Reports
Health 2018
The Auditor-General, Margaret Crawford, released a report today on the New South Wales Health Cluster. The report focuses on key observations and findings from the most recent financial audits of thirty health entities in New South Wales. Unqualified audit opinions were issued for all health entities’ financial statements. However, assessing the fair value of health entities’ property, plant and equipment created challenges, particularly for local health districts.
This report analyses the results of our audits of financial statements of the Health cluster for the year ended 30 June 2018. The table below summarises our key observations.
This report provides parliament and other users of the Health cluster’s financial statements with the results of our audits, our observations, analysis, conclusions and recommendations in the following areas:
- financial reporting
- audit observations.
Financial reporting is an important element of good governance. Confidence and transparency in public sector decision making are enhanced when financial reporting is accurate and timely.
This chapter outlines our audit observations related to the financial reporting of agencies in the Health cluster for 2018.
| Observation | Conclusions and recommendations |
| 2.1 Quality of financial reporting | |
| We issued unqualified audit opinions for all health entities. We identified fewer misstatements than last year, but they were more significant. | The Ministry of Health sets significant accounting policies centrally and provides a template for the preparation of health entities' financial statements. These processes promote consistent quality in the financial reports of health entities. Significant errors identified in 2017–18 predominantly related to revaluations of property, plant and equipment. |
| 2.2 Timeliness of financial reporting | |
| Entities' continue to bring forward financial statement procedures to 31 March where possible. All entities submitted their financial statements on time. | Health entities continue to meet statutory deadlines. |
| 2.3 Financial and sustainability analysis | |
| NSW Health recorded an operating surplus of $377.7 million in 2017–18. Fewer health entities recorded operating deficits in 2017–18. | The operating surplus was $123 million less than budgeted, and $29.0 million less than the surplus recorded for 2016–17. NSW Health budgets for surpluses to help it invest in new facilities, upgrades and redevelopments. |
| Expenses across NSW Health increased by 5.5 per cent in 2017–18 (4.4 per cent in 2016–17). | The expense growth rate for NSW Health is 0.5 percentage points lower than the projected long-term annual expense growth rate of six per cent. |
| The capital replacement ratio (investment in new assets divided by depreciation) for NSW Health is 2.0. | NSW Health's high capital replacement ratios for ten health entities in 2017–18 is driven by its substantial ongoing investment in hospitals and other assets. |
| 2.4 Performance against budget | |
| This year, four out of 17 (ten out of 17 in 2016–17) local health districts and specialty networks reported a budget variance outside of performance expectations. | Health entities' budgets are revised frequently throughout the year by the Ministry of Health. In 2017–18 the budgeted expenses of health entities were incrementally increased throughout the year by a total of $807 million. The Ministry of Health expects health entities not to exceed their revised budgeted expenses by more than 0.5 per cent. Four of the local health districts did not meet this requirement. |
| 2.5 Financial impact of health entity employees | |
| Thirty-four per cent of NSW Health’s workforce has excess annual leave balances, compared to 35 per cent in 2016–17. |
Managing excess annual leave continues to challenge health entities.
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| The Ambulance Service of NSW reported an average sick leave rate of 88.9 hours per FTE in 2017–18, an increase from 85.2 hours per FTE in 2016–17. | Managing sick leave continues to challenge the Ambulance Service of NSW. Recommendation: The Ambulance Service of NSW should further implement and monitor targeted human resource strategies to address the high rates of sick leave taken. |
| The Ambulance Service of NSW reported overtime payments of $74.8 million ($74.6 million in 2016–17). This continues to be significantly higher than other health entities. | Recommendation: The Ambulance Service of NSW should further review the effectiveness of its rostering practices to identify strategies to reduce excessive overtime payments. |
| Weak timesheet approval controls mean unapproved employee timesheets continue to be a problem for health entities. | Recommendation: Health entities should, as part of the benefits realisation of HealthRoster, continue to rectify time and leave recording control weaknesses, to reduce the risk of timesheet errors and fraud. |
Appropriate financial controls help ensure the efficient and effective use of resources and administration of agency policies. They are essential for quality and timely decision making.
This chapter outlines our observations and insights from:
- our financial statement audits of agencies in the Health cluster for 2018
- the areas of focus identified in the Audit Office annual work program.
The Audit Office Annual Work Program provides a summary of all audits to be conducted within the proposed time period as well as detailed information on the areas of focus for each of the NSW Government clusters.
| Observation | Conclusions and recommendations |
| 3.1 Internal control deficiencies | |
| The number of internal control deficiencies decreased. However, almost a quarter of control deficiencies are repeat issues and over a quarter relate to managing employees' leave and time recording. | Control deficiencies that relate to managing employees' leave, employees' time recording or information system limitations can be difficult for entities to resolve in a timely manner. Nonetheless, the longer the deficiency remains unaddressed the more likely the vulnerability will contribute to error or fraud. |
| 3.2 Audit Office annual work program | |
| Revaluation of property, plant and equipment | |
| Three health entities did not effectively oversee the asset revaluations performed by the experts they engaged in 2017–18. All three entities made material adjustments to their draft financial statements. | Valuation of health property, plant and equipment is complex and subjective. Health entities and the Ministry of Health rely on the experts they engage, but needed to do more to review and oversee their work. |
| Capital projects | |
| NSW Health manages a significant capital program ($1.7 billion in 2017–18). We noted significant revisions to completion dates and budgeted costs for some projects. | NSW Health complied with approval requirements for business cases, initial budgets and budget variations for the projects we reviewed. For some projects revisions to planned completion dates and budgeted costs impact on the ability to assess the timeliness and cost effectiveness of projects. Combining stages of projects for simplicity of reporting, as a project progresses also makes it difficult to see how the project is tracking to the original plan. |
| Asset maintenance | |
| The five health entities with the highest maintenance expense used different methods to estimate budgets for maintenance expense. Entities that calculated maintenance budgets by applying CPI factors to prior year expenses were less likely to deliver within budget. | Maintenance budgets are more accurately predicted when estimates are made of expected costs and prepared with the input of asset maintenance staff. |
| Two of the five entities recorded significantly higher unplanned maintenance expenditure. Planned maintenance expenditure for these entities was lower than other entities. |
The entities plan to address this by performing condition audits of their assets, increasing planned maintenance and replacing assets. |
| All five of the entities were using assets that have been fully depreciated. The replacement cost of each entities' fully depreciated assets represented between 3–7 per cent total replacement cost. | While entities are now regularly reassessing the useful lives of their assets, they continue to use some assets that were fully depreciated prior to the implementation of these processes. |
Internal Controls and Governance 2018
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:
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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:
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| 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. |
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Performance management 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:
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Transitioning services 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:
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. |
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User access administration
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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:
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| 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 | |
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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. |
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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:
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| 4.2 Reporting on reports | |
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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. |
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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:
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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:
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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:
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Detective controls 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:
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| 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:
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Conclusion: Agencies can promote savings and provide more options to staff where their taxi use policies:
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| 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 | |
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Prevention systems 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:
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| 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 |
State Finances 2018
Pursuant to the Public Finance and Audit Act 1983, I present my Report on State Finances 2018.
I am pleased to once again report that I issued a clear audit opinion on the State’s consolidated financial statements. This demonstrates the Government’s focus on preparing high quality information on the State’s financial position and performance for use by stakeholders.
However, there are two key areas I would like to see addressed to further support the preparation of the State’s financial statements.
Firstly, some complex accounting matters are not being resolved until late in the financial reporting cycle. This has contributed to an increase in the number of errors in the financial statements key agencies are submitting for audit, particularly around assessing the value of physical assets. Better planning and earlier resolution of these matters would lead to more efficient processes.
Secondly, the State needs to implement five new accounting standards over the next two years. Agencies will need to devote significant resources and effort to collect the necessary information and assess the impact at the whole of government level. I will work with Treasury and relevant agencies to help them improve quality assurance controls over their financial reporting.
Throughout 2017-18 my office worked with Treasury on reforms to improve financial governance, budgeting and reporting arrangements across the sector.
The Government Sector Finance Bill 2018 passed both houses of Parliament in June 2018. However, the Legislative Council returned other proposed changes to the Public Finance and Audit Act 1983 to the Legislative Assembly for further consideration. Most of these changes relate to the Public Accounts Committee. At the time of writing, the cognate Bill had not been debated.
The budget result was a $4.2 billion surplus. The consolidated financial statements at 30 June 2018 do not reflect the sale of 51 per cent of the State’s investment in Sydney Motorway Corporation for which it received $9.3 billion. The sale was announced on 31 August 2018.
Finally, I would like to thank the staff of Treasury for the way they approached the audit. Our partnership is critical to ensuring the quality of financial management and reporting.
Margaret Crawford
Auditor-General
19 October 2018
The State's financial statements given a clear audit opinion
Timely and accurate financial reporting enables informed decision making, effective management of public funds and enhances public accountability.
Since the introduction of mandatory ‘early close procedures’ in 2011-12, the number of significant errors in financial statements of agencies had fallen largely due to identifying and resolving complex accounting issues early.
In 2016-17, Treasury narrowed the scope of mandatory procedures to focus on physical asset valuations and pro-forma financial statements. Despite being broadened for 2017-18, we have observed an increase in the number of errors in agency financial statements.
In 2017-18, twenty-three errors exceeding $20 million were found in agencies’ financial statements that make up the State’s consolidated financial statements. This compares to only five in 2015-16.
The errors identified this year were the result of:
- incorrectly applying Australian Accounting Standards
- deficiencies in assessing the value of physical assets
- using inappropriate and inaccurate assumptions when measuring liabilities
- inaccurately reflecting inter-agency payables and receivables.
Quality financial reporting would be enhanced by responding to key accounting issues as soon as they are identified, and preparing accounting position papers for consideration by Treasury, agency Audit and Risk Committees and the Audit Office.
Key accounting matters addressed by the State in 2017-18.
Restatement of some of the State’s previously reported asset and liability values.
The state corrected the previously reported values of some long-term liabilities ($2 billion).
Accounting standards require the State to measure its long-term liabilities at the best estimate of the expenditures required to settle the obligations. The affected liabilities include claims liabilities of the Lifetime Care and Support Authority of NSW and the NSW Self Insurance Corporation, and scheme liabilities of the Long Service Corporation. The liabilities are adjusted by what is referred to as the ‘discount rate’ to reflect the decreasing value of money over time.
In the past, agencies used a variety of rates to discount these liabilities. Some liabilities were discounted using the estimated long-term fair value of 10-year TCorp bond yields while others were discounted using the expected
return on investments. These discount rates did not comply with the requirements of Australian Accounting Standards and underestimated liabilities by $2.0 billion.
In 2017-18, the State assessed the discount rates previously used in the Sector. It determined the market yield on Commonwealth Bonds best met the Accounting Standard requirements and used this rate to discount similar liabilities in relevant agencies. This resulted in a $2.0 billion increase in the previously reported values of these liabilities and a similar decrease in retained earnings at 1 July 2016.
The State corrected previously reported values of certain Library assets ($1.1 billion).The value of the Pictorial Collection of the Library Council of NSW (the Library) was reassessed at 31 January 2018. During the valuation process the Library identified three errors in the 2015 valuations which overstated the previously reported asset values. The errors included:
This resulted in a $1.1 billion decrease in previously reported asset values and a corresponding decrease in the asset revaluation reserve at 1 July 2016. |
Information system limitations continue at TAFE NSW.TAFE NSW has experienced ongoing issues with its student administration system.TAFE NSW has again implemented additional processes to verify the accuracy and completeness of revenue from student fees. TAFE NSW expects to spend up to $89 million on a new information system to address these issues. Modules of the new student enrolment system are planned to be in place by May 2019 |
Risks to the quality and timeliness of financial reporting.
Challenges associated with valuing the State's physical assets.
When we audit financial statements we focus on areas we consider higher risk. These areas often require the use of estimates and judgements.
The valuation of the State’s physical assets is one such area. Fair value estimates are inherently complex and sensitive to assumptions and judgements. In the public sector, this may be exacerbated by the unique nature of its assets, such as land under roads, preserved plant specimens, cultural collections and other heritage assets.
In 2017-18, valuations of physical assets added $24.5 billion to the value of the State’s balance sheet. These assets are now valued at $339.2 billion. Our audits of these valuations identified:
The Library Council of NSW had three errors in the methodology previously used to value their pictorial assets ($1.1 billion error). |
The Royal Botanic Gardens and Domain Trust did not previously recognise a value for their Herbarium assets ($284 million error). |
Some revaluations within the Ministry of Health did not meet the requirements of Australian Accounting Standards or Treasury requirements ($159 million error). |
The Department of Justice used an incorrect valuation
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Some important matters agencies should consider when planning/conducting asset valuations include:
STARTING OUT
- Planning is important
- Most effective revaluations include early engagement with all stakeholders, including auditors.
- Determine who needs to be involved and advised of progress with the revaluation – e.g. finance, internal audit, audit and risk committee.
- Ensure asset registers are complete and there is evidence to demonstrate the agency controls the assets.
- The effective date of the valuation can be any date after the financial year commences, but well before year end.
MANAGEMENT'S ROLE
- For large mass valuations consider using a suitable project management methodology to ensure the process remains ‘on track’ with sufficient oversight.
- Consider engaging an expert to perform the valuation, but maintain responsibility for the outcomes. Ensure the outcomes are reasonable and quality review the results, including the appropriateness of inputs and key assumptions.
- Compare pre and post valuation results on an individual asset basis. Where changes are significant and/or unexpected, document explanations from the valuer.
- Start revaluations early so they are completed by early close (around March). The timetable must allow time for a quality review of results and for the results to be recorded in the financial records.
- Revaluation workpapers must include the revaluation source data provided to the valuer and a reconciliation of the source data to the general ledger.
USING EXPERTS
- The terms of engagement should be documented in an engagement letter, which clearly details the proposed valuation methodology. It’s important the valuer knows what is required from a policy perspective and clearly understands the accounting framework used to prepare the financial statements.
- Valuation reports should detail the key assumptions used, explain why the valuation approach was adopted and how the use of relevant observable input was maximised.
- Valuation reports should clearly differentiate between assets revalued using a cost approach and those using an income or market approach. They should explain why the approach used was the most relevant for the asset type.
- Consider using representative/statistical sampling for mass valuations and determine the extent of physical inspections that may be required.
- If a sampling technique is used, it should provide sufficient confidence that the sample is representative of the population.
- Significant judgements should be supported by relevant benchmark data or other analysis and observations. A common example in the public sector is to discount asset values to reflect restrictions on use.
- Ensure the valuer has considered the age and condition of the assets, and heritage/cultural aspects and/or other special factors.
WHAT ABOUT INTERVENING YEARS?
- Perform revaluations with sufficient regularity to ensure asset carrying values in the financial statements reflect fair value.
- Indexation alone is not normally a substitute for a full revaluation. A full revaluation may be needed to accurately establish fair values if asset values move significantly when indices are applied to them.
- Where indexation is used between full revaluations, the indices should be appropriate for the type of asset being assessed.
- Indexing can be unreliable in assessing whether the fair value of assets has moved over time. For example, some assets are valued based on re- collection cost estimates, which may fall over time due to improved re-collection methods and technology.
COMMUNICATION
- For mass or complex valuations, key stakeholders, including auditors, should be involved at the scoping stage and invited to planning meetings with valuers.
- Management should meet with the auditors regularly to discuss progress and outcomes.
- When issues are identified, management should consult with and seek advice from Treasury.
The state will need to implement five new accounting standards over the next two years.
The State has started developing processes it considers necessary to effectively implement the requirements of five new accounting standards. The changes are significant and will impact the financial position and results of agencies and the State.
The new requirements increase the risk of errors in the financial statements. To minimise this risk, agencies will need to devote resources and effort to collect the necessary information and assess the impact of the accounting changes at the whole of government level.
Treasury is liaising with and obtaining information from agencies to assess the impact of the new standards at the whole of government level. Treasury is also liaising with other Treasuries throughout Australia on common implementation issues. To help agencies implement the new standards, Treasury is developing guidance, preparing position papers on proposed accounting treatments, and mandating options within the new standards that agencies need to adopt on transition.
A $4.2 billion surplus, $1.5 billion more than was budgeted
The Total State Sector comprises 304 entities controlled by NSW Government
The General Government Sector, which comprises 212 entities, generally provides goods and services funded centrally by the State.
The non-General Government Sector, which comprises 92 Government businesses, generally provides goods and services, such as water, electricity and financial services that consumers pay for directly.
A principal measure of a Government’s overall performance is its Net Operating Balance (Budget Result). This is the difference between the cost of General Government service delivery and the revenue earned to fund these sectors.
WHAT CHANGED FROM 2017 TO 2018?
$4.2b |
2017-18 General Government Budget Result |
Changes in revenues compared to 2016-17
 Dividends and distributions
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Due to:
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| 2016-2017 | Change | 2017-2018 | |
2.4b |
+1.3b |
3.7b |
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| Taxation
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Due to:
|
||
| 2016-2017 | Change | 2017-2018 | |
30.8b |
+537m |
31.3b |
|
 Grants & Subsidies
|
Due to:
|
||
| 2016-2017 | Change | 2017-2018 | |
31.4b |
+509m |
31.9b |
|
 Sale of Goods and services
|
Includes:
|
||
| 2016-2017 | Change | 2017-2018 | |
8.2b |
+349m |
8.5b |
|
5.5b |
-185m |
5.3b |
Other revenues |
Changes to expenses compared to 2016-17
| Recurrent Grants & Subsidies
|
Due to:
|
||
| 2016-2017 | Change | 2017-2018 | |
12.6b |
+1.3b |
13.9b |
|
 Employee costs
|
Due to:
|
||
| 2016-2017 | Change | 2017-2018 | |
34.9b |
+1.2b |
36.1b |
|
 Other operating expenses
|
Includes:
|
||
| 2016-2017 | Change | 2017-2018 | |
18.3b |
+1.4b |
19.7b |
|
6.8b |
+103m |
6.9b |
Other expenses |
$5.7b |
2016-17 General Government Budget Result |
The State maintained its AAA credit rating.
The object of the Fiscal Responsibility Act 2012 is to maintain the State’s AAA credit rating.
The Government manages NSW’s finances in alignment with the Fiscal Responsibility Act 2012 (the Act).
The Act establishes the framework for fiscal responsibility and the strategy to protect the State’s AAA credit rating and service delivery
to the people of NSW.
The legislation sets out targets and principles for financial management to achieve this.
New South Wales has credit ratings of AAA/ Stable from Standard & Poor’s and Aaa/ Stable from Moody’s Investors Service.
THE FISCAL TARGETS FOR ACHIEVING THIS OBJECTIVE ARE:
General Government annual expenditure growth is lower than long term average revenue growth.
General Government expenditure grew by 5.4 per cent in 2017-18. This was lower than the long-term revenue growth rate of 5.6 per cent.
Eliminating unfunded superannuation liabilities by 2030.
The Act sets a target to eliminate unfunded superannuation liabilities by 2030.
The State’s funding plan is to contribute amounts escalated by five per cent each year so the schemes will be fully funded by 2030. In 2017-18, the State made employer contributions of $1.7 billion, which is largely consistent with contributions over the past five years. Treasury expects superannuation liabilities will be fully funded by 2030 based on the funding program at the last triennial review (December 2015).
For fiscal responsibility purposes, the State uses AASB 1056: Superannuation Entities. This standard discounts superannuation liabilities using the expected return on assets backing the liability.
Using this method, the State’s unfunded superannuation liability was $14.0 billion at 30 June 2018 ($15.0 billion at 30 June 2017). The unfunded liability is $3.4 billion less than it was when the Act was introduced.
Revenues increased by $3.2 billion to $86.7 billion in 2017-18.
Revenues were underpinned by growth in taxation and Australian Government grant revenues, but stamp duties fell.
Tax revenue for the Total State Sector increased by $746 million, or 2.5 per cent compared to 2016-17, primarily due to a:
- $582 million increase in land tax from growth in land values
- $562 million increase in payroll tax from NSW employment and wages growth
- $1 billion decrease in stamp duty due to lower than expected growth in property market transactions, volumes and prices. In 2016-17, stamp duty included $718 million from the leases of Ausgrid and Endeavour Energy assets.
The State expects total stamp duties will fall to $9.5 billion in 2018-19, a decrease of almost $2.0 billion from 2016-17.
The State received Australian Government grants and subsidies of $30.9 billion in 2017-18.
The State received $444 million more in grants and subsidies from the Australian Government than it did in 2016-17. This was due to increases in GST revenues ($753 million) and special purpose payments ($683 million).
There was a decrease in National Partnership payments ($992 million), mainly due to the timing of major road projects including the Pacific Highway (Woolgoolga to Ballina), WestConnex and Western Sydney Infrastructure Program.
In 2017-18, sales of goods and services were $1.1 billion higher than in 2016-17. This reflected increased transaction revenue at Sydney Water ($139 million), the Department of Education ($133 million), WestConnex ($145 million), Department of Finance, Services and Innovation ($111 million) and Sydney Trains ($83 million).
Other dividends and distributions were $803 million higher than in 2016-17 mainly reflecting higher investment returns on TCorp investments.
$ |
83.5b |
+3.9% |
86.7b |
Total Revenue |
Key revenues include:
| 2016-2017 | Change% | 2017-2018 | ||
 |
35.4b |
+2.8 |
36.3b |
Taxation, Fees, Fines, and other |
|
31.4b |
+1.6 |
31.9b |
Grants & Subsidies |
|
14.1b |
+8.1 |
15.2b |
Sale of Goods and Services |
Expenses increased $4.9 billion to $84.2 billion in 2017-18
Overall expenses increased 6.1 per cent compared to 2016-17. Most of the increase was due to higher employee and operating costs.
$ |
79.3b |
+6.1% |
84.2b |
Total Expenses |
Salaries and wages increased by 3.6 per cent compared to 2016-17.
Salaries and wages increased to $31.1 billion from $30 billion. This was due to inflation linked salary and wage increases and a reported increase in front line staff.
The Government wages policy aims to limit growth in employee remuneration and other employee related costs to no more than 2.5 per cent per annum.
Operating expenses increased by 7.8 per cent from 2016-17.
Within operating expenses, payments for supplies, services and other expenses increased, in part, due to:
- increased costs of major rail projects, WestConnex, B-Line bus program and a new rail timetable
- addressing the maintenance backlog and higher school operating expenses of the Department of Education.
Key expenses include:
| 2016-2017 | Change% | 2017-2018 | ||
|
32.8b |
+3.8 |
34.1b |
Employee Expenses |
|
21.6b |
+7.8 |
23.3b |
Operating Costs |
|
9.7b |
+12.7 |
10.9b |
Grants & Subsidies |
 |
7.2b |
+6.6 |
7.6b |
Depreciation |
 |
4.6b |
+2.8 |
4.7b |
Superannuation Expense |
Health costs remain the highest expense of the State.
The Australian Bureau of Statistics introduced a revised Classification of the Function of Government Australia Framework (COFOG-A) effective 1 July 2017. This resulted in some re-classification of expenditure between purposes and now shows State expenses are highest in:
- Health (25.5 per cent)
- General Public Services (25.0 per cent)
- Education (19.6 per cent).
General Public Services includes the executive and legislative branches, financial affairs, public debt transactions and general public service transactions.
The graph highlights the annual expenditure by function and the value of assets to deliver those services.
Assets grew by $35.6 billion to $443 billion in 2017-18
Valuing the State’s physical assets.
The State had physical assets with a fair value of $339 billion at 30 June 2018. This includes land and buildings ($161.6b) and Infrastructure ($160.2b).
Our audits assess the reasonableness and appropriateness of assumptions used to value physical assets. This includes obtaining an understanding of the valuation methodologies used and judgements made. We also review the completeness of asset registers and the mathematical accuracy of valuation models.
Net movements between years include additions, disposals, depreciation and valuations. This year, revaluations of physical assets added $24.5 billion to the value of the State’s assets. This was mainly attributable to the following agencies:
- Department of Education - $8.5 billion
- Roads and Maritime Services - $7.4 billion.
The State’s financial assets increased by $308 million in 2017-18 ($27.5 billion in 2016-17).
In 2016-17, the significant increase in financial assets was primarily from the sale or lease of the following government assets and businesses:
- In June 2017, the Government leased 50.4 per cent of Endeavour Energy assets, which followed the long-term lease 50.4 per cent of Ausgrid’s assets in December 2016. The Government received proceeds of $24.0 billion from these transactions.
- A 35-year concession for providing titling and registry services, effective 30 June 2017, was granted to a private sector operator. The Government received $2.6 billion cash for the concession.
The Government implemented reforms relating to the use the State’s financial assets.
In 2017-18, the Asset and Liability Committee, which advises the Government on balance sheet management, recommended the following policy actions and frameworks to help manage the State’s financial risks and opportunities:
- expanding the scope of cash management reforms to give the State a whole-of-government view on the use of surplus funds. Treasury advises these reforms have centralised funds management of approximately $3.0 billion
- endorsing a new whole-of-government Foreign Exchange (FX) Risk Policy (effective 1 July 2018) to effectively manage the State’s FX risk
- expanding management of the State’s debt portfolio to minimise interest rate risks, reduce interest costs where possible, and extend the average weighted life of the General Government’s debt portfolio towards eight years
- endorsing establishment of a ‘sustainability bond’ program to further diversify and expand the State’s bond investor base and raise awareness of the Government’s social and environmental initiatives.
The State has established the NSW Generations Fund to maintain debt at sustainable levels.
The State established the NSW Generations Funds (NGF) in June 2018 to support debt retirement and to fund community-focused initiatives. The Government has indicated it will initially capitalise the NGF with $3.0 billion from its reserves.
The NSW Generations Funds Act 2018 requires an audit of each NSW Generations Fund by the Auditor- General (including a report by the Auditor-General on whether payments from the Funds have been made in accordance with the Act). The first audit of the fund will be for the period up to 30 June 2019.
$ |
407b |
+8.7% |
443b |
Total Assets |
Key assets include:
| 2016-2017 | Change% | 2017-2018 | ||
| Physical Assets | ||||
 |
147.0b |
+9.0 |
160.2b |
Infrastructure |
 |
143.4b |
+12.7 |
161.6b |
Land and Buildings |
| Financial Assets | ||||
 |
27.7b |
- 4.6 |
26.4b |
Equity investments |
|
20.6b |
- 5.2 |
19.5b |
Cash and Recievables |
|
40.5b |
+6.5 |
41.3b |
Investments and Placements |
Liabilities increased $5.1 billion to $189 billion in 2017-18
Valuing the State’s liabilities relies on actuarial assessments.
Nearly half of the State’s liabilities relate to its employees. They include unfunded superannuation, and employee benefits, such as long service and recreation leave.
Valuing these obligations involves complex estimation techniques and significant judgements. Small changes in assumptions can materially impact the values and the financial statements.
The State’s superannuation obligations fell $2.2 billion in 2017-18.
The State’s $56.4 billion unfunded superannuation liability represents obligations to past and present employees less the value of assets set aside to meet those obligations. The unfunded superannuation liability fell from $58.6 billion to $56.4 billion in 2017-18.
The State’s borrowings at 30 June 2018 were $700 million higher than they were at 30 June 2017.
The State’s borrowings totalled $71.3 billion at 30 June 2018.
TCorp issues bonds to raise funds for NSW Government agencies. These are actively traded in financial markets, which provides price transparency and liquidity to public sector borrowers and institutional investors. All TCorp bonds are guaranteed by the NSW Government.
The Government manages its debt liabilities through its balance sheet management strategy. The strategy extends to TCorp, which applies an active risk management strategy to the Government’s debt portfolio.
General Government Sector debt has been restructured by replacing shorter-term debt with longer-term debt. This lengthens the portfolio to match liabilities with the funding requirements for infrastructure assets.
$ |
184b |
+2.8% |
189b |
Total Liabilities |
Key liabilities include:
| 2016-2017 | Change% | 2017-2018 | ||
|
58.6b |
- 3.7 |
56.4b |
Unfunded Superannuation |
|
18.3b |
+4.7 |
19.1b |
Other Employee Benefits |
|
70.6b |
+1.0 |
71.3b |
Borrowings |
Procurement and reporting of consultancy services
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.
HealthRoster benefits realisation
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.
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
Managing risks in the NSW public sector: risk culture and capability
The Ministry of Health, NSW Fair Trading, NSW Police Force, and NSW Treasury Corporation are taking steps to strengthen their risk culture, according to a report released today by the Auditor-General, Margaret Crawford. 'Senior management communicates the importance of managing risk to their staff, and there are many examples of risk management being integrated into daily activities', the Auditor-General said.
We did find that three of the agencies we examined could strengthen their culture so that all employees feel comfortable speaking openly about risks. To support innovation, senior management could also do better at communicating to their staff the levels of risk they are willing to accept.
Effective risk management is essential to good governance, and supports staff at all levels to make informed judgements and decisions. At a time when government is encouraging innovation and exploring new service delivery models, effective risk management is about seizing opportunities as well as managing threats.
Over the past decade, governments and regulators around the world have increasingly turned their attention to risk culture. It is now widely accepted that organisational culture is a key element of risk management because it influences how people recognise and engage with risk. Neglecting this ‘soft’ side of risk management can prevent institutions from managing risks that threaten their success and lead to missed opportunities for change, improvement or innovation.
This audit assessed how effectively NSW Government agencies are building risk management capabilities and embedding a sound risk culture throughout their organisations. To do this we examined whether:
- agencies can demonstrate that senior management is committed to risk management
- information about risk is communicated effectively throughout agencies
- agencies are building risk management capabilities.
The audit examined four agencies: the Ministry of Health, the NSW Fair Trading function within the Department of Finance, Services and Innovation, NSW Police Force and NSW Treasury Corporation (TCorp). NSW Treasury was also included as the agency responsible for the NSW Government's risk management framework.
In assessing an agency’s risk culture, we focused on four key areas:
Executive sponsorship (tone at the top)
In the four agencies we reviewed, senior management is communicating the importance of managing risk. They have endorsed risk management frameworks and funded central functions tasked with overseeing risk management within their agencies.
That said, we found that three case study agencies do not measure their existing risk culture. Without clear measures of how employees identify and engage with risk, it is difficult for agencies to tell whether employee's behaviours are aligned with the 'tone' set by the executive and management.
For example, in some agencies we examined we found a disconnect between risk tolerances espoused by senior management and how these concepts were understood by staff.
Employee perceptions of risk management
Our survey of staff indicated that while senior leaders have communicated the importance of managing risk, more could be done to strengthen a culture of open communication so that all employees feel comfortable speaking openly about risks. We found that senior management could better communicate to their staff the levels of risk they should be willing to accept.
Integration of risk management into daily activities and links to decision-making
We found examples of risk management being integrated into daily activities. On the other hand, we also identified areas where risk management deviated from good practice. For example, we found that corporate risk registers are not consistently used as a tool to support decision-making.
Support and guidance to help staff manage risks
Most case study agencies are monitoring risk-related skills and knowledge of their workforce, but only one agency has addressed the gaps it identified. While agencies are providing risk management training, surveyed staff in three case study agencies reported that risk management training is not adequate.
NSW Treasury provides agencies with direction and guidance on risk management through policy and guidelines. In line with better practice, NSW Treasury's principles-based policy acknowledges that individual agencies are in a better position to understand their own risks and design risk management frameworks that address those risks. Nevertheless, there is scope for NSW Treasury to refine its guidance material to support a better risk culture in the NSW public sector.
Recommendation
By May 2019, NSW Treasury should:
- Review the scope of its risk management guidance, and identify additional guidance, training or activities to improve risk culture across the NSW public sector. This should focus on encouraging agency heads to form a view on the current risk culture in their agencies, identify desirable changes to that risk culture, and take steps to address those changes.
Appendix one - Response from agencies
Appendix three - About the audit
Appendix four - Performance auditing
Parliamentary reference - Report number #298 - released 23 April 2018
Mental Health Workforce
Compared to the mental health workforce in most other Australian states and territories, the NSW workforce is more concentrated in acute hospitals for adult patients and is marginally smaller for its population. NSW Health increased its mental health workforce between 2006 and 2009. It has improved the geographical distribution of clinicians across the state to more closely match need. It has also increased the number of staff working with younger and older mental health patients. These are positive achievements in a time of financial stringency.
Parliamentary reference - Report number #210 - released 16 December 2010
Volume Eleven 2010 focus on Health and Ports
The report includes comments on his financial audits of NSW Government health agencies for 2009-10. It found Health Support Services need to agree the respective responsibilities for implementing effective standardised internal controls with its customers and the Department. Control deficiencies have increased the risk that irregularities are not prevented or detected. The standardised internal controls should be implemented at Health Support Services and its customers as soon as practicable.
Helicopter Emergency Medical Service Contract
We found that the contract process was satisfactory. Ambulance data show that the performance of CHC is meeting contract requirements with the exception of the availability of the Wollongong helicopter. Ambulance’s ability to transport patients to the right hospital at the right time has improved. However the cost of the new Greater Sydney helicopter contract is three times higher than before.
Parliamentary reference - Report number #206 - released 22 September 2010
Volume One 2010
The report includes comments on his annual audit of entitlements paid to Members of NSW Parliament and financial audits of WorkCover, Justice Health, Waste Recycling Processing Corporation and some other NSW Government agencies.
In his audit the Auditor-General had called for a system to be developed to ensure accrued loyalty/reward benefits are used to reduce Members’ parliamentary business travel expenditure, rather than be forfeited when a Member leaves Parliament. He also called for better controls over the Logistic Support Allocation used for transport, communications, printing, stationery, office supplies and equipment.
