effective controls in place to manage both key financial systems and IT service contracts.

Observation	Conclusions and recommendations
3.1 Management of IT vendors
Contract management framework Although 87 per cent of agencies have a contract management policy to manage IT vendors, one fifth require review.	Conclusion: Agencies can more effectively manage IT vendor contracts by developing policies and procedures to ensure vendor management frameworks are kept up to date, plans are in place to manage vendor performance and risk, and compliance with the framework is monitored by: internal audit focusing on key contracting activities experienced officers who are independent of contract administration performing spot checks or peer reviews targeted analysis of data in contract registers.
Contract risk management Forty-one per cent of agencies are not using contract management plans and do not assess contract risks. Half of the agencies that did assess contract risks, had not updated the risk assessments since the commencement of the contract.	Conclusion: Instead of applying a 'set and forget' approach in relation to management of contract risks, agencies should assess risk regularly and develop a plan to actively manage identified risks throughout the contract lifecycle - from negotiation and commencement, to termination.
Performance management Eighty-six per cent of agencies meet with vendors to discuss performance. Only 24 per cent of agencies sought assurance about the accuracy of vendor reporting against KPIs, yet sixty-seven per cent of the IT contracts allow agencies to determine performance based payments and/or penalise underperformance.	Conclusion: Agencies are monitoring IT vendor performance, but could improve outcomes and more effectively manage under-performance by: a more active, rigorous approach to both risk and performance management checking the accuracy of vendor reporting against those KPIs and where appropriate seeking assurance over their accuracy invoking performance based payments clauses in contracts when performance falls below agreed standards.
Transitioning services Forty-three per cent of the IT vendor contracts did not contain transitioning-out provisions. Where IT vendor contracts do make provision for transitioning-out, only 28 per cent of agencies have developed a transitioning-out plan with their IT vendor.	Conclusion: Contract transition/phase out clauses and plans can mitigate risks to service disruption, ensure internal controls remain in place, avoid unnecessary costs and reduce the risk of 'vendor lock-in'.
Contract Registers Eleven out of forty agencies did not have a contract register, or have registers that are not accurate and/or complete.	Conclusion: A contract register helps to manage an agency’s compliance obligations under the Government Information (Public Access) Act 2009 (the GIPA Act). However, it also helps agencies more effectively manage IT vendors by: monitoring contract end dates and contract extensions, and commence new procurements through their central procurement teams in a timely manner managing their contractual commitments, budgeting and cash flow requirements. Recommendation: Agencies should ensure their contract registers are complete and accurate so they can more effectively govern contracts and manage compliance obligations.
3.2 IT general controls
Governance Ninety-five per cent of agencies have established policies to manage key IT processes and functions within the agency, with ten per cent of those due for review.	Conclusion: Regular review of IT policies ensures risks are considered and appropriate strategies and procedures are implemented to manage these risks on a consistent basis. An absence of policies can lead to ad-hoc responses to risks, and failure to consider emerging IT risks and changes to agency IT environments.
User access administration Seventy-two deficiencies were identified related to user access administration, including: thirty issues related to granting user access across 43 per cent of agencies sixteen issues related to removing user access across 30 per cent of agencies twenty-six issues related to periodic reviews of user access across 50 per cent of agencies.	Recommendation: Agencies should strengthen the administration of user access to prevent inappropriate access to key systems.
Privileged access Forty per cent of agencies do not periodically review logs of the activities of privileged users to identify suspicious or unauthorised activities.	Recommendation: Agencies should: review the number of, and access granted to privileged users, and assess and document the risks associated with their activities monitor user access to address risks from unauthorised activity.
Password controls Twenty-three per cent of agencies did not comply with their own policy on password parameters.	Recommendation: Agencies should ensure IT password settings comply with their password policies.
Program changes Fifteen per cent of agencies had deficient IT program change controls mainly related to segregation of duties and authorisation and testing of IT program changes prior to deployment.	Recommendation: Agencies should maintain appropriate segregation of duties in their IT functions and test system changes before they are deployed.

This chapter outlines our audit observations, conclusions and recommendations from our review of how agencies reported their performance in their 2016–17 annual reports. The Annual Reports (Statutory Bodies) Regulation 2015 and Annual Reports (Departments) Regulation 2015 (annual reports regulation) currently prescribes the minimum requirements for agency annual reports.

Observation

Conclusion or recommendation

4.1 Reporting on performance

Only 57 per cent of agencies linked reporting on performance to their strategic objectives.

The use of targets and reporting performance over time was limited and applied inconsistently.

Conclusion: There is significant disparity in the quality and consistency of how agencies report on their performance in their annual reports. This limits the reliability and transparency of reported performance information.

Agencies could improve performance reporting by clearly linking strategic objectives to reported outcomes, and reporting on performance against targets over time. NSW Treasury may need to provide more guidance to agencies to support consistent and high-quality performance reporting in annual reports.

There is no independent assurance that the performance metrics agencies report in their annual reports are accurate.

Prior performance audits have noted issues related to the collection of performance information. For example, our 2016 Report on Red Tape Reduction highlighted inaccuracies in how the dollar-value of red tape reduction had been reported.

Conclusion: The ability of Parliament and the public to rely on reported information as a relevant and accurate reflection of an agency's performance is limited.

The relevance and accuracy of performance information is enhanced when:

policies and guidance support the consistent and accurate collection of data
internal review processes and management oversight are effective
independent review processes are established to provide effective challenge to the assumptions, judgements and methodology used to collect the reported performance information.

4.2 Reporting on reports

Agency reporting on major projects does not meet the requirements of the annual reports regulation.

Forty-seven per cent of agencies did not report on costs to date and estimated completion dates for major works in progress. Of the 47 per cent of agencies that reported on major works, only one agency reported detail about significant cost overruns, delays, amendments, deferments or cancellations.

NSW Treasury produce an annual report checklist to help agencies comply with their annual report obligations.

Recommendation: Agencies should comply with the annual reports regulation and report on all mandatory fields, including significant cost overruns and delays, for their major works in progress.

The information the annual reports regulation requires agencies to report deals only with major works in progress. There is no requirement to report on completed works.

Sixteen of 30 agencies reported some information on completed major works.

Conclusion: Agencies could improve their transparency if they reported, or were required to report:

on both works in progress and projects completed during the year
actual costs and completion dates, and forecast completion dates for major works, against original and revised budgets and original expected completion dates
explanations for significant cost overruns, delays and key project performance metrics.

This chapter outlines our audit observations, conclusions and recommendations, arising from our review of agency preventative and detective controls over purchasing card and taxi use for 2017–18.

Observation	Conclusion or recommendation
5.1 Management of purchasing cards
Volume of credit card spend Purchasing card expenditure has increased by 76 per cent over the last four years in response to a government review into the cost savings possible from using purchasing cards for low value, high volume procurement.	Conclusion: The increasing use of purchasing cards highlights the importance of an effective framework for the use and management of purchasing cards.
Policy framework We found all agencies that held purchasing cards had a policy in place, but 26 per cent of agencies have not reviewed their purchasing card policy by the scheduled date, or do not have a scheduled revision date stated within their policy.	Recommendation: Agencies should mitigate the risks associated with increased purchasing card use by ensuring policies and purchasing card frameworks remain current and compliant with the core requirements of TPP 17–09 'Use and Management of NSW Government Purchasing Cards'.
Preventative controls We found that: all agencies maintained purchasing card registers seventy-six per cent provided training to cardholders prior to being issued with a card eighty-nine per cent appointed a program administrator, but only half of these had clearly defined roles and responsibilities thirty-two per cent of agencies place merchant blocks on purchasing cards forty-seven per cent of agencies place geographic restrictions on purchasing cards.	Agencies have designed and implemented preventative controls aimed at deterring the potential misuse of purchasing cards. Conclusion: Further opportunities exist for agencies to better control the use of purchasing cards, such as: updating purchasing card registers to contain all mandatory fields required by TPP17–09 appointing a program administrator for the agency's purchasing card framework and defining their role and responsibility for the function strengthening preventive controls to prevent misuse.
Detective controls Ninety-two per cent of agencies have designed and implemented at least one control to monitor purchasing card activity. Major reviews, such as data analytics (29 per cent of agencies) and independent spot checks (49 per cent of agencies) are not widely used.	Agencies have designed and implemented detective controls aimed at identifying potential misuse of purchasing cards. Conclusion: More effective monitoring using purchasing card data can provide better visibility over spending activity and can be used to: detect misuse and investigate exceptions analyse trends to highlight cost saving opportunities.
5.2 Management of taxis
Policy framework Thirteen per cent of agencies have not developed and implemented a policy to manage taxi use. In addition: a further 41 per cent of agencies have not reviewed their policies by the scheduled revision date, or do not have a scheduled revision date more than half of all agencies’ policies do not offer alternative travel options. For example, only 36 per cent of policies promoted the use of general Opal cards.	Conclusion: Agencies can promote savings and provide more options to staff where their taxi use policies: limit the circumstances where taxi use is appropriate offer alternate, lower cost options to using taxis, such as general Opal cards and rideshare.
Detective controls All agencies approve taxi expenditure by expense reimbursement, purchasing card and Cabcharge, and have implemented controls around this approval process. However, beyond this there is minimal monitoring and review activity, such as data monitoring, independent spot checks or internal audit reviews.	Conclusion: Taxi spend at agencies is not significant in terms of its dollar value, but it is significant from a probity perspective. Agencies can better address the probity risk by incorporating taxi use into a broader purchasing card or fraud monitoring program.

Fraud and corruption control is one of the 17 key elements of our governance lighthouse. Recent reports from ICAC into state agencies and local government councils highlight the need for effective fraud control and ethical frameworks. Effective frameworks can help protect an agency from events that risk serious reputational damage and financial loss.

Our 2016 Fraud Survey found the NSW Government agencies we surveyed reported 1,077 frauds over the three year period to 30 June 2015. For those frauds where an estimate of losses was made, the reported value exceeded $10.0 million. The report also highlighted that the full extent of fraud in the NSW public sector could be higher than reported because:

unreported frauds in organisations can be almost three times the number of reported frauds
our 2015 survey did not include all NSW public sector agencies, nor did it include any NSW universities or local councils
fraud committed by citizens such as fare evasion and fraudulent state tax self-assessments was not within the scope of our 2015 survey
agencies did not estimate a value for 599 of the 1,077 (56 per cent) reported frauds.

Commissioning and outsourcing of services to the private sector and the advancement of digital technology are changing the fraud and corruption risks agencies face. Fraud risk assessments should be updated regularly and in particular where there are changes in agency business models. NSW Treasury Circular TC18-02 NSW Fraud and Corruption Control Policy now requires agencies develop, implement and maintain a fraud and corruption control framework, effective from 1 July 2018.

Our Fraud Control Improvement Kit provides guidance and practical advice to help organisations implement an effective fraud control framework. The kit is divided into ten attributes. Three key attributes have been assessed below; prevention, detection and notification systems.

This chapter outlines our audit observations, conclusions and recommendations, arising from our review of agency fraud and corruption controls for 2017–18.

Observation	Conclusion or recommendation
6.1 Prevention systems
Prevention systems Ninety-two per cent of agencies have a fraud control plan in place, 81 per cent maintain a fraud database and 79 per cent report fraud and corruption matters as a standing item on audit and risk committee agendas. Only 54 per cent of agencies have an employment screening policy and all agencies have IT security policies, but gaps in IT security controls could undermine their policies.	Conclusion: Most agencies have implemented fraud prevention systems to reduce the risk of fraud. However poor IT security along with other gaps in agency prevention systems, such as employment screening practices heightens the risk of fraud and inappropriate use of data. Agencies can improve their fraud prevention systems by: completing regular fraud risk assessments, embedding fraud risk assessment into their enterprise risk management process and reporting the results of the assessment to the audit and risk committee maintaining a fraud database and reviewing it regularly for systemic issues and reporting a redacted version of the database on the agency's website to inform corruption prevention networks developing policies and procedures for employee screening and benchmarking their current processes against ICAC's publication ‘Strengthening Employment Screening Practices in the NSW Public Sector’ developing and maintaining up to date IT security policies and monitoring compliance with the policy.
Twenty-three per cent of agencies were not performing fraud risk assessments and some agency fraud risk assessments may not be as robust as they could be.	Conclusion: Agencies' systems of internal controls may be less effective where new and emerging fraud risks have been overlooked, or known weaknesses have not been rectified.
6.2 Detection systems
Detection systems Several agencies reported they were developing a data monitoring program, but only 38 per cent of agencies had already implemented a program.	Studies have shown data monitoring, whereby entire populations of transactional data are analysed for indicators of fraudulent activity, is one of the most effective methods of early detection. Early detection decreases the duration a fraud remains undetected thereby limiting the extent of losses. Conclusion: Data monitoring is an effective tool for early detection of fraud and is more effective when informed by a comprehensive fraud risk assessment.
6.3 Notification systems
Notification system All agencies have notification systems for reporting actual or suspected fraud and corruption. Most agencies provide multiple reporting lines, provide training and publicise options for staff to report actual or suspected fraud and corruption.	Conclusion: Training staff about their obligations and the use of fraud notification systems promotes a fraud-aware culture

Appendix one - List of 2018 recommendations

Appendix two - Status of 2017 recommendations

Appendix three - Cluster agencies

4 September 2018

Published

Procurement and reporting of consultancy services

Finance

Education

Community Services

Industry

Justice

Planning

Premier and Cabinet

Health

Treasury

Transport

Environment

Information technology

NSW Government agencies engage consultants to provide professional advice to inform their decision‑making. The spend on consultants is measured and reported in different ways for different purposes and the absence of a consistently applied definition makes quantification difficult.

The NSW Government’s procurement principles aim to help agencies obtain value for money and be fair, ethical and transparent in their procurement activities. All NSW Government agencies, with the exception of State Owned Corporations, must comply with the NSW Procurement Board’s Direction when engaging suppliers of business advisory services. Business advisory services include consultancy services. NSW Government agencies must disclose certain information about their use of consultants in their annual reports. The table below illustrates the detailed procurement and reporting requirements.

	Relevant guidance	Requirements
Procurement of consultancy services	PBD 2015 04 Engagement of major suppliers of consultancy and other services (the Direction) including the Standard Commercial Framework (revised on 31 January 2018, shortly before it was superseded by 'PBD 2018 01')	Required agencies to seek the Agency Head or Chief Financial Officer's approval for engagements over $50,000 and report the engagements in the Major Suppliers' Portal (the Portal).
	PBD 2018 01 Engagement of professional services suppliers (replaced 'PBD 2015 04' in May 2018)	Requires agencies to seek the Agency Head or Chief Financial Officer's approval for engagements that depart from the Standard Commercial Framework and report the engagements in the Portal. Exhibit 3 in the report includes the key requirements of these three Directions.
Reporting of consultancy expenditure	Annual Reports (Departments) Regulation 2015 and Annual Reports (Statutory Bodies) Regulation 2015	Requires agencies to disclose, in their annual reports, details of consultants engaged in a reporting year.
	Premier's Memorandum 'M2002 07 Engagement and Use of Consultants'	Outlines additional reporting requirements for agencies to describe the nature and purpose of consultancies in their annual reports.

We examined how 12 agencies complied with their procurement and reporting obligations for consultancy services between 1 July 2016 and 31 March 2018. Participating agencies are listed in Appendix two. We also examined how NSW Procurement supports the functions of the NSW Procurement Board within the Department of Finance, Services and Innovation.

This audit assessed:

agency compliance with relevant procurement requirements for their use of consultants
agency compliance with disclosure requirements about consultancy expenditure in their annual reports
the effectiveness of the NSW Procurement Board (the Board) in fulfilling its functions to oversee and support agency procurement of consultancy services.

Conclusion

No participating agency materially complied with procurement requirements when engaging consultancy services. Eight participating agencies under reported consultant fees in their annual reports. The NSW Procurement Board is not fully effective in overseeing and supporting agencies' procurement of consultancy services.

All 12 agencies that we examined did not materially comply with the NSW Procurement Board Direction for the use of consultants between 1 July 2016 and 31 March 2018.

Eight agencies did not comply with annual reporting requirements in the 2016–17 financial reporting year. Three agencies did not report expenditure on consultants that had been capitalised as part of asset costs, and one agency did not disclose consultancy fees incurred by its subsidiaries. Agencies also defined ‘consultants’ inconsistently.

The NSW Procurement Board's Direction was revised in January 2018, and mandates the use of the Standard Commercial Framework. The Direction aims to drive value for money, reduce administrative costs and simplify the procurement process. In practice, agencies found the Framework challenging to use. To better achieve the Direction’s intent, the Board needs to simplify procurement and compliance processes.

The Board is yet to publish any statistics or analysis of agencies’ procurement of business advisory services due to issues with the quality of data and systems limitations. Also, the Board’s oversight of agency and supplier compliance with the Framework is limited as it relies on self reporting, and the information provided is insufficient to properly monitor compliance. NSW Procurement is yet to develop an effective procurement and business intelligence system for use by government agencies. Better procurement support, benefit realisation monitoring and reporting by NSW Procurement will help promote value for money in the engagement of consultants.

Appendix one - Response from agencies

Appendix two - List of selected agencies

Appendix three - Performance auditing

8 June 2018

Published

Universities 2017

Universities

Asset valuation

Compliance

Cyber security

Financial reporting

Information technology

Internal controls and governance

The Auditor-General, Margaret Crawford released her report today on the results of financial audits of NSW universities for the year ended 31 December 2017. No qualified audit opinions were issued for any university and the quality and timeliness of financial reporting continues to improve.

This report analyses the results of our audits of financial statements of the ten NSW universities and their controlled entities for the year ended 31 December 2017. The table below summarises our key observations.

This report focuses on our observations on the common issues identified in our audits of the financial statements of the ten NSW universities and their controlled entities in 2017. The universities and controlled entities are listed in Appendix three and four respectively.

The report provides our analysis of universities’ results and findings in the following areas:

Financial reporting and performance
Teaching and research
Financial controls and governance.

Accurate and timely financial reporting is important for universities to make efficient and effective economic decisions. Sound financial performance provides the platform for universities to deliver high quality teaching and research outcomes.

This chapter outlines our audit observations on the financial reporting and performance of NSW universities for 2017.

Observation	Conclusion or recommendation
3.1 Financial reporting
Audit results
The financial statements of all ten NSW universities and 66 out of 69 of their controlled entities received unmodified audit opinions.	Two controlled entities did not fully comply with the financial reporting and audit requirements of the Public Finance and Audit Act 1983 as they did not submit their financial statements to the Auditor-General. One of these entities was audited under the requirements applicable in its foreign jurisdiction. A third controlled entity submitted financial statements, but only after the statutory due date.
Quality and timeliness of financial reporting
The number of uncorrected misstatements continues to decrease.	The quality of financial statements of the universities improved in 2017.
Two universities simplified disclosures in their financial statements.	The financial statements of the University of Sydney and Macquarie University are more concise, readable and understandable than those of other universities.
Six universities finalised their financial statements earlier than in previous years.	Universities that performed aspects of early close procedures improved the timeliness of their financial reporting and helped us conclude our audits earlier.
Eight universities are yet to quantify the impact of new accounting standards applicable in future years.	The two universities that have assessed the impact of the new accounting standards believe the impact will be material.
An accounting issue was identified relating to the recognition and measurement of payroll tax liabilities on employees' defined benefit superannuation contributions payable to the superannuation funds.	Recommendation: NSW universities should clarify the recognition and measurement of their liability for payroll tax on their defined benefit superannuation obligations before 31 December 2018.
3.2 Financial performance
Sources of revenue from operations
Government grants as a proportion of total revenue decreased over the past five years by 6.4 per cent.	The Australian Government announced funding freezes to Australian Government grants revenue for the next two years. Universities are expanding other revenue streams to decrease their reliance on grant funding. The revenue stream that has increased the most significantly over the past five years is overseas student revenue.
Revenue from overseas student course fees increased by 23 per cent in the last year and contributed $2.8 billion to the NSW university sector in 2017.	Overseas student revenue exceeded domestic student revenue by 37 per cent, and comprised over a quarter of NSW universities' total revenues in 2017. The growth in overseas student revenue has not been shared equally in the sector. Some universities are more dependent on overseas student revenue than others.
Revenue from overseas students from four countries comprised 37 per cent of total student revenues for all NSW universities.	Recommendation: NSW universities should assess their student market concentration risk where they rely heavily on students from a single country of origin. This increases their sensitivity to economic or political changes in that country. Universities' data shows as much as 71 per cent of their overseas student revenue comes from a single country of origin.
Research income of NSW universities was $1.1 billion in 2016 and has grown by 9.8 per cent between 2012 and 2016.	Two universities attracted 65.2 per cent of the total research income received by all NSW universities.
Other revenues
Total philanthropic revenue increased by 1.0 per cent to $151 million in 2017.	Philanthropic revenue has been increasing for the past five years. Two universities attracted 76.8 per cent of the total philanthropic dollars received by all NSW universities.
Average investment returns fell from 7.0 per cent in 2013 to 5.8 per cent in 2017, while total investments grew to $5.4 billion in 2017 from $3.5 billion in 2013.	Universities have structured their investment portfolios between fixed and non-fixed income assets, seeking to optimise their returns in a low interest rate environment within the limits of their risk management strategies. Investment income is a significant source of revenue for some, but not all universities. Two universities' investment funds represented 52.3 per cent of the total investment funds of all NSW universities combined.
Low interest rates have made investment in fixed income assets less attractive for universities. Over the last five years universities have increased their investment in non-fixed income (or market based) assets by 67.1 per cent.
Most NSW universities have established investment governance frameworks.
Financial sustainability indicators
Operating expenditure per equivalent full-time student load (EFTSL) increased by 3.0 per cent in 2017.	The universities that have been able to attract international students to grow their operational revenues have been able to leverage economies of scale to maximise their average margin per EFTSL. Other universities have had to rely on containing costs to achieve higher EFTSL margins.
For six universities, the growth in operating expenditure has exceeded the growth in operating revenue, reducing operating margins. The risk associated with narrowing margins is compounded where universities have a high reliance on student revenues from a single source. Sudden changes in demand can challenge the ability of those universities to adjust their cost structures.	As the margin between operating revenue and operating expenditure decreases, operational results are more at risk from unexpected fluctuations, such as Australian Government higher education reforms and reduced overseas student enrolments. Smaller operating margins reduce the funds available to invest in upgrading infrastructure and implement corporate strategies to meet future challenges.
Eight universities have current ratios greater than one in 2017.
Controlled entities
Sixteen of the universities' 58 controlled entities that operate business activities reported losses in 2017 (15 in 2016).	Overall, the financial performance of controlled entities operating business activities was positive, but results in 2017 were lower than in 2016.
The total profit of controlled entities operating business activities decreased 5.5 per cent to $77.5 million in 2017 ($82.6 million in 2016).	Universities may be able to improve their overall performance by reassessing the viability of business ventures that continue to make losses and/or rely on them for financial support.
Eighteen controlled entities relied on guarantees of financial support from their parent entity in 2017 (19 in 2016).

Teaching and research are key objectives of universities and they invest most of their resources in achieving high quality academic and research outcomes to maintain or advance their reputations and rankings in Australia and abroad. Universities have also committed to achieving certain government objectives.

This chapter outlines teaching and research outcomes for NSW universities for 2017.

Observation	Conclusion or recommendation
4.1 Teaching outcomes
Achieving Australian Government target
NSW universities met the Australian Government target of having 40 per cent of 25 to 34 year-olds with bachelor degrees ten years earlier than the original target date of 2025.	The proportion of 25 to 34 year-olds in NSW holding a bachelor degree increased to 43.4 per cent in 2017. In 2009, when the target was originally set, only 35.5 per cent of 25 to 34 year-olds held a bachelor degree.
Graduate employment rates
Seven universities exceeded the national average of 71.8 per cent for the proportion of their undergraduates who obtain full-time employment. Four universities achieved better than the national average of 86.1 per cent for the proportion of their postgraduates who obtain full-time employment.	Most NSW universities' employment outcomes are better than the national average.
Student enrolments by field of education
NSW universities have increased enrolments in fields of study that align with known skills shortages in NSW identified by the Australian Government for 2016 and 2017.	Alignment of student intake with identified shortages helps ensure graduates secure timely employment on completion of their studies.
Achieving diversity outcomes
NSW universities agreed to targets set by the Australian Government for enrolments of students from low socio economic status (SES) and Aboriginal or Torres Strait Islander backgrounds.	NSW universities can improve outcomes for these students by implementing policies to increase enrolments and support students to graduation.
Three universities exceeded the target of 20 per cent of low SES student enrolments in 2017. Six universities met their Indigenous student enrolment target in 2017. The target is having a growth rate in the enrolment of Indigenous students that is more than 50 per cent higher than the growth rate of non-Indigenous student enrolments.	At the current rate, it is unlikely most universities will reach the agreed low SES target by 2020.

Appropriate financial controls help ensure efficient and effective use of resources, and the implementation and monitoring of university policies. Governance consists of frameworks, processes and behaviours that enable the universities to operate effectively and comply with relevant laws and policies.

This chapter outlines our audit observations on the financial control and governance of NSW universities for 2017.

Observation	Conclusion or recommendation
5.1 Internal controls
Internal control findings
Eighty-three internal control deficiencies were identified during our audits, of which 40 related to Information Technology (IT). High risk We identified a high risk finding in relation to storage of unencrypted username and password information on a database without appropriate access restrictions. We performed additional audit procedures to conclude that the control deficiency did not present a risk of material misstatement in the university's financial statements. Moderate risk Forty-three moderate risk control deficiencies were identified, of which 22 related to IT and 21 related to governance and financial reporting.	Recommendation: NSW universities should ensure controls, including information technology controls, are properly designed and operate effectively to protect intellectual property, staff and student data, and assets. Universities should rectify identified deficiencies in a timely manner.
Repeat findings Twenty-four findings were repeat internal control deficiencies, of which 18 related to IT.	IT issues can take some time to rectify because specialist skill and/or partnering with software suppliers is often required to implement new controls. However, until rectified, the vulnerabilities those control deficiencies present can be significant.
Cyber security Our audits identified opportunities to improve cyber security controls and processes to reduce risks, including risks relating to financial loss, reputational damage and breaches of privacy laws.	Recommendation: NSW universities should strengthen their cyber security frameworks to manage cyber security risks. This includes developing: procedures, protocols and supporting systems to effectively identify, report and respond to cyber security threats and incidents staff awareness training and programs, including programs tailored for a range of audiences.
Use of credit card and work-related travel All NSW universities had appropriate published policies on the use of credit cards, and have internal controls and processes to implement those policies. The risks of unauthorised use can be mitigated by regular monitoring, and reporting breaches for investigation and disciplinary action.	Appropriately designed and implemented preventive and detective controls are most effective when enforcement and disciplinary activities are oversighted by university audit and risk committees.

Appendix one - 2017 recommendations

Appendix two - Status of 2016 recommendations

Appendix three - NSW universities

Appendix four - Controlled entities

Appendix five - Financial data

7 June 2018

Published

HealthRoster benefits realisation

Health

Compliance

Information technology

Management and administration

Project management

Workforce and capability

The HealthRoster system is delivering some business benefits but Local Health Districts are yet to use all of its features, according to a report released today by the Auditor-General for New South Wales, Margaret Crawford. HealthRoster is an IT system designed to more effectively roster staff to meet the needs of Local Health Districts and other NSW health agencies.

The NSW public health system employs over 100,000 people in clinical and non-clinical roles across the state. With increasing demand for services, it is vital that NSW Health effectively rosters staff to ensure high quality and efficient patient care, while maintaining good workplace practices to support staff in demanding roles.

NSW Health is implementing HealthRoster as its single state-wide rostering system to more effectively roster staff according to the demands of each location. Between 2013–14 and 2016–17, our financial audits of individual LHDs had reported issues with rostering and payroll processes and systems.

NSW Health grouped all Local Health Districts (LHDs), and other NSW Health organisations, into four clusters to manage the implementation of HealthRoster over four years. Refer to Exhibit 4 for a list of the NSW Health entities in each cluster.

Cluster 1 implementation commenced in 2014–15 and was completed in 2015–16.
Cluster 2 implementation commenced in 2015–16 and was completed in 2016–17.
Cluster 3 began implementation in 2016–17 and was underway during the conduct of the audit.
Cluster 4 began planning for implementation in 2017–18.

Full implementation, including capability for centralised data and reporting, is planned for completion in 2019.

This audit assessed the effectiveness of the HealthRoster system in delivering business benefits. In making this assessment, we examined whether:

expected business benefits of HealthRoster were well-defined
HealthRoster is achieving business benefits where implemented.

The HealthRoster project has a timespan from 2009 to 2019. We examined the HealthRoster implementation in LHDs, and other NSW Health organisations, focusing on the period from 2014, when eHealth assumed responsibility for project implementation, to early 2018.

Conclusion

The HealthRoster system is realising functional business benefits in the LHDs where it has been implemented. In these LHDs, financial control of payroll expenditure and rostering compliance with employment award conditions has improved. However, these LHDs are not measuring the value of broader benefits such as better management of staff leave and overtime.

NSW Health has addressed the lessons learned from earlier implementations to improve later implementations. Business benefits identified in the business case were well defined and are consistent with business needs identified by NSW Health. Three of four cluster 1 LHDs have been able to reduce the number of issues with rostering and payroll processes. LHDs in earlier implementations need to use HealthRoster more effectively to ensure they are getting all available benefits from it.

HealthRoster is taking six years longer, and costing $37.2 million more, to fully implement than originally planned. NSW Health attributes the increased cost and extended timeframe to the large scale and complexity of the full implementation of HealthRoster.

Business benefits identified for HealthRoster accurately reflect business needs.

NSW Health has a good understanding of the issues in previous rostering systems and has designed HealthRoster to adequately address these issues. Interviews with frontline staff indicate that HealthRoster facilitates rostering which complies with industrial awards. This is a key business benefit that supports the provision of quality patient care. We saw no evidence that any major business needs or issues with the previous rostering systems are not being addressed by HealthRoster.

In the period examined in this audit since 2015, NSW Health has applied appropriate project management and governance structures to ensure that risks and issues are well managed during HealthRoster implementation.

HealthRoster has had two changes to its budget and timeline. Overall, the capital cost for the project has increased from $88.6 million to $125.6 million (42 per cent) and has delayed expected project completion by four years from 2015 to 2019. NSW Health attributes the increased cost and extended time frame to the large scale and complexity of the full implementation of HealthRoster.

NSW Health has established appropriate governance arrangements to ensure that HealthRoster is successfully implemented and that it will achieve business benefits in the long term. During implementation, local steering committees monitor risks and resolve implementation issues. Risks or issues that cannot be resolved locally are escalated to the state-wide steering committee.

NSW Health has grouped local health districts, and other NSW Health organisations, into four clusters for implementation. This has enabled NSW Health to apply lessons learnt from each implementation to improve future implementations.

NSW Health has a benefits realisation framework, but it is not fully applied to HealthRoster.

NSW Health can demonstrate that HealthRoster has delivered some functional business benefits, including rosters that comply with a wide variety of employment awards.

NSW Health is not yet measuring and tracking the value of business benefits achieved. NSW Health did not have benefits realisation plans with baseline measures defined for LHDs in cluster 1 and 2 before implementation. Without baseline measures NSW Health is unable to quantify business benefits achieved. However, analysis of post-implementation reviews and interviews with frontline staff indicate that benefits are being achieved. As a result, NSW Health now includes defining baseline measures and setting targets as part of LHD implementation planning. It has created a benefits realisation toolkit to assist this process from cluster 3 implementations onwards.

NSW Health conducted post-implementation reviews for clusters 1 and 2 and found that LHDs in these clusters were not using HealthRoster to realise all the benefits that HealthRoster could deliver.

By September 2018, NSW Health should:

Ensure that Local Health Districts undertake benefits realisation planning according to the NSW Health benefits realisation framework
Regularly measure benefits realised, at state and local health district levels, from the statewide implementation of HealthRoster
Review the use of HealthRoster in Local Health Districts in clusters 1 and 2 and assist them to improve their HealthRoster related processes and practices.

By June 2019, NSW Health should:

Ensure that all Local Health Districts are effectively using demand based rostering.

Appendix one - Response from agency

Appendix two - About the audit

Appendix three - Performance auditing

Parliamentary reference - Report number #301 - released 7 June 2018

20 April 2018

Published

Report on Local Government 2017

Local Government

Asset valuation

Information technology

Internal controls and governance

Under section 421C of the Local Government Act 1993, I am pleased to present our first report on the statutory financial audits of councils, to NSW Parliament.

My appointment as the auditor of local government in New South Wales is the most significant change to the Auditor-General's mandate in nearly three decades.

Moving to the new audit arrangements over the past 18 months has been challenging but rewarding. It has confirmed my appreciation of local government – a sector passionate about the community and focused on delivering local services.

The unique relationship each council has with its community differentiates it from other tiers of government.

Our audits
I am pleased to report that we completed 139 out of 140 financial statement audits for the 2016–17 audit cycle. The remaining council received an extension to lodge its financial statements.

We have also released a performance audit report on council reporting on service delivery. We will soon release another report on fraud controls in local councils and a report on council shared services later this year.

While the new audit mandate brings immense responsibility, my office has embraced the challenges involved and the objectives that NSW Parliament gave us:
strengthening governance and financial oversight in local government
providing greater consistency in external audit
ensuring reliable financial information is available to assess council performance
improving financial management, fiscal responsibility and public accountability in how councils use citizens’ funds.

This report
This report is rich in data extracted from the results of the 2016–17 financial audits. For the first time, it presents a consistent view of financial performance across the New South Wales local government landscape. The report also provides guidance and includes recommendations to councils and the Office of Local Government aimed at strengthening financial reporting, asset management, governance and internal controls.

The report will help NSW Parliament understand the common challenges that councils face. It provides points of comparison for councils and signposts matters that will be the focus of future audits. Importantly, this report and the data visualisation that accompanies it, provides comprehensive and accessible information to citizens regarding the management and performance of their councils.

I would like to acknowledge the cooperation of councils throughout the audit process and our partnerships with the contract audit firms that helped us to deliver the audits. Together we can learn from each other and work towards improving outcomes for the community.

1. Introduction
Local government sector	NSW has 140 councils: 128 local councils serving a geographic area and 12 county councils formed for a specific purpose. We completed audits of 139 councils' 2016–17 financial statements and eight councils' 2015–16 financial statements. Bayside Council received a lodgement extension from the Office of Local Government (OLG) and has not yet presented their 2016–17 financial statements for audit.
Service delivery	Each council provides a range of services, influenced by population density, demographics, the local economy, geographic and climatic characteristics. These differences influence the financial profile of councils.
2. Financial reporting
Quality of financial reporting	The overall quality of financial reporting needs to improve: we issued modified (qualified) audit opinions on the financial statements of three councils in 2016–17 and one council and one water authority in 2015–16 we reported 39 significant matters to 29 councils. They related to material accounting issues and significant deficiencies in internal controls twenty-two councils required material adjustments to correct errors in previous audited financial statements moderate risk issues were identified in financial statement preparation processes for 43 councils. OLG guidance for council year-end financial reporting needs to align with Australian Accounting Standards and be issued earlier.
Timeliness of financial reporting	Timeliness of financial reporting needs to improve. Forty councils required lodgement extensions past the 31 October 2017 statutory reporting deadline.
3. Financial performance and sustainability
Operating revenue	Eighteen councils operating expenses exceed current operating revenue. Fifty-nine councils do not meet OLG’s target of 60 per cent for own source operating revenue.
Liquidity and working capital	Most councils have sufficient liquidity and working capital. However, there are indicators that: three councils may not have the ability to meet short-term obligations as measured by the unrestricted current ratio two councils may not have sufficient operating cash available to service debt as measured by the debt service cover ratio eighteen councils do not meet the OLG benchmark for the collection of rates and annual charges five councils may not have sufficient cash to continue paying expenses without additional cash inflows as measured by the cash expense cover ratio.
Asset management measures	Reporting against OLG’s asset management performance measures highlights that councils need to consider whether spending on existing infrastructure assets is sufficient to ensure they continue to meet service delivery standards: seventy councils are not renewing assets in line with the rate of their depreciation eighty-four councils did not meet OLG’s benchmark for managing the infrastructure maintenance backlog seventy-one councils are not maintaining their assets in accordance with their asset management plans.
4. Asset management
High risk issues	We reported ten high risk issues relating to councils’ asset management and accounting practices.
Asset reporting	The accuracy of asset registers requires improvement and all assets need to be reported in the financial statements. At 30 June 2017, 62 councils did not record all rural fire-fighting equipment in their financial statements. A large proportion of rural fire-fighting equipment is not reported in either State government or local government financial statements.
Asset valuation	We reported seven high risk matters related to asset valuations, including two that resulted in qualified audit opinions.
Asset useful life estimates	We identified that accounting for the useful lives of similar assets varied across councils, resulting in variable depreciation expense for these assets. In addition, the useful lives of assets need to be reviewed annually. This review should be supported by current condition assessments.
Asset policy and planning	Thirteen councils do not have an asset management strategy, policy and plan, as required by the Office of Local Government’s Integrated Planning and Reporting Framework.
5. Governance and internal controls
High risk issues	We reported 17 high risk issues relating to governance, financial accounting, purchasing and payables and payroll matters.
Governance	There is currently no requirement for councils to have an audit, risk and improvement committee and internal audit function. Consequently, 53 councils do not have an audit committee and 52 councils do not have an internal audit function. The Office of Local Government has incomplete information on the number of entities established by councils. There is no financial reporting framework for the variety of entities established by councils. Councils can strengthen policies and procedures to support critical business processes, practices for risk management and compliance with key laws and regulations.
Internal controls	Councils can improve internal controls over manual journals, reconciliations, purchasing and payables and payroll.
6. Information technology
High risk issues	We reported nine high risk issues relating to information technology.
Access to IT systems	Controls over user access to IT systems need to be strengthened.
Information Technology governance	IT governance benefits from appropriate policies, standards and guidelines across all critical IT processes. We identified that: around one in four councils do not have an IT strategy or operational plan half of NSW councils have an IT security policy seventeen councils do not have a documented plan to recover from a disaster.

Accurate and timely financial statements are an important element of sound financial management. They bring accountability and transparency to the way councils use public resources. Our financial audits assessed the following aspects of councils’ financial reporting:

quality of financial reporting
timeliness of financial reporting.

Observation	Conclusion or recommendation
2.1 Quality of financial reporting
Qualified audit opinions We issued unmodified audit opinions on the: 2016–17 financial statements of 136 councils and two water authorities 2015–16³ financial statements for seven councils and two water authorities.	The councils that received unmodified audit opinions prepared financial statements that fairly present their financial position and results.
We issued modified (qualified) opinions on the: 2016–17 financial statements of three councils 2015–16 financial statement of one council and one water authority.	Councils with modified opinions should address the issues that give rise to the audit qualification.
Significant audit matters We reported 39 significant matters in 29 councils. They included material accounting issues and significant deficiencies in internal controls. Seventy-seven per cent of the matters related to assets.	Significant issues with the quality of financial reporting delayed the completion of a number of audits. Improving the reporting on assets should be a priority.
Prior period errors We found 33 material errors worth $9.1 billion in the previous audited financial statements of 22 councils. These all required prior-year audited balances to be corrected. Eighty eight per cent of these were asset related.	The high number of asset-related prior-period errors reinforces the need for councils to improve the way they value and account for assets.
Financial statements We reported 43 moderate risk findings where councils can improve the way they complete their financial statements.	Recommendation Councils can improve the quality of financial reporting by reviewing their financial statements close processes to identify areas for improvements.
Of the councils that had an audit, risk and improvement committee, 55 per cent of these did not review the financial statements before audit.	Recommendation Councils can improve the quality of financial reporting by involving an audit, risk and improvement committee in the review of financial statements.
OLG guidance To support councils in preparing 30 June 2017 financial statements, OLG issued guidance documents in June 2017 and September 2017. This limited the time councils had to prepare financial statements in the prescribed form and resolve financial reporting and audit issues.	Recommendation The Office of Local Government should release the Local Government Code of Accounting Practice and Financial Reporting and the End of Year Financial Reporting Circular earlier in the audit cycle, ideally by 30 April each year.
The Code applicable for the 2016–17 financial reporting period provided options and guidance that in some instances did not fully align with Australian Accounting Standards.	Recommendation The Local Government Code of Accounting Practice and Financial Reporting should align with Australian Accounting Standards.
2.2 Timeliness of financial reporting
Statutory deadlines One hundred councils submitted audited financial statements to OLG by the statutory deadline of 31 October 2017. Thirty-nine councils received reporting extensions up to 28 February, including 16 of the 20 newly amalgamated councils. Bayside Council received a reporting extension to 31 May 2018 and has not yet presented their financial statements for audit.	Councils need to improve their financial reporting processes in order to lodge their financial statements by the statutory reporting deadline.
Early close procedures Councils currently do not use early close procedures to resolve accounting issues before the end of the financial year.	Recommendation The Office of Local Government should introduce early close procedures with an emphasis on asset valuations.

³ The Auditor‑General was appointed statutory auditor of eight councils for the 2015–16 reporting period at the specific request of councils, due to the failure by councils to appoint an auditor, or the inability of the previous auditor to complete the audit due to external investigation or auditor retirement.

Strong and sustainable financial performance provides the platform for councils to deliver services and respond to the needs of their community. This chapter outlines our audit observations on the performance of councils against the Office of Local Government's (OLG) performance indicators, grouped in three areas:

operating revenue performance measures
liquidity and working capital performance measures
asset management performance measures.

Our analysis indicates that some councils face challenges in meeting these performance and sustainability measures.

Observations	Conclusions
3.1 Operating revenue performance measures
Operating performance Operating expenses for 18 councils exceeded their operating revenue. Another 20 councils would not have met OLG’s operating performance benchmark without the receipt of 2017–18 financial assistance grants which was recorded as revenue during 2016–17. Eleven councils have not met OLG’s operating performance benchmark for the last three years.	It is important that councils have financial management strategies that support their financial sustainability and ability to meet OLG’s operating performance benchmark over the long term.
Operating performance measures how well councils contain operating expenses within operating revenue. OLG has prescribed a benchmark of greater than zero.
Own source operating revenue Fifty-nine councils did not meet OLG’s benchmark, and 42 of those were rural councils.	Rural councils have high-value infrastructure assets that cover large areas with smaller populations and less capacity to raise revenue from alternative sources compared with metropolitan councils.
Own source operating revenue measures a council’s fiscal flexibility and the degree to which it can generate revenue from own sources compared with total revenue from all sources. OLG has prescribed a benchmark of more than 60 per cent of total revenue.
3.2 Liquidity and working capital performance measures
Unrestricted current ratio All but three councils met OLG’s benchmark.	Most councils can meet short-term obligations as they fall due.
The unrestricted current ratio represents a council’s ability to meet its short-term obligations as they fall due. OLG has prescribed a benchmark of greater than 1.5 times.
Debt service cover ratio All but two councils met OLG’s benchmark. These two councils did not meet OLG’s benchmark due to the early repayment of borrowings. Regional councils have 56 per cent of the value of all borrowings in the sector.	Most councils have sufficient operating cash available to service their borrowings. Regional councils borrow more heavily than metropolitan councils to deliver water and sewerage infrastructure. Metropolitan councils do not have the responsibility to provide water and sewerage infrastructure.
The debt service cover ratio measures the operating cash available to service debt including interest, principal and lease payments. OLG has prescribed a benchmark of greater than two times.
Rates and annual charges outstanding Eight rural, five regional, three metropolitan and two county councils did not meet OLG’s benchmark. These councils also did not meet the infrastructure backlog ratio.	Most councils are collecting rates and annual charges levied. Councils with higher levels of uncollected rates and charges can experience increased pressure on the working capital available to fund operations.
The rates and annual charges outstanding measure assesses the impact of uncollected rates and annual charges on a council’s liquidity and the adequacy of debt recovery efforts. OLG has prescribed a benchmark of less than five per cent for metropolitan and less than ten per cent for other councils.
Cash expense cover ratio Three rural and two county councils did not meet OLG’s benchmark.	Most councils have the capacity to cover more than three months of operating expenses.
The cash expense cover ratio indicates the number of months a council can continue paying its expenses without additional cash inflows. OLG has prescribed a benchmark of greater than three months.
This measure does not exclude externally and internally restricted funds. If externally restricted funds are excluded, all councils would still meet OLG’s benchmark. If both externally and internally restricted funds are excluded: an additional 32 councils would have a cash expense cover ratio of less than three months a further nine councils are left without any unrestricted funds for general operations.	Councils with a higher proportion of restricted funds may have less flexibility to pay operational expenses than the cash expense cover ratio suggests. However, councils can resolve to lift internal restriction if required.
3.3. Asset management performance measures (not audited)
Building and infrastructure renewals ratio Seventy councils reported to OLG they do not meet the benchmark for this ratio. Most councils included expenditure related to work-in-progress in calculating this ratio. OLG are of the view that work-in-progress should be excluded and as a result identified that a further 23 councils do not meet the benchmark.	These councils appear to not be renewing assets in line with the rate they are depreciating them. This raises questions as to whether council asset management plans are adequate to determine whether assets are being kept up to agreed standards. Uncertainty on the inclusion of work-in-progress assets does need to be is clarified in order to ensure consistency in determining whether councils are adequately renewing their assets.
The building and infrastructure renewals ratio represents the rate at which assets are being renewed relative to the rate at which they are depreciating. OLG has prescribed a benchmark of greater than 100 per cent.
Infrastructure backlog ratio Eighty-four councils reported to OLG that they do not meet the benchmark for this ratio.	These councils may not be maintaining their infrastructure backlog at a manageable level.
The infrastructure backlog ratio represents the proportion of infrastructure backlog relative to the total net book value of a council's infrastructure assets. OLG has prescribed a benchmark of less than two per cent.
Asset maintenance ratio Seventy-one councils reported to OLG they do not meet the benchmark for this ratio	These councils’ maintenance expenditure may be insufficient to sustain their assets in a functional state so they reach their predicted useful life.
The asset maintenance ratio represents the rate at which assets are being maintained relative to the rate at which they are required to be maintained. OLG has prescribed a benchmark of greater than 100 per cent.
Costs to bring assets to agreed service level One-hundred and two councils reported results against this indicator to OLG. The reported results ranged from 0.1 per cent to 19.8 per cent.	There is variability between councils in the amount of outstanding renewal works to be completed.
This ratio represents the estimated cost to renew or rehabilitate existing infrastructure assets that have reached the condition-based interval level adopted by a council, relative to the gross replacement cost of all infrastructure assets. OLG has not prescribed a benchmark for this performance measure.

OLG’s benchmarks for financial performance and sustainability

Each local council has unique characteristics such as its size, location and services provided to their communities. These differences affect the nature of each council's assets and liabilities, revenue and expenses, and in turn the financial performance measures against which it reports.

The Office of Local Government prescribes performance indicators for council reporting

The analysis in this chapter is based on performance measures prescribed in OLG’s Code of Accounting Practice and Financial Reporting (the Code). Councils report against these measures in their annual report, which includes the audited financial statements and other unaudited information. In the audited financial statements, councils report performance against six financial sustainability measures:

operating performance
own source operating revenue
unrestricted current ratio
debt service cover ratio
rates and annual charges outstanding percentage
cash expense cover ratio.

Councils also include the unaudited Special Schedule 7 'Report on Infrastructure Assets' in their annual reports. In this schedule, councils report to OLG on performance against four further measures:

building and infrastructure renewals ratio
infrastructure backlog ratio
asset maintenance ratio
cost to bring assets to agreed service level.

Each audited measure and three of the four unaudited measures has a prescribed benchmark. OLG’s benchmarks are the same for metropolitan, regional, rural and county councils, with the exception of the rates and annual charges outstanding percentage. Regional, rural and county councils have a different benchmark to metropolitan councils for this measure.

Three rural councils did not meet three of the audited OLG benchmarks

Most councils met OLG’s benchmarks for at least five or all of the six audited performance measures. Eight rural, four regional, four metropolitan and two county councils did not meet OLG’s benchmarks for two out of the six audited performance measures. Three rural councils did not meet OLG’s benchmarks for three out of the six audited performance measures.

The following table summarises how the councils performed across the six audited performance measures.

Number of OLG benchmarks met by councils		Number of councils
Number of OLG benchmarks met by councils	Metropolitan	Regional	Rural	County
6	12	12	29	5
5	17	21	17	5
4	4	4	8	2
3	--	--	3	--
Not available*	1	--	--	--
Total	34	37	57	12

* The financial statements for Bayside Council are not yet presented for audit.
Source: Audited Financial Statements for 2016–17.

Appendix ten lists the performance of each council against all performance measures.

NSW councils own and manage a significant range of assets, including infrastructure, property, plant and equipment with a total value of $136 billion.

Many of the issues that our local government audits identified related to asset management. This chapter discusses some of the asset accounting issues we found, focusing on five areas:

overall asset management issues
asset registers
asset valuation
recognition and asset useful life estimates
asset policy and planning.

Observations	Conclusion or recommendation
4.1 High risk issues
Significant matters reported to those charged with council governance Our 2016–17 audits identified ten high risk issues related to the accuracy of asset registers, restricted assets and asset revaluations.	High risk issues affect council’s ability to maintain their assets in the condition required to deliver essential services.
4.2 Asset reporting
Accuracy of asset registers Our audits identified instances where councils had multiple asset registers, inaccurate or incomplete registers, unreconciled registers, or uncontrolled manual spreadsheets.	Maintaining accurate asset records is important as it enables councils to manage their assets effectively and report on finances appropriately.
Unrecorded land and infrastructure assets Twenty-four councils had not recorded $145 million worth of assets, mainly land and infrastructure assets.	Assets not captured in council records is at risk of not being subject to their care and control, nor recorded in the financial statements.
Rural fire-fighting equipment At 30 June 2017, forty-six councils did report vested rural fire-fighting equipment in their financial statements. However, 62 councils did not record vested fire-fighting equipment in their financial statements. These rural fire‑fighting equipment assets are not reported in either State government or local government financial statements.	Recommendation The Office of Local Government should address the different practices across the local government sector in accounting for rural fire‑fighting equipment before 30 June 2018. In doing so, the Office of Local Government should work with NSW Treasury to ensure there is a whole‑of‑government approach.
4.3 Asset valuation
Restricted assets Our audits found that ten councils did not appropriately consider restrictions on the use of community land and land under roads when determining asset fair values in accordance with Australian Accounting Standards. Nine councils corrected the land values in their 2016–17 financial statements, reducing the reported value of community land and land under roads by $12.1 billion.	The valuation of community land and land under roads should reflect the physical and legislative restrictions on these assets as required by Australian Accounting Standards. The impact of restrictions can be significant. Councils should consider engaging experts to assist with the determination of asset fair values, as necessary.
Asset revaluations Our audits found many cases where councils did not review valuation results, comply with applicable codes, or work effectively with valuers to obtain accurate asset valuations.	Valuing large infrastructure assets is a complex process. Councils would benefit if the process is started earlier and there is a clear plan to ensure valuations are appropriately managed and documented.
4.4 Asset useful life estimates
Asset useful life estimates We found considerable variability in councils' useful lives for similar assets. In some cases, the useful lives of assets are not reviewed annually or supported by regular condition assessment.	Depreciation is a significant expense for councils and therefore impacts on reported financial results and key performance indicators. To comply with Australian Accounting Standards, councils need to reassess the useful lives of all assets annually. Regular condition assessments are essential to identify maintenance requirements and maintain service delivery.
4.5 Asset policy and planning
Asset management strategy Thirteen councils do not have an asset management policy, strategy and plan, as required by OLG's Integrated Planning and Reporting Framework. Newly amalgamated councils have until 30 June 2018 to implement this.	An effective asset management strategy, policy and plan helps councils to manage their assets appropriately over their life cycle and to make informed decisions on the allocation of resources.

Asset overview

NSW councils own and manage a significant range of assets, including infrastructure, property, plant and equipment.

At 30 June 2017, the combined carrying value of NSW council assets was as follows.

Good governance systems help councils to operate effectively and comply with relevant laws and standards. Internal controls assist councils to operate reliably and produce effective financial statements.

This chapter highlights the high risk issues we found and reports on a range of governance and control areas. Governance and control issues relating to asset management and information technology are covered in separate chapters.

Observation	Conclusion or recommendation
5.1 High risk issues
Significant matters reported to those charged with council governance
Our 2016–17 audits identified 36 high risk governance and internal control deficiencies across 17 councils.	Asset practices accounted for the highest number of high risk issues and information technology accounted for the largest overall number of control deficiencies. These matters are covered in chapters four and six respectively.
We reported: seventeen high risk issues relating to governance, purchase-to-pay, financial accounting and payroll processes ten high risk issues relating to asset practices nine high risk issues related to information technology management.	High risk issues affect council’s ability to achieve their objectives and increase the risk of fraud and error.
5.2 Governance
Audit committees
Councils are currently not required to have an audit, risk and improvement committee. Consequently, 53 councils do not have an audit committee.	Proposed legislative changes will require councils to establish an audit, risk and improvement committee by March 2021. Recommendation Councils should early adopt the proposed requirement to establish an audit, risk and improvement committee.
Internal audit Councils are currently not required to have an internal audit function. Consequently, 52 councils do not have this function.	Recommendation The Office of Local Government should introduce the requirement for councils to establish internal audit functions and update its 2010 Internal Audit Guidelines.
Council entities The Office of Local Government's register of entities approved under section 358 of the Local Government Act 1993 is incomplete.	Recommendation The Office of Local Government should maintain an accurate register of council entities approved under section 358 of the Local Government Act 1993.
The Local Government Act 1993 does not stipulate a financial reporting framework for council entities.	Recommendation The Office of Local Government should establish a financial reporting framework for council entities.
Policies and procedures We identified 50 high and moderate risk issues across 33 councils where policies and procedures over critical business processes did not exist or had not been updated.	It is important there are current policies, standards and guidelines available to staff and contractors across all critical business processes.
Legislative compliance frameworks Our audits found that 45 councils do not have sufficient processes to show they are complying with legislative requirements.	Councils can improve practices in monitoring compliance with key laws and regulations. This includes implementing a legislative compliance framework, register and policy.
Risk management We identified 15 high and moderate risk issues across 15 councils where risk management practices could be strengthened.	Council risk management practices are enhanced when there is a fit-for-purpose risk management framework, register and policy to outline how risks are identified, managed and monitored.
5.3 Internal controls
Financial accounting We identified 45 high and moderate risk control deficiencies across 41 councils concerning the use of manual journals to adjust council financial records. This can increase the risk of fraud and error. We identified 51 high and moderate risk issues across 39 councils where reconciliation processes need to improve to support the preparation of accurate financial statements	Sound financial accounting processes include controls to ensure: a person other than the preparer authorises manual journals key account reconciliations are prepared and reviewed.
Purchasing and payables We found 102 high and moderate risk deficiencies in purchasing and payable controls across 64 councils. Sound purchasing controls are important to minimise error, unauthorised purchases, fraud and waste.	As councils spend a substantial amount each year to procure goods and services, strong controls over purchasing and payment practices are critical. These include: a review of changes to vendor master file data by an appropriate independent officer an independent review and approval of purchases, including credit card transactions compliance with Tendering Guidelines for NSW Local Government.
Payroll We identified 71 high and moderate risk deficiencies in payroll controls across 48 councils. Weaknesses in payroll controls could result in incorrect payments being made to employees, due to error or fraud. Managing excess annual leave balances was a challenge for 32 councils.	Effective payroll controls are important because employee expenses represent a large portion of council expenditure. These controls include segregation of duties in the review of payroll master file data, timesheets, leave forms, payroll exception reports and termination payments. Excessive annual leave balances can have implications on employee costs, disrupts service delivery and affect work, health and safety. Excess annual leave balances should be continuously monitored and managed.

Like most public sector agencies, councils increasingly rely on information technology (IT) to deliver services and manage sensitive information. While IT delivers considerable benefits, it also presents risks that councils need to address.

Our review of council IT systems focused on understanding the processes and controls that support the integrity, availability and security of the data used to prepare financial statements. This chapter outlines issues in three broad areas:

high risk issues
access to IT systems
IT governance.

Issues	Conclusion
6.1 High risk issues
Significant matters reported to those charged with council governance
Our 2016–17 audits identified nine high risk IT control deficiencies across seven councils. The issues related to user access controls, privileged access controls and user developed applications.	High risk issues affect council’s ability to achieve their objectives and increase the risk of fraud and error.
6.2 Access to IT systems
User access controls We identified 107 issues across 56 councils where user access controls could be strengthened.	Inadequate IT policies and controls around user access, including privileged access, increases the risk of individuals having excessive or unauthorised access to critical financial systems and data.
Privileged access We identified 86 examples across 64 councils of inappropriate privileged access, inadequate review of access and insufficient retention and review of access logs.
User developed applications User developed applications (UDAs) are computing applications, tools and processes developed or managed outside IT administration. UDAs may allow users to bypass formal user access controls. Our audits found 22 councils using spreadsheets for business operations, decision making and financial reporting that were not adequately secured, with changes that were not tracked, tested or reviewed. We also identified five councils where finance staff and senior management use database query tools to directly modify financial data, circumventing system-based business process controls.	It is important councils are aware of all circumstances they are relying on UDAs to limit the risk of errors and potential misuse. This allows councils to: transition UDA functions to internal systems where possible ensure UDAs are adequately controlled where they continue to use them regularly review access rights to UDAs and back-up business-critical information.
6.3 IT Governance
Strategy, policies and procedures Around one in four councils do not have an IT strategy or operational plan. Some councils also need to develop or improve IT policies and procedures. Sixty-six councils do not have an adequate information security policy.	IT governance is enhanced where there is: a fit-for-purpose IT strategy and operational plan appropriate policies, standards and guidelines across all critical IT processes a formally defined process to support security and access to all systems.
Disaster recovery and business continuity Our audits identified that 17 councils do not have a documented plan to recover critical business functions in the event of a disaster. The ability to restore data from backups is critical to ensure business continuity in the face of a system disaster. We also found that 15 councils do not periodically test their ability to restore backups of data relevant to financial reporting.	Sound management of disaster recovery and business continuity includes: a documented plan for how critical business functions will be recovered in the event of a disaster, which is periodically reviewed and tested the ability to restore backed-up data, which is periodically tested. We expect to focus on these areas in our future audits.

Appendix one - Response from the Office of Local Government

Appendix two - List of recommendations

Appendix three - Sources of information and council classifications

Appendix four - Councils amalgamated in 2016

Appendix five - Status of audits

Appendix six - Council spending by function - Definitions from the local government code of accounting practice and financial reporting

Appendix seven - OLG’s performance indicators from the audited financial statement - Descriptions

Appendix eight - OLG’s performance indicators from the unaudited special schedule 7 - Descriptions

Appendix nine - Financial information

Appendix ten - OLG’s performance indicators

Appendix 11 - NSW Crown Solicitor’s advice

Click here to access the Report on Local Government 2017 Data Visualisation

20 December 2017

Published

Internal Controls and Governance 2017

Finance

Education

Community Services

Health

Justice

Whole of Government

Asset valuation

Compliance

Cyber security

Information technology

Internal controls and governance

Project management

Risk

Agencies need to do more to address risks posed by information technology (IT).

Effective internal controls and governance systems help agencies to operate efficiently and effectively and comply with relevant laws, standards and policies. We assessed how well agencies are implementing these systems, and highlighted opportunities for improvement.

1. Overall trends

New and repeat findings	The number of reported financial and IT control deficiencies has fallen, but many previously reported findings remain unresolved.
High risk findings	Poor systems implementations contributed to the seven high risk internal control deficiencies that could affect agencies.
Common findings	Poor IT controls are the most commonly reported deficiency across agencies, followed by governance issues relating to cyber security, capital projects, continuous disclosure, shared services, ethics and risk management maturity.

2. Information Technology

IT security	Only two-thirds of agencies are complying with their own policies on IT security. Agencies need to tighten user access and password controls.
Cyber security	Agencies do not have a common view on what constitutes a cyber attack, which limits understanding the extent of the cyber security threat.
Other IT systems	Agencies can improve their disaster recovery plans and the change control processes they use when updating IT systems.

3. Asset Management

Capital investment	Agencies report delays delivering against the significant increase in their budgets for capital projects.
Capital projects	Agencies are underspending their capital budgets and some can improve capital project governance.
Asset disposals	Eleven per cent of agencies were required to sell their real property through Property NSW but didn’t. And eight per cent of agencies can improve their asset disposal processes.

4. Governance

Governance arrangements	Sixty-four per cent of agencies’ disclosure policies support communication of key performance information and prompt public reporting of significant issues.
Shared services	Fifty-nine per cent of agencies use shared services, yet 14 per cent do not have service level agreements in place and 20 per cent can strengthen the performance standards they set.

5. Ethics and Conduct

Ethical framework	Agencies can reinforce their ethical frameworks by updating code‑of‑conduct policies and publishing a Statement of Business Ethics.
Conflicts of interest	All agencies we reviewed have a code of conduct, but they can still improve the way they update and manage their codes to reduce the risk of fraud and unethical behaviour.

6. Risk Management

Risk management maturity	All agencies have implemented risk management frameworks, but with varying levels of maturity.
Risk management elements	Many agencies can improve risk registers and strengthen their risk culture, particularly in the way that they report risks to their lead agency.

This report covers the findings and recommendations from our 2016–17 financial audits related to the internal controls and governance of the 39 largest agencies (refer to Appendix three) in the NSW public sector. These agencies represent about 95 per cent of total expenditure for all NSW agencies and were considered to be a large enough group to identify common issues and insights.

The findings in this report should not be used to draw conclusions on the effectiveness of individual agency control environments and governance arrangements. Specific financial reporting, controls and service delivery comments are included in the individual 2017 cluster financial audit reports tabled in Parliament from October to December 2017.

This new report offers strategic insight on the public sector as a whole

In previous years, we have commented on internal control and governance issues in the volumes we published on each ‘cluster’ or agency sector, generally between October and December. To add further value, we then commented more broadly about the issues identified for the public sector as a whole at the start of the following year.

This year, we have created this report dedicated to internal controls and governance. This will help Parliament to understand broad issues affecting the public sector, and help agencies to compare their own performance against that of their peers.

Without strong control measures and governance systems, agencies face increased risks in their financial management and service delivery. If they do not, for example, properly authorise payments or manage conflicts of interest, they are at greater risk of fraud. If they do not have strong information technology (IT) systems, sensitive and trusted information may be at risk of unauthorised access and misuse.

These problems can in turn reduce the efficiency of agency operations, increase their costs and reduce the quality of the services they deliver.

Our audits do not review every control or governance measure every year. We select a range of measures, and report on those that present the most significant risks that agencies should mitigate. This report divides these into the following six areas:

Overall trends
Information technology
Asset management
Governance
Ethics and conduct
Risk management.

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

operate effectively and efficiently
produce reliable financial reports
comply with laws and regulations.

This chapter outlines the overall trends for agency controls and governance issues, including the number of findings, level of risk and the most common deficiencies we found across agencies. The rest of this volume then illustrates this year’s controls and governance findings in more detail.

Issues	Recommendations
1.1 New and repeat findings
The number of internal control deficiencies reduced over the past three years, but new higher-risk information technology (IT) control deficiencies were reported in 2016–17. Deficiencies repeated from previous years still make up a sizeable proportion of all internal control deficiencies.	Recommendation Agencies should focus on emerging IT risks, but also manage new IT risks, reduce existing IT control deficiencies, and address repeat internal control deficiencies on a more timely basis.
1.2 High risk findings
We found seven high risk internal control deficiencies, which might significantly affect agencies.	Recommendation Agencies should rectify high risk internal control deficiencies as a priority
1.3 Common findings
The most common internal control deficiencies related to poor or absent IT controls. We found some common governance deficiencies across multiple agencies.	Recommendation Agencies should coordinate actions and resources to help rectify common IT control and governance deficiencies.

Information technology (IT) has become increasingly important for government agencies’ financial reporting and to deliver their services efficiently and effectively. Our audits reviewed whether agencies have effective controls in place over their IT systems. We found that IT security remains the source of many control weakness in agencies.

Issues

Recommendations

2.1 IT security

User access administration

While 95 per cent of agencies have policies about user access, about two-thirds were compliant with these policies. Agencies can improve how they grant, change and end user access to their systems.

Recommendation

Agencies should strengthen user access administration to prevent inappropriate access to sensitive systems. Agencies should:

establish and enforce clear policies and procedures
review user access regularly
remove user access for terminated staff promptly
change user access for transferred staff promptly.

Privileged access

Sixty-eight per cent of agencies do not adequately manage who can access their information systems, and many do not sufficiently monitor or restrict privileged access.

Recommendation

Agencies should tighten privileged user access to protect their information systems and reduce the risks of data misuse and fraud. Agencies should ensure they:

only grant privileged access in line with the responsibilities of a position
review the level of access regularly
limit privileged access to necessary functions and data
monitor privileged user account activity on a regular basis.

Password controls

Forty-one per cent of agencies did not meet either their own standards or minimum standards for password controls.

Recommendation

Agencies should review and enforce password controls to strengthen security over sensitive systems. As a minimum, password parameters should include:

minimum password lengths and complexity requirements
limits on the number of failed log-in attempts
password history (such as the number of passwords remembered)
maximum and minimum password ages.

2.2 Cyber Security

Cyber security framework

Agencies do not have a common view on what constitutes a cyber attack, which limits understanding the extent of the cyber security threat.

Recommendation

The Department of Finance, Services and Innovation should revisit its existing framework to develop a shared cyber security terminology and strengthen the current reporting requirements for cyber incidents.

Cyber security strategies

While 82 per cent of agencies have dedicated resources to address cyber security, they can strengthen their strategies, expertise and staff awareness.

Recommendations

The Department of Finance, Services and Innovation should:

mandate minimum standards and require agencies to regularly assess and report on how well they mitigate cyber security risks against these standards
develop a framework that provides for cyber security training.

Agencies should ensure they adequately resource staff dedicated to cyber security.

2.3 Other IT systems

Change control processes

Some agencies need to improve change control processes to avoid unauthorised or inaccurate system changes.

Recommendation

Agencies should consistently perform user acceptance testing before system upgrades and changes. They should also properly approve and document changes to IT systems.

Disaster recovery planning

Agencies can do more to adequately assess critical business systems to enforce effective disaster recovery plans. This includes reviewing and testing their plans on a timely basis.

Recommendation

Agencies should complete business impact analyses to strengthen disaster recovery plans, then regularly test and update their plans.

Agency service delivery relies on developing and renewing infrastructure assets such as schools, hospitals, roads, or public housing. Agencies are currently investing significantly in new assets. Agencies need to manage the scale and volume of current capital projects in order to deliver new infrastructure on time, on budget and realise the intended benefits. We found agencies can improve how they:

manage their major capital projects
dispose of existing assets.

Issues

Recommendations or conclusions

3.1 Capital investment

Capital asset investment ratios

Most agencies report high capital investment ratios, but one-third of agencies’ capital investment ratios are less than one.

Recommendation

Agencies with high capital asset investment ratios should ensure their project management and delivery functions have the capacity to deliver their current and forward work programs.

Volume of capital spending

Most agencies have significant forward spending commitments for capital projects. However, agencies’ actual capital expenditure has been below budget for the last three years.

Conclusion

The significant increase in capital budget underspends warrant investigation, particularly where this has resulted from slower than expected delivery of projects from previous years.

3.2 Capital projects

Major capital projects

Agencies’ major capital projects were underspent by 13 percent against their budgets.

Conclusion

The causes of agency budget underspends warrant investigation to ensure the NSW Government’s infrastructure commitment is delivered on time.

Capital project governance

Agencies do not consistently prepare business cases or use project steering committees to oversee major capital projects.

Conclusion

Agencies that have project management processes that include robust business cases and regular updates to their steering committees (or equivalent) are better able to provide those projects with strategic direction and oversight.

3.3. Asset disposals

Asset disposal procedures

Agencies need to strengthen their asset disposal procedures.

Recommendations

Agencies should have formal processes for disposing of surplus properties.

Agencies should use Property NSW to manage real property sales unless, as in the case for State owned corporations, they have been granted an exemption.

Governance refers to the high-level frameworks, processes and behaviours that help an organisation to achieve its objectives, comply with legal and other requirements, and meet a high standard of probity, accountability and transparency.

This chapter sets out the governance lighthouse model the Audit Office developed to help agencies reach best practice. It then focuses on two key areas: continuous disclosure and shared services arrangements. The following two chapters look at findings related to ethics and risk management.

Issues

Recommendations or conclusions

4.1 Governance arrangements

Continuous disclosure

Continuous disclosure promotes improved performance and public trust and aides better decision-making. Continuous disclosure is only mandatory for NSW Government Businesses such as State owned corporations.

Conclusion

Some agencies promote transparency and accountability by publishing on their websites a continuous disclosure policy that provides for, and encourages:

regular public disclosure of key performance information
disclosure of both positive and negative information
prompt reporting of significant issues.

4.2 Shared services

Service level agreements

Some agencies do not have service level agreements for their shared service arrangements.

Many of the agreements that do exist do not adequately specify controls, performance or reporting requirements. This reduces the effectiveness of shared services arrangements.

Conclusion

Agencies are better able to manage the quality and timeliness of shared service arrangements where they have a service level agreement in place. Ideally, the terms of service should be agreed before services are transferred to the service provider and:

specify the controls a provider must maintain
specify key performance targets
include penalties for non-compliance.

Shared service performance

Some agencies do not set performance standards for their shared service providers or regularly review performance results.

Conclusion

Agencies can achieve better results from shared service arrangements when they regularly monitor the performance of shared service providers using key measures for the benefits realised, costs saved and quality of services received.

Before agencies extend or renegotiate a contract, they should comprehensively assess the services received and test the market to maximise value for money.

All government sector employees must demonstrate the highest levels of ethical conduct, in line with standards set by The Code of Ethics and Conduct for NSW government sector employees.

This chapter looks at how well agencies are managing these requirements, and where they can improve their policies and processes.

We found that agencies mostly have the appropriate codes, frameworks and policies in place. But we have highlighted opportunities to improve the way they manage those systems to reduce the risks of unethical conduct.

Issues

Recommendations or conclusions

5.1 Ethical framework

Code of conduct

All agencies we reviewed have a code of conduct, but they can still improve the way they update and manage their codes to reduce the risk of fraud and unethical behaviour.

Recommendation

Agencies should regularly review their code-of-conduct policies and ensure they keep their codes of conduct up-to-date.

Statement of business ethics

Most agencies maintain an ethical framework, but some can enhance their related processes, particularly when dealing with external clients, customers, suppliers and contractors.

Conclusion

Agencies can enhance their ethical frameworks by publishing a Statement of Business Ethics, which communicates their values and culture.

5.2 Potential conflicts of interest

Conflicts of interest

All agencies have a conflicts-of-interest policy, but most can improve how they identify, manage and avoid conflicts of interest.

Recommendation

Agencies should improve the way they manage conflicts of interest, particularly by:

requiring senior executives to make a conflict-of-interest declaration at least annually
implementing processes to identify and address outstanding declarations
providing annual training to staff
maintaining current registers of conflicts of interest.

Gifts and benefits

While all agencies already have a formal gifts-and-benefits policy, we found gaps in the management of gifts and benefits by some that increase the risk of unethical conduct.

Recommendation

Agencies should improve the way they manage gifts and benefits by promptly updating registers and providing annual training to staff.

Risk management is an integral part of effective corporate governance. It helps agencies to identify, assess and prioritise the risks they face and in turn minimise, monitor and control the impact of unforeseen events. It also means agencies can respond to opportunities that may emerge and improve their services and activities.

This year we looked at the overall maturity of the risk management frameworks that agencies use, along with two important risk management elements: risk culture and risk registers.

Issues

Recommendations or conclusions

6.1 Risk management maturity

All agencies have implemented risk management frameworks, but with varying levels of maturity in their application.

Agencies’ averaged a score of 3.1 out of five across five critical assessment criteria for risk management. While strategy and governance fared best, the areas that most need to improve are risk culture, and systems and intelligence.

Conclusion

Agencies have introduced risk management frameworks and practices as required by the Treasury’s:

'Risk Management Toolkit for the NSW Public Sector'
'Internal Audit and Risk Management Policy for the NSW Public Sector'.

However, more can be done to progress risk management maturity and embed risk management in agency culture.

6.2 Risk management elements

Risk culture

Most agencies have started to embed risk management into the culture of their organisation. But only some have successfully done so, and most agencies can improve their risk culture.

Conclusion

Agencies can improve their risk culture by:

setting an appropriate tone from the top
training all staff in effective risk management
ensuring desired risk behaviours and culture are supported, monitored, and reinforced through business plans, or the equivalent and employees' performance assessments.

Risk registers and reporting

Some agencies do not report their significant risks to their lead agency, which may impair the way resources are allocated in their cluster. Some agencies do not integrate risk registers at a divisional and whole-of-enterprise level.

Conclusion

Agencies not reporting significant risks at the cluster level increases the likelihood that significant risks are not being mitigated appropriately.

Effective risk management can improve agency decision-making, protect reputations and lead to significant efficiencies and cost savings. By embedding risk management directly into their operations, agencies can also derive extra value for their activities and services.

13 December 2017

Published

Managing demand for ambulance services 2017

Health

Information technology

Management and administration

Risk

Service delivery

Shared services and collaboration

Workforce and capability

NSW Ambulance has introduced several initiatives over the past decade to better manage the number of unnecessary ambulance responses and transports to hospital emergency departments. However, there is no overall strategy to guide the development of these initiatives nor do NSW Ambulance's data systems properly monitor their impact. As a result, the Audit Office was unable to assess whether NSW Ambulance's approach to managing demand is improving the efficiency of ambulance services.

Demand for ambulance services is increasing. Demographic factors including population growth and ageing have contributed to this and ongoing growth in demand is likely. It is important that NSW Ambulance finds ways to respond to this demand more efficiently, while maintaining patient safety standards and meeting community expectations.

Most triple zero calls to NSW Ambulance do not involve medical issues that require an emergency response. NSW Ambulance has introduced a range of initiatives to change the way it manages these less urgent requests for assistance. Its major demand management initiatives include using a telephone advice line, referring some patients to services other than hospital emergency departments and using specialist paramedics to respond to less urgent cases.

The role of NSW Ambulance has changed in recent years. It is aiming to become a ‘mobile health service’ that identifies the needs of patients and provides or refers them to the most appropriate type of care. This change involves a significant expansion of the clinical decision-making role of paramedics. Considerable strategic and organisational efforts are required to make this work. The successful implementation of demand management initiatives is important to NSW Ambulance's ability to continue to meet demand for its services.

This audit assessed NSW Ambulance's major demand management initiatives that aim to reduce unnecessary demand for ambulance responses and unnecessary transport to hospital emergency departments. It aimed to assess the extent to which these initiatives have improved the efficiency of its services.

Conclusion

NSW Ambulance has introduced several initiatives that aim to manage demand for its services from less urgent cases more efficiently. There is no overall strategy for these initiatives and NSW Ambulance’s data systems do not measure their outputs or outcomes. As a result, we are unable to assess the impact of NSW Ambulance's demand management initiatives on the efficiency of ambulance services. More focus is needed to ensure these initiatives achieve the efficiency improvements necessary to help NSW Ambulance meet future increases in demand.

Increasing demand for ambulance services is a key issue for NSW Ambulance. Demand has increased at a faster rate than population growth in recent years and continued growth is expected. NSW Ambulance has introduced several initiatives that aim to manage demand for its services from people with less urgent medical issues more efficiently and align its approach with the rest of the health system in New South Wales.

These individual initiatives lack a broader strategy to guide their development. NSW Ambulance’s demand management initiatives also lack clear goals and performance targets, with insufficient organisational resources allocated to support their implementation. NSW Ambulance does not have a data system that allows it to conduct accurate routine monitoring of the activity and performance of these initiatives.

More effort is required to make demand management initiatives a core part of NSW Ambulance's work. Key relationships with other health services to support demand management initiatives have only recently been established. NSW Ambulance has not communicated proactively with the public about its demand management initiatives. To ensure paramedics are as well prepared as possible for their expanded roles, they need better professional development and up to date technology.

Demand for ambulance services in New South Wales is increasing steadily. Forecast future increases in demand due to population growth and ageing mean that NSW Ambulance must improve its efficiency to maintain its performance.

Demand for ambulance services is growing at a rate higher than population growth. The increase in demand is likely to continue as the population continues to grow and age. NSW Ambulance has made several recent changes to remove large parts of demand for its services, including moving non-emergency patient transport to a separate government agency and changing the way triple zero calls are categorised.

These changes were expected to improve emergency response time performance, but the anticipated improvements have not been achieved. If demand continues to increase as forecast, NSW Ambulance will need to find more efficient ways to manage demand to maintain its performance.

NSW Ambulance has introduced initiatives to change the way it manages demand from patients who have less urgent medical issues. These have the potential to achieve positive results, but we were unable to fully assess their impact because of weaknesses in data systems and monitoring. More needs to be done to demonstrate progress toward the efficiency improvements required.

NSW Ambulance uses a telephone referral system to manage triple zero calls from people with medical issues that do not require an ambulance. This has the potential to achieve efficiency improvements but there are weaknesses in NSW Ambulance's use and monitoring of this system. Paramedics are now able to make decisions about whether patients need transport to a hospital emergency department. NSW Ambulance does not routinely measure or monitor the decisions paramedics make, so it does not know whether these decisions are improving efficiency. Extended Care Paramedics who have additional skills in diagnosing and treating patients with less urgent medical issues were introduced in 2007. NSW Ambulance analysis indicates that these paramedics have the potential to improve efficiency, but have not been used as effectively as possible.

Our 2013 audit of NSW Ambulance found that accurate monitoring of activity and performance was not being conducted. More than four years later, this remains the case.

NSW Ambulance has recognised the need to change the way it manages demand and has developed initiatives that have the potential to improve efficiency. However, there are significant weaknesses in the strategy for and implementation of its demand management initiatives.

NSW Ambulance has identified the goal of moving from an emergency transport provider to a mobile health service and developed several initiatives to support this. Its demand management initiatives have the potential to contribute to the broader policy directions for the health system in New South Wales. However, there is no clear overall strategy guiding these initiatives and their implementation has been poor.

NSW Ambulance's reasons for changing its approach to demand management have not been communicated proactively to the community. Demand management initiatives that have been operating for over a decade still do not have clear performance measures or targets. Project management of new initiatives has been inadequate, with insufficient organisational resources to oversee them and inadequate engagement with other healthcare providers.

NSW Ambulance uses an in-house Vocational Education and Training course to recruit some paramedics, as well as recruiting paramedics who have completed a university degree. No other Australian ambulance services continue to provide their own Vocational Education and Training qualifications. Paramedics will need more support in several key areas to be able to fulfil their expanded roles in providing a mobile health service. Performance and development systems for paramedics are not used effectively. Up to date technology would help paramedics make better decisions and improve NSW Ambulance's ability to monitor demand management activity.

There are gaps in NSW Ambulance's oversight of the risks of some of the initiatives it has introduced, particularly its lack of information on the outcomes for patients who are not transported to hospital. Weaknesses in the way NSW Ambulance uses its data limit its ability to properly assess the risks of the demand management initiatives it has introduced.

Parliamentary reference - Report number #295 - released 13 December 2017

5 December 2017

Published

Health 2017

Health

Asset valuation

Compliance

Financial reporting

Fraud

Information technology

Internal controls and governance

Management and administration

Procurement

Project management

The following report highlights results of the financial audits of entities in the NSW health cluster. The report focuses on key observations and findings from the most recent audits of these entities.

The report also includes a range of findings on service delivery. Overall, NSW Health is achieving most of their targets. Some local health districts are continuing to experience increased demand for their services and are finding it more difficult to meet their targets. For example, three local health districts had not achieved some emergency department response time targets for three consecutive years.

1. Financial reporting and controls

Financial Reporting	All health cluster entities received unqualified audit opinions and the quality of financial reporting remains high across the cluster. Early close procedures were largely completed and all financial statements were submitted by the deadlines.
Financial performance	Overall, NSW Health recorded an operating surplus of $407 million in 2016–17. Eleven local health districts/specialty networks recorded operating deficits in 2016–17, four more than 2015–16. Expenses across NSW Health increased by 4.4 per cent in 2016–17 (6.0 per cent in 2015–16), lower than the expected long term annual expense growth rate.
Excess annual leave	Managing excess annual leave is a continual challenge for NSW Health, with thirty–five per cent of the workforce having excess balances.
Overtime payments	NSW Health entities are generally managing overtime well; however NSW Ambulance’s overtime payments, $74.6 million in 2016–17, remain significantly higher than other health entities.
Time and leave recording practices	Unapproved employee timesheets continue to be a problem for health entities. Weak timesheet approval controls increase the risk of staff claiming and being paid for hours they have not worked. There is also an increased risk of high volumes of roster adjustments, manual pays, salary overpayments and leave not being recorded accurately.

2. Service Delivery

Service Agreements	Most of the service agreements between the Secretary of NSW Health and health entities were signed earlier than prior years.
Performance monitoring	Five NSW Health entities are not meeting the Ministry of Health’s performance expectations at 30 June 2017.
Emergency department performance	Data provided by the Ministry indicates NSW Health, on average, met emergency department triage response time targets across all triage categories for the fourth consecutive year.
Ambulance response times	Data provided by the Ministry shows NSW Ambulance response times for imminently life‑threatening incidents of 7.5 minutes in 2016–17 was within the Ministry’s target of 10.0 minutes. Data provided by the Ministry indicates NSW Ambulance response times for potentially life‑threatening incidents did not improve in 2016–17. The median response time of 11.1 minutes in 2016–17 was similar to 2015–16 (11.0 minutes). This is despite the number of Priority 1 responses reducing by 4.3 per cent.
Unplanned hospital re-admissions	Data provided by the Ministry shows eight local health districts achieved the Ministry of Health’s unplanned hospital re‑admissions target in 2016–17. The target is for local health districts to reduce re‑admission rates from the previous financial year.

This report sets out the results of the 30 June 2017 financial statement audits of Health cluster entities.

The report has been structured into two chapters focusing on:

Financial reporting and controls
Service delivery.

This chapter outlines audit observations, conclusions and recommendations related to financial reporting and internal controls of entities for 2016-17.

Observation	Conclusion or recommendation
2.1 Quality of financial reporting
All cluster entities received unqualified audit opinions and misstatements identified in financial statements fell.	The quality of financial reporting remains high across the cluster.
2.2 Timeliness of financial reporting
Early close procedures were largely completed and all financial statements were submitted by the deadlines.	Health entities controlled by the Ministry of Health continued submitting their financial statements well ahead of the statutory deadlines.
2.4 Financial and sustainability analysis
NSW Health recorded an operating surplus of $407 million in 2016–17. Eleven local health districts/specialty networks recorded operating deficits in 2016–17, four more than 2015–16. Expenses across NSW Health increased by 4.4 per cent in 2016–17 (6.0 per cent in 2015–16). The capital replacement ratio of local health districts/specialty networks ranged from 0.5 to 5.7 in 2016–17. Seven local health districts had capital replacement ratio higher than one.	The statewide operating surplus was $84 million higher than 2015–16. Net surpluses contribute to NSW Health’s ability to invest in new facilities, upgrades and redevelopments. The 2016–17 financial results were once again impacted by the NSW Government initiative to improve cash management across the sector. The expense growth rate for NSW Health is 1.6 percentage points lower than the expected long term annual expense growth rate. Substantial ongoing investment in hospitals and other assets across NSW Health is evidenced by high capital replacement ratios for some health entities in 2016–17.
2.5 Performance against budget
Ten local health districts/specialty networks’ expense budget variance was outside performance expectations agreed with the Ministry at the beginning of 2016–17.	The Ministry continues to manage performance across NSW Health to improve the accuracy of budgeting practices.
2.7 Human Resources
Thirty-five per cent of NSW Health’s workforce have excess annual leave balances. NSW Ambulance had the highest average sick leave rate in NSW Health of 85.2 hours per FTE in 2016–17 (78.7 hours in 2015–16). This was higher than the statewide average of 62.1 hours (62.0 hours in 2015–16). NSW Ambulance’s overtime payments in 2016–17 totalled $74.6 million; $2.8 million more than 2015–16 and significantly higher than other health entities Other NSW Health entities are generally managing overtime well. Unapproved employee timesheets continue to be a problem for health entities. Weak timesheet approval controls increase the risk of staff claiming and being paid for hours they have not worked.	Managing excess annual leave is a continual challenge for health entities. Recommendation: Health entities should further review the approach to managing excess annual leave in 2017–18. They should: monitor current and projected leave balances to the end of the financial year on a monthly basis agree formal leave plans with employees to reduce leave balances over an acceptable timeframe. NSW Ambulance continues to face significant challenges in managing sick leave. Recommendation: NSW Ambulance should further implement and monitor targeted human resource strategies to address the high rates of sick leave taken Recommendation: NSW Ambulance should further review the effectiveness of its rostering practices to identify strategies to reduce excessive overtime payments. Recommendation: Health entities should conduct a risk‑based review of time and leave recording practices to ensure control weaknesses are identified and fixed.

This chapter outlines our audit observations, conclusions and recommendations relating to service delivery for 2016–17.

Observation	Conclusion or recommendation
3.1 Service agreements in NSW Health
Most of the service agreements between the Secretary of NSW Health and health entities were signed earlier than prior years. Thirteen local health districts/specialty networks signed their service agreements by the 31 July 2017 due date. This is a significant improvement with only seven local health districts/specialty networks meeting the date in 2015–16.	Having service agreements signed as close as possible to the start of each year provides the Ministry and NSW Health entities with clarity around roles, responsibilities, performance measures, budgets, and service volumes and levels.
3.2 Performance of NSW Health entities
Five NSW Health entities were not meeting the Ministry’s performance expectations at 30 June 2017.	The Ministry is managing the five entities in accordance with its performance review process.
3.4 Emergency department response times
Data provided by the Ministry indicates NSW Health again, on average, met emergency department triage response time targets across all triage categories for the fourth consecutive year. The Ministry manages performance across NSW Health to ensure patients presenting at emergency departments receive care in a clinically appropriate timeframe.	Based on the Ministry’s data, local health districts/specialty networks are, on average, meeting triage targets despite increasing emergency department attendances. The data shows eleven local health districts met all triage targets in 2016–17, compared to eight in 2015–16.
3.5 Emergency treatment performance
The Ministry manages public patient access to emergency services in public hospitals. It has an emergency treatment performance target of 81 per cent of patients leaving emergency departments within four hours.	Data provided by the Ministry indicates NSW Health maintained its overall emergency treatment performance in 2016–17, but did not achieve its target. The State average emergency treatment performance was 74.2 per cent (74.2 per cent in 2015–16). Based on the Ministry’s data, only four local health districts achieved the target in 2016–17, five in 2015–16.
3.6 Ambulance response times
NSW Ambulance has a response time target of 10.0 minutes for imminently life‑threatening incidents in New South Wales.	Data provided by the Ministry indicates NSW Ambulance response times for imminently life-threatening incidents of 7.5 minutes in 2016–17 was within the Ministry’s target.
3.7 Transfer of care
The Ministry has a target of 90 per cent for the number of ambulance arrivals within a 30 minute ‘transfer of care’ timeframe.	Data provided by the Ministry indicates the rate of ambulance arrivals within a 30 minute 'transfer of care' timeframe improved from 87.6 per cent in 2015–16 to 91.7 per cent in 2016–17, exceeding the Ministry’s target.
3.8 Average length of stay in hospital
Based on the Ministry’s 2016–17 data, the average length of stay for acute episodes was 3.0 days. The average length of stay in New South Wales hospitals is lower than the national average of 3.2 days (in 2015–16).	The Ministry’s data shows the average length of stay by patients for acute episodes has remained stable in New South Wales hospitals for four years.
3.9 Elective surgery access performance
Data provided by the Ministry indicates NSW Health continues to manage waiting times for elective surgery in public hospitals.	The Ministry’s data shows NSW Health improved on‑time admission of patients for elective surgery in 2016–17 despite a 1.8 per cent increase in admissions. While the result improved, only one of the three targets for elective surgery waiting times was met in 2016–17.
3.10 Unplanned hospital re-admissions
Data provided by the Ministry indicates NSW Health, on average, did not reduce the rate of unplanned hospital re‑admissions in 2016–17. The Ministry has a target of reducing unplanned hospital re‑admissions compared to the previous financial year. Low re‑admission rates may indicate good patient management practices and post-discharge care.	The Ministry’s data shows eight local health district met the target to reduce the rate of re‑admissions compared to the previous financial year. The statewide average rate increased from 6.3 per cent to 6.4 per cent.
3.11 Post discharge care for acute mental health patients
NSW Health has a goal to increase community-based care to acute mental health patients after they are discharged. Continuity of care in the community can lead to reduced symptom severity, lower re‑admission rates, and improved quality of life.	The Ministry’s 2016–17 data shows the statewide average for post discharge follow-up of acute mental health patients within seven days was 70.0 per cent (66.0 per cent in 2015–16). The statewide average improved and met the NSW Health target of 70 per cent. Nine local health districts exceeded the NSW Health target.
3.12 Mental health acute re-admissions
NSW Health has a goal to reduce acute public sector mental health re-admissions. High re‑admission rates may indicate deficiencies in inpatient treatment and follow up care.	The Ministry’s data shows twelve local health districts did not achieve the NSW Health target of 13 per cent mental health acute re‑admissions in 2016–17.
3.13 Unplanned and emergency re‑presentations
NSW Health aims to reduce the number of unplanned and emergency re‑presentations to emergency departments. The Ministry’s 2016–17 data shows the State average of emergency department re‑presentations decreased marginally from 5.0 per cent in 2015–16 to 4.9 per cent.	Patients attending rural emergency departments are more likely to re‑present within 48 hours of being discharged than those in regional or metropolitan emergency departments.
3.14 Healthcare associated infection
The national target for the rate of Staphylococcus aureus (golden staph) bloodstream infection is two cases per 10,000 bed days.	Data provided by the Ministry indicates the rate of golden staph bloodstream infection in New South Wales hospitals continues to be well below the target and national benchmark at 0.72 cases per 10,000 bed days in 2016–17 (0.75 in 2015–16).
3.15 Patient experience and satisfaction
The Bureau of Health Information analyses and reports on the results of patient surveys. The Bureau’s survey shows 65 per cent of adult admitted patients rated the care they received in hospital as ‘very good’ and 29 per cent rated it as ‘good’.	NSW Health recognises that patient surveys are an important feedback mechanism on the health care system that can only come from personal experiences.

Appendix one - List of 2017 recommendations

Appendix two - Status of 2016 recommendations

Appendix three - Timeliness of financial and audit reporting

Appendix four - Financial indicators

Appendix five - Agencies selected for this report

Appendix six - Financial information

Appendix seven - Performance information

23 November 2017

Published

Agency compliance with NSW Government travel policies

Education

Community Services

Finance

Health

Industry

Justice

Local Government

Planning

Premier and Cabinet

Transport

Treasury

Universities

Whole of Government

Compliance

Internal controls and governance

Procurement

Overall, agencies materially complied with NSW Government travel policies.

However, the Auditor-General found some agencies:

did not always book official travel through the approved supplier
had weaknesses in their travel approval processes
had travel policies that were inconsistent with the NSW Government policy
did not adequately manage their travel records.

Last year the NSW Government spent almost $250 million on travel. The government’s travel policies aim to help agencies make better travel decisions and reduce costs. The Department of Finance, Services and Innovation (DFSI) is responsible for the government’s travel policy and manages the government contract with an approved private sector provider to procure travel services.

This audit assessed how effective agency processes were to ensure compliance with:

the ‘Policy on Official Travel within Australia and Overseas’ issued by the Department of Premier and Cabinet in Circular OFS-2014–07 ‘Official Travel in Australia and Overseas’ (the former policy)
the ‘NSW Government Travel and Transport Policy’ issued by DFSI (the new policy), effective from 28 September 2016.

We examined 15 agencies from different NSW Government clusters with significant travel expenditure. For a list of participating agencies, refer to the Appendix two.

Conclusion

We found that overall, agencies materially complied with NSW Government travel policies. However, some agencies:

did not always book official travel through the approved supplier
had weaknesses in their travel approval processes
had travel policies that were inconsistent with the government policy
did not adequately manage their travel records.

Self-assessments indicate agencies comply with most aspects of the new policy. Agencies also believe more guidance from DFSI about certain aspects of the policy would increase compliance.

We asked the 15 participating agencies to complete a self assessment of the processes they have implemented to comply with the new policy. The key observations are summarised below.

Appendix one - Responses from agencies

Appendix two - List of selected agencies

2 November 2017

Published

Government Advertising: Campaigns for 2015–16 and 2016–17

Premier and Cabinet

Justice

Local Government

Compliance

Internal controls and governance

Management and administration

Procurement

The 'Stronger Councils, Stronger Communities' and the 'Dogs deserve better' government advertising campaigns complied with the Government Advertising Act and most elements of the Government Advertising Guidelines.

However, some advertisements were designed to build support for government policy and used subjective or emotive messages. This is inconsistent with the requirement in the Government Advertising Guidelines for 'objective presentation in a fair and accessible manner'.

Advertisements in the 'Stronger Councils, Stronger Communities' campaign used subjective statements such as 'the system is broken' and 'brighter future'. While advertisements in the 'Dogs deserve better' campaign used confronting imagery such as gun targets, blood smears and gravestones.

The Government Advertising Act 2011 (the Act) requires the Auditor-General to conduct a performance audit in relation to at least one government advertising campaign in each financial year. The performance audit assesses whether advertising campaigns were carried out effectively, economically and efficiently and in compliance with the Act, the regulations, other laws and the Government Advertising Guidelines (the Guidelines). In this audit, we examined two campaigns:

the ‘Stronger Councils, Stronger Communities’ campaign run by the Office of Local Government and the Department of Premier and Cabinet
the ‘Dogs deserve better’ campaign run by the Department of Justice.

Section 6 of the Act details the specific prohibitions on political advertising. Under this section, material that is part of a government advertising campaign must not contain the name, voice or image of a minister, member of parliament or a candidate nominated for election to parliament or the name, logo or any slogan of a political party. Further, a campaign must not be designed so as to influence (directly or indirectly) support for a political party.

The ‘Stronger Councils, Stronger Communities’ government advertising campaign was run by the Office of Local Government and the Department of Premier and Cabinet in four phases from August 2015 to May 2016. The total cost of the campaign was over $4.5 million. See Appendix 2 for more details on this campaign.

The ‘Stronger Councils, Stronger Communities’ advertising campaign has not breached the specific provisions of Section 6 of the Act which prohibits political advertising.

Two factors potentially compromised value for money for the campaign. The request for quotes for the design of the Phase 1 advertisement did not reflect the full scale of work to be undertaken, which was substantially greater than initially quoted. Further, the department did not meet all recommended timeframes to minimise media booking costs for all phases of the campaign.

The campaign did not comply with all administrative requirements in all phases. Advertising for Phase 1 commenced before the compliance certificate was signed. There was no evidence that a compliance certificate was signed for Phase 2 extension. The cost benefit analyses for Phase 2 and Phase 2 extension did not sufficiently consider alternatives to advertising, as is required by the Government Advertising Guidelines.

Advertisements adopted subjective messages designed to build public support for council mergers and directed audiences to websites for more detailed information. Campaign research identified statements that were most likely to reduce resistance to mergers. Some advertising content used subjective language, which we consider inconsistent with the requirement for ‘objective presentation’. Evaluations of advertising effectiveness also measured the success of the advertisements in increasing public support for council mergers.

No breach of specific prohibitions in the Act

Section 6 of the Act prohibits the use of government advertising for political advertising. A government advertising campaign must not:

be designed to influence (directly or indirectly) support for a political party
contain the name, voice or image of a minister, any other member of parliament or a candidate nominated for election to parliament
contain the name, logo or any slogan of, or any other reference relating to, a political party.

We did not identify any breach of the specific prohibitions listed above in the advertising content of this campaign.

Request for quotes to design advertisement did not reflect the full scope required

The request for quotes for the design of the Phase 1 advertisement did not reflect the full scale of work that was to be undertaken, and this created a risk to achieving value for money. The Office of Local Government sought quotes for design of a television advertisement only. It did not request an estimate for radio, online advertisements, or translation for linguistically diverse audiences, which were ultimately required for the campaign.

A full and fair assessment of which supplier could provide the best value for money could not be made given that the quotes obtained did not reflect the full scope of work. The final amount paid for the design of Phase 1 was 2.7 times the original quote. It is possible that another supplier that provided a quote could have provided overall better value for money.

The Office of Local Government continued to use the Phase 1 supplier for Phase 2 and Phase 2 extension (Exhibit 4). Where there are other suppliers that could feasibly compete for a contract, direct negotiation increases the risk the agency has not obtained the best value for money. The department advised that it continued with the same agency to avoid costs involved in briefing a new agency on the campaign.

The ‘Dogs deserve better’ government advertising campaign was run by the Department of Justice from August 2016, after the government announced its decision to prohibit greyhound racing, and was terminated in October 2016 after a change of government policy. The campaign had a budget of $1.6 million, with an actual spend of $1.3 million. See Appendix 2 for more details on this campaign.

The ‘Dogs deserve better’ advertising campaign has not breached the specific provisions of Section 6 of the Act which prohibits political advertising.

The Secretary of the department determined that urgent circumstances existed that required advertising to commence prior to completing a cost benefit analysis and peer review. There was a concern that industry participants may make impulse decisions to destroy greyhounds without further information on support services; there was also an identified need to promote public greyhound adoptions.

Phase 1 advertisements focused on explaining the reasons for the prohibition on greyhound racing with a reference to a website for further information. While industry participants were identified as the primary audience, media expenditure was not specifically targeted to this group. Phase 2 advertisements more effectively addressed the originally identified ‘urgent needs’ of providing information on support services for greyhound owners and information on how the public could adopt a greyhound.

The urgency to advertise potentially compromised value for money. The department did not use price competition when selecting a creative supplier due to a concern this would add to timeframes. Further, the department did not meet recommended timeframes to minimise media booking costs.

We identified three other areas in Phase 1 advertisements that were inconsistent with government advertising requirements. Advertisements used provocative language and confronting imagery, which we consider to be inconsistent with the requirement for ‘objective presentation’. Two statements presented as fact based on the Special Commission’s Inquiry report were inaccurate; one of these was due to a calculation error. Radio advertisements did not clearly identify that they were authorised by the New South Wales Government for the first few days of the campaign.

No breach of specific prohibitions in the Act

Section 6 of the Act prohibits the use of government advertising for political advertising. A government advertising campaign must not:

be designed to influence (directly or indirectly) support for a political party
contain the name, voice or image of a minister, any other member of parliament or a candidate nominated for election to parliament
contain the name, logo or any slogan of, or any other reference relating to, a political party.

We did not identify any breach of the specific prohibitions listed above in the advertising content of this campaign.

Animal welfare concerns were identified as the reason for urgent advertising

A brief prepared by the department in July 2016 raised concerns about the welfare of greyhounds following the NSW Premier’s announcement that the government would prohibit greyhound racing. The brief raised the risk that industry members may make impulse decisions to destroy their greyhounds without information on support that was being offered.

The department used the provisions in Sections 7(4) and 8(3) of the Act to expedite the release of advertising due to ‘other urgent circumstances’. This provision allows advertising to commence prior to completing the peer review process and cost benefit analysis.

In introducing the Government Advertising Bill to parliament in 2011, the then Premier noted that exceptional circumstances would cover situations ‘such as a civil emergency or sudden health epidemic’. There is no other guidance on when it is appropriate to use this section. It is at the discretion of a government agency head to determine whether a campaign is urgent.

Phase 1 advertisements did not focus on the urgent needs

This advertising campaign had three overarching objectives:

to increase public awareness of the animal welfare reasons for the closure of the greyhound racing industry
to change the behaviour of dog owners from potentially harming their greyhounds to treating them humanely, by accessing the support options and packages available
to promote greyhound adoptions by the public.

Alongside advertising, the department took other steps to engage with the greyhound racing industry. This included direct mail, face to face meetings around the State, setting up a call centre and community consultation through an online survey. Other government agencies and animal welfare agencies were also engaged to reach out to affected stakeholders.

Phase 1 advertising content focused on providing information about the reasons for the closure of the industry. The department’s radio and television advertisements did not refer to support packages or encourage the public to adopt a greyhound. While print advertisements did mention these things, this was only presented in fine print. In all advertisements, audiences were referred to a website for further information.

The focus of advertisements on the reasons for industry closure was not consistent with the identified needs to urgently commence advertising to influence the behaviour of dog owners and encourage the public to adopt a greyhound.

The content in Phase 2 advertisements, which began around four weeks after the first phase, was more explicit in highlighting the services and support for industry members such as offering business and retraining advice. These advertisements also referred audiences to a call centre number as well as the website.

Peer review process limited to influencing second phase of advertisements

In urgent circumstances, the Act allows for peer review to be completed after advertising has commenced. For this campaign, the peer review process was completed on 19 August 2016, two weeks after advertising had commenced. Where advertising commences before the peer review process is completed, the usefulness of peer reviewers’ recommendations is limited to informing subsequent phases of advertising and the post-campaign evaluation.

The peer review report found the messages in Phase 1 advertisements were not clearly defined, and the role of advertising was not clearly defined amongst other campaign activities. These recommendations informed the second phase of advertising, which ran from 27 August 2016 until the campaign was terminated in October 2016.

The department could not demonstrate value for money was achieved for creative work

The department provided a fixed budget for creative work when requesting quotes from creative agencies to develop advertising material. This is not consistent with the quotation requirements in the government’s Guidelines for Advertising and Digital Communication Services. This approach creates risks to achieving value for money as creative agencies are not required to compete on price for their services. The department advised that it had pre-set the creative costs based on a comparative government campaign of a similar size. This was done due to a concern that requiring agencies to compete on price would affect the short timeframe given to develop creative material.

Three creative agencies accepted the opportunity to present design ideas for the campaign. The department was unable to provide evidence of how it chose the preferred supplier out of these three agencies. Records are important for accountability and allow a procurement decision to be audited after an urgent decision.

Short notice did not allow for cost-efficient media booking for all phases

Placement of advertisements in various media channels was done through the State’s Media Agency Services contract. This contract achieves savings as the government can use its aggregated media spend to gain discounts from the media supplier.

The Department of Premier and Cabinet provides guidance to ensure cost efficient media booking. For example, media time for a television advertisement should be booked at least 6 to 12 weeks in advance. Radio advertisements should be booked at least 2 to 8 weeks in advance.

The peer review report noted that the department did not have adequate time to look for the most cost-efficient way to advertise. In its response to the peer reviewers, the department acknowledged this to be due to the urgency to start advertising. The media booking authority was signed by the department one day before the campaign commenced.

The department used a wide public campaign for a narrow target audience

The campaign identified greyhound industry participants as the primary target audience. In 201516 there were 1,342 greyhound trainers, 1,695 owner/trainers, 983 attendants and 1,247 breeders in New South Wales. The department’s advertising submission identified ‘concerns that industry members could make impulsive decisions, potentially jeopardising the welfare of a large number of dogs, prior to the shutdown of the industry’.

The submission’s evidence of advertising effectiveness focused on increasing the level of wider community support for the ban rather than stopping industry members from making impulse decisions. It used an early opinion poll to show that total support for the ban on greyhound racing rises by 17 points and opposition drops by four points following explanation of the findings of the Special Commission of Inquiry report.

The peer review report noted that the role of advertising was not clearly defined amongst the department’s range of other direct and targeted communications and consultations held with industry members.

No demonstrated basis for use of confronting imagery and provocative language

The Guidelines require ‘objective presentation in a fair and accessible manner’. Neither the Guidelines or Handbook further explain what objective presentation means. We have used an ordinary definition of this term as ‘not influenced by personal feelings or opinions in considering and representing facts’. This is synonymous with terms like ‘impartial’, ‘neutral’, and ‘dispassionate’ and opposite to ‘subjective’. We consider that to meet the current requirements in the Guidelines for objectivity, advertising content should contain accurate statements or facts, and avoid subjective language.

Phase 1 focussed on the ongoing consequences if no action was taken to close the industry. The advertisements used provocative language, for example ‘Up to 70 per cent of dogs are deemed wastage by their own industry. Wastage! Slaughtered just for being slow’. Advertisements used confronting imagery like gravestones, blood smears and gun targets.

Our literature review into this area highlighted mixed findings on the effectiveness of confrontational advertising materials. In some cases, shock campaigns may cause an audience to reject or ignore the message, and may even encourage people to do the opposite of the intended behaviour. In other cases, such as in road safety campaigns, this style of advertising can be successful. This shows the importance of conducting pre-campaign research before adopting a confrontational or emotive approach in advertising.

The Government Advertising Handbook recommends that an agency explain the rationale and the evidence for their chosen advertising approach. There was no evidence that the department researched the effectiveness of its advertising approach with its target audience. The department had planned to undertake creative concept testing as part of a strategy to ensure the creative material was understood by its audience. The department advised that due to the urgency of the campaign, it did not have time to conduct this testing.

Not all Phase 1 radio advertisements clearly identified that they were authorised by the New South Wales Government

For the first few days on air, Phase 1 radio advertisements ended by referring the audience to a government website, instead of clearly identifying that it had been authorised by the New South Wales Government. Government authorisations and logos ensure the work and the programs of the NSW Government are easily identifiable by the community.

The department’s cost benefit analysis did not consider alternatives to advertising

For government advertising campaigns that cost over $1.0 million, the Act requires the advertising agency to carry out a cost benefit analysis and obtain approval from the Cabinet Standing Committee on Communications, prior to commencing the campaign.

The department engaged with audiences through direct mail, face to face forums, and a telephone helpline in addition to advertising. However, the department’s cost benefit analysis did not meet the requirements in the Guidelines to specify the extent to which expected benefits could be achieved without advertising, and to compare costs of options other than advertising that could be used to successfully implement the program (see Exhibit 6).

The cost benefit analysis made optimistic assumptions about the impact of the campaign on greyhound adoptions. It estimated that 2,360 greyhounds would be adopted if the campaign was run. This is significantly higher than the ‘most optimistic outcome’ of re-homing in the Special Commission Inquiry report (we calculated this to be 1,467 greyhounds). There was insufficient evidence to support the higher number of adoptions in the cost benefit analysis.

The sensitivity analysis shows that using the Special Commission’s ‘most optimistic outcome’ figure of re-homing would reduce the net present value of advertising to be negative. Further, the cost benefit analysis also assumed that increased government funding would be made available to animal welfare and rehoming organisations to support more adoptions, but did not estimate or include this cost when calculating the net present value of advertising.

There were two factual inaccuracies in key messages used for Phase 1 advertisements

Section 8(2) of the Act requires the head of a government agency to certify that the proposed campaign ‘contains accurate information’. The Secretary of the Department of Justice signed the compliance certificate on 29 July 2016, before advertisements commenced.

We examined the accuracy of factual claims in this advertising campaign, by comparing the key statements to the report of Special Commission of Inquiry into the Greyhound Racing Industry (the Commissioner report). The Commissioner report was quoted by the NSW Government as the basis for its policy to transition the greyhound racing industry to closure.

We identified that two of the key statements used in Phase 1 advertisements to support the animal welfare reasons for industry closure were inaccurate (Exhibit 7).

Appendix one - Responses from agencies

Appendix two - About the campaigns

Appendix three - About the Audit

Appendix four - Performance Auditing

Parliamentary reference - Report number #294 - released 2 November 2017

Audit progress

Sector

Year

Report type

Topic

Reports

This report offers insights into internal controls and governance in the NSW public sector

The focus of the report has changed since last year

Agencies selected for the volume account for 95 per cent of the state's expenditure

OLG’s benchmarks for financial performance and sustainability

The Office of Local Government prescribes performance indicators for council reporting

Three rural councils did not meet three of the audited OLG benchmarks

Asset overview

1. Overall trends

2. Information Technology

3. Asset Management

4. Governance

5. Ethics and Conduct

6. Risk Management

This new report offers strategic insight on the public sector as a whole

2.1 IT security

2.2 Cyber Security

2.3 Other IT systems

3.1 Capital investment

3.2 Capital projects

3.3. Asset disposals

4.1 Governance arrangements

4.2 Shared services

5.1 Ethical framework

5.2 Potential conflicts of interest

6.1 Risk management maturity

6.2 Risk management elements

Conclusion

No breach of specific prohibitions in the Act

Request for quotes to design advertisement did not reflect the full scope required

No breach of specific prohibitions in the Act

Animal welfare concerns were identified as the reason for urgent advertising

Phase 1 advertisements did not focus on the urgent needs

Peer review process limited to influencing second phase of advertisements

The department could not demonstrate value for money was achieved for creative work

Short notice did not allow for cost-efficient media booking for all phases

The department used a wide public campaign for a narrow target audience

No demonstrated basis for use of confronting imagery and provocative language

Not all Phase 1 radio advertisements clearly identified that they were authorised by the New South Wales Government

The department’s cost benefit analysis did not consider alternatives to advertising

There were two factual inaccuracies in key messages used for Phase 1 advertisements