The Auditor-General for New South Wales, Margaret Crawford, released her report today on the Industry cluster. The report focuses on key observations and findings from the most recent financial audits of agencies in the cluster. Cluster agencies received unqualified audit opinions for 41 out of the 47 financial statements presented for audit for 30 June 2018. Six audits remain incomplete. 'While it is pleasing to note that unqualified audit opinions have been issued, the timeliness of financial reporting needs to be improved through better oversight, prompt resolution of issues, and an increased focus on early close procedures', the Auditor-General said.

This report analyses the results of our audits of financial statements of the Industry cluster for the year ended 30 June 2018. The table below summarises our key observations.

This report provides parliament and other users of the Industry cluster agencies' financial statements with the results of our audits, including our observations, analysis, conclusions and recommendations in the following areas:

• financial reporting
• audit observations
• service delivery.

The Department of Industry (the Department) is the lead agency in a cluster of 50 agencies. Other significant agencies in the cluster include Local Land Services, New South Wales Rural Assistance Authority, Technical and Further Education Commission (TAFE NSW), various sporting agencies, Forestry Corporation NSW and Water NSW.

The cluster:

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 Industry cluster for 2018.
 

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 Industry cluster for 2018
• the areas of focus identified in the Audit Office 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.

Agencies in the Industry cluster provide services across a wide variety of areas. This chapter outlines certain service delivery outcomes for 2017–18 for the Industry cluster. It provides important contextual information about the cluster's operation, but the data on activity levels and performance is provided by Cluster agencies. The Audit Office does not have a specific mandate to audit performance information. Accordingly, the information in this chapter is unaudited. 

In our recent performance audit, Progress and measurement of Premier's Priorities, we identified 12 limitations of performance measurement and performance data. We recommended that the Department of Premier and Cabinet ensure that processes to check and verify data are in place for all agency data sources.

Appendix one - List of 2018 recommendations

Appendix two - Status of 2017 recommendations  

Appendix three - Cluster agencies

Appendix four - Timeliness of financial reporting

Appendix five - Management letter findings

Appendix six - Financial audit reporting

Appendix seven - Financial analysis

The Auditor-General, Margaret Crawford released her report today on NSW Justice cluster agencies. The report focuses on key observations and findings from the most recent financial audits of law and order and emergency services agencies. We are pleased to report that unqualified audit opinions were issued for all Justice agencies’ financial statements.

This report analyses the results of the financial statement audits of the Justice cluster for the year ended 30 June 2018. The table below summarises our key observations.

This report provides parliament and other users of the Justice cluster agencies' financial statements with the results of our audits, including our observations, analysis, conclusions and recommendations in the following areas:

• financial reporting
• audit observations
• service delivery.

The Justice cluster delivers legal, law enforcement and emergency services across the state and plays the lead role in commemorating the legacy of servicemen and women. 

The commentary in this report covers the following cluster agencies.

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

This chapter outlines our audit observations, conclusions and recommendations related to the financial reporting of agencies in the Justice cluster for 2018.

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 Justice 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.

Government outcomes can be achieved through effective delivery of the right mix of services, whether from the public, private or not for profit sectors. Service delivery reform will be most successful if there is clear accountability for service delivery outcomes, decisions are aligned to strategic direction and performance is monitored and evaluated.

The Justice cluster is an integrated cluster with key service delivery inter-dependencies. Achieving state priorities and ensuring communities are safe requires both upstream and downstream agencies to be appropriately resourced. This is a delicate balance. Increases in frontline policing can subsequently impact the court system as more offences are identified. More convictions can in turn increase prison overcrowding and limit the opportunities for inmate rehabilitation.

Failure to successfully rehabilitate prisoners and prevent reoffending could impact future police resourcing. 

This chapter outlines certain service delivery outcomes for 2017–18. The data on activity levels and performance is provided by Cluster agencies. The Audit Office does not have a specific mandate to audit performance information. Accordingly, the information in this chapter is unaudited. 

We report this information on service delivery to provide additional context to understand the operations of the Justice cluster and to collate and present service information on law and order and emergency services agencies in one report. 

In our recent performance audit, Progress and measurement of the Premier's Priorities, we identified 12 limitations of performance measurement and performance data. We recommended the Department of Premier and Cabinet ensure that processes to check and verify data are in place for all agency data sources.

Appendix one - List of 2018 recommendations

Appendix two - Status of 2017 recommendations

Appendix three - Cluster agencies

Appendix four - Financial data

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:

1. Internal control trends
2. Information technology (IT), including IT vendor management
3. Transparency and performance reporting
4. Management of purchasing cards and taxis
5. 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.

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.

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.

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.

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.

Appendix one - List of 2018 recommendations

Appendix two - Status of 2017 recommendations

Appendix three - Cluster agencies

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.

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:

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?

Changes in revenues compared to 2016-17

Dividends and distributions			Due to:  Increases in dividends from Sydney Water ($255 million), Water NSW ($60 million) and the Port Authority of NSW ($195 million). An increase in the dividend from Landcom ($200 million) as profits retained in prior years to fund certain projects were not spent. Returns from investments in managed funds increased by $649 million as the State increased the value of its investment using proceeds from the lease of Ausgrid and Endeavour Energy assets
2016-2017	Change	2017-2018
2.4b	+1.3b	3.7b

Taxation			Due to:  Increases in land tax ($564 million) driven by land valuations used to calculate land tax assessments. Increases in payroll tax ($553 million) and other taxes ($419 million). Stamp duty receipts were $1.0 billion lower largely due to additional duty in the prior year of $718 million relating to the lease of Ausgrid and Endeavour Energy assets.
2016-2017	Change	2017-2018
30.8b	+537m	31.3b

Grants & Subsidies			Due to: Increase in the receipt of general purpose grants relating to GST collected by the Australian Government ($753 million). Decreases in national partnerships and specific purpose payments received from the Australian Government ($305 million), mainly due to the timing of major road projects. An increase in Commonwealth Health Reform funding ($338 million). An increase in grants associated with the National Education Reform Agreement for Education ($233 million).
2016-2017	Change	2017-2018
31.4b	+509m	31.9b

Sale of Goods and services			Includes:  Increases in education revenue ($133 million). Higher fees for services in transport to produce property plant and equipment ($89 million).
2016-2017	Change	2017-2018
8.2b	+349m	8.5b

Changes to expenses compared to 2016-17

Recurrent Grants & Subsidies			Due to:  A $613 million increase in grants for the delivery of aging, disability (including NDIS), homecare, community and public housing services. Increase in grants paid to local government sector ($342 million).
2016-2017	Change	2017-2018
12.6b	+1.3b	13.9b

Employee costs			Due to:  Wage inflation increases ($701 million). Increased workers' compensation and long service leave costs ($337 million).
2016-2017	Change	2017-2018
34.9b	+1.2b	36.1b

Other operating expenses			Includes:  Increased expenditure by Transport for NSW ($283 million) for major rail projects and the new rail timetable. Increased expenditure by the Department of Education ($165 million) to address the maintenance backlog, and higher school operating expenses.
2016-2017	Change	2017-2018
18.3b	+1.4b	19.7b
6.8b	+103m	6.9b	Other expenses

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.

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.

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.
 

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.

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

Appendix one - Prescribed entities

Appendix two - Legal opinions

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.

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. 

Appendix one - Response from agencies

Appendix two - List of selected agencies

Appendix three - Performance auditing

In 2012, governments across Australia entered into the National Partnership Agreement on Skills Reform. Under the National Partnership Agreement, the Australian Government provided incentive payments to States and Territories to move towards a more contestable Vocational Education and Training (VET) market. The aim of the National Partnership Agreement was to foster a more accessible, transparent, efficient and high quality training sector that is responsive to the needs of students and industry. 

The New South Wales Government introduced the Smart and Skilled program in response to the National Partnership Agreement. Through Smart and Skilled, students can choose a vocational course from a list of approved qualifications and training providers. Students pay the same fee for their chosen qualification regardless of the selected training provider and the government covers the gap between the student fee and the fixed price of the qualification through a subsidy paid to their training provider. 

Smart and Skilled commenced in January 2015, with the then Department of Education and Communities having primary responsibility for its implementation. Since July 2015, the NSW Department of Industry (the Department) has been responsible for VET in New South Wales and the implementation of Smart and Skilled. 

The NSW Skills Board, comprising nine part-time members appointed by the Minister for Skills, provides independent strategic advice on VET reform and funding. In line with most other States and Territories, the Department maintains a 'Skills List' which contains government subsidised qualifications to address identified priority skill needs in New South Wales.

This audit assessed the effectiveness of the Department in identifying, prioritising, and aligning course subsidies to the skill needs of NSW. To do this we examined whether:

• the Department effectively identifies and prioritises present and future skill needs 
• Smart and Skilled funding is aligned with the priority skill areas
• skill needs and available VET courses are effectively communicated to potential participants and training providers.

Smart and Skilled is a relatively new and complex program, and is being delivered in the context of significant reform to VET nationally and in New South Wales. A large scale government funded contestable market was not present in the VET sector in New South Wales before the introduction of Smart and Skilled. This audit's findings should be considered in that context.
 

Appendix one - Response from agency

Appendix two - About the audit

Appendix three - Performance auditing

Parliamentary reference - Report number #305 - released 26 July 2018

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.

Appendix one - Response from agencies

Appendix two - Survey results

Appendix three - About the audit

Appendix four - Performance auditing

Parliamentary reference - Report number #298 - released 23 April 2018

The quality of financial reporting in the cluster continues to improve with the number of reported misstatements identified during audit decreasing over the past five years. The audits resulted in unqualified audit opinions on the financial statements of all cluster agencies for the year ended 30 June 2014, with the exception of the State Emergency Service.
 

For the second consecutive year, the General Government and Total State Sector Accounts received an unqualified auditor’s opinion following more than a decade of qualifications. The quality and timeliness of financial reporting across the NSW public sector has continued to improve. Compared to previous years, there were fewer errors in agencies’ 2013–14 financial statements submitted for audit and used for whole-of-government financial reporting.

NSW Government agencies with large landholdings need to better manage their contaminated sites.

When contaminated sites are reported to the Environmental Protection Authority (EPA) there are long delays in assessing the extent of contamination. The EPA also lacks the management controls to ensure that all significantly contaminated sites are actively monitored and key milestones for remediation are met.

Parliamentary reference - Report number #245 - released 10 July 2014