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Appendix one – Misstatements in financial statements submitted for audit

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14 December 2023

Published

Planning and Environment 2023

Planning

Environment

Industry

Asset valuation

Compliance

Financial reporting

Information technology

Infrastructure

Internal controls and governance

Management and administration

Risk

Shared services and collaboration

What this report is about

Results of the Planning and Environment portfolio financial statement audits for the year ended 30 June 2023.

The audit found

Unqualified audit opinions were issued for all completed Planning and Environment portfolio agencies. Seven audits are ongoing.

The Catholic Metropolitan Cemeteries Trust (CMCT) did not comply with its obligations under the Government Sector Finance Act 2018 (GSF Act) to prepare and submit financial statements for audit.

The Department of Planning and Environment (the department) has not yet provided their assessment of the financial reporting requirements for the 579 Category 2 Statutory Land Managers (SLMs) for 2022–23.

One-hundred-and-nineteen Commons Trusts are non-compliant with the GSF Act as they have not submitted their financial statements for audit.

We issued unqualified opinions on the Water Administration Ministerial Corporation's 2020–21, 2021–22 and 2022–23 financial statements.

The number of monetary misstatements identified in our audits decreased from 59 in 2021–22 to 51 in 2022–23, however the gross value of misstatements increased.

The key audit issues were

The former Resilience NSW and NSW Reconstruction Authority (the Authority) re-assessed the accounting implications arising from contractual agreements relating to temporary housing assets associated with the Northern Rivers Temporary Homes Program. This resulted in adjustments to recognise the associated assets and liabilities.

We continue to identify significant deficiencies in NSW Crown land information records.

The department has not been effective in addressing the differing practices for the financial reporting of rural firefighting equipment vested to councils under section 119 (2) of the Rural Fires Act 1997.

The number of findings across the portfolio reported to management increased from 132 in 2021–22 to 140 in 2022–23. Thirty per cent of issues were repeated from the prior year.

Seven high-risk issues were identified. These related to the findings outlined above, deficiencies in quality reviews of asset valuations, internal control processes and IT general controls.

The audit recommended

Recommendations were made to the department and portfolio agencies to address these deficiencies.

This report provides Parliament and other users of the Planning and Environment portfolio of agencies’ financial statements with the results of our audits, analysis, conclusions and recommendations in the following areas:

financial reporting
audit observations.

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

This chapter outlines our audit observations related to the financial reporting of agencies in the Planning and Environment portfolio of agencies (the portfolio) for 2023.

Section highlights

Unqualified audit opinions were issued on all completed 30 June 2023 financial statements audits of portfolio agencies. Seven audits are ongoing.
We have been unable to commence audits of the Catholic Metropolitan Cemeteries Trust (CMCT). NSW Treasury's position remains that the Catholic CMCT is a controlled entity of the State for financial reporting purposes. This means CMCT is a Government Sector Finance (GSF) agency and is obliged under Section 7.6 of the Government Sector Finance Act 2018 (GSF Act) to prepare financial statements and submit them to the Auditor-General for audit. To date, CMCT has not met its statutory obligations under the GSF Act.
The Department of Planning and Environment has not yet provided their assessment against the reporting exemption requirements in the Government Sector Finance Regulation 2018 (GSF Regulation) for the estimated 579 Category 2 Statutory Land Managers (SLMs) or 119 Commons Trusts for 2022–23 and no Category 2 SLM or Commons Trust has submitted its 2022–23

financial statements for audit. Consequently, the lack of compliance with reporting requirements by these 698 agencies presents a challenge to obtaining reliable financial data for these agencies for the purposes of consolidation to the Total State Sector Accounts.
The audits of the Water Administration Ministerial Corporation's (WAMC) financial statements for the years ended 30 June 2021 and 30 June 2022 were completed in June 2023 and unqualified audit opinions issued. The 30 June 2023 audit was completed and an unqualified audit opinion was issued on 12 October 2023.
The number of reported corrected misstatements decreased from 46 in 2021–22 to 36, however the gross value of misstatements increased from $73 million in 2021–22 to $491.8 million in 2022–23.
Portfolio agencies met the statutory deadline for submitting their 2022–23 early close financial statements and other mandatory procedures.
A change to the NSW paid parental leave scheme, effective October 2023, created a new legal obligation that needed to be recognised by impacted government agencies. Impact to the agencies' financial statements were not material.

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 portfolio.

Section highlights

The number of findings across the portfolio reported to management increased from 132 in 2021–22 to 140 in 2022–23 and 30% were repeat issues (34% in 2021–22).
The 2022–23 audits identified seven high-risk and 76 moderate risk issues across the portfolio. Four of the high-risk issues were repeat issues, one was a repeat issue with the risk rating reassessed to high-risk in the current year and two were new findings in 2022–23.
The former Resilience NSW and NSW Reconstruction Authority had previously assessed that they did not control the temporary housing assets associated with the administration of the Northern Rivers Temporary Homes Program, under relevant accounting standards. A re-assessment of the agreements was made subsequent to the submission of the Authority’s 2022–23 financial statements for audit, which determined that the Authority was the appropriate NSW Government agency to recognise these assets and associated liabilities not previously recognised by the Authority or the former Resilience NSW.
There continues to be significant deficiencies in Crown land records. The department should continue to implement their data strategy and action plan to ensure the Crown land database is complete and accurate.
Since 2017, the Audit Office has recommended that the department, through OLG should address the differing practices for the financial reporting of rural firefighting equipment vested to councils under section 119 (2) of the Rural Fires Act 1997. The department has not been effective in resolving this issue. In 2023, twenty-six of 108 completed audits of councils received qualified audit opinions on their 2023 financial statements (43 of 146 completed audits in 2022). Six councils had their qualifications for not recognising vested rural firefighting equipment removed in 2022–23.

Appendix one – Misstatements in financial statements submitted for audit

29 November 2023

Published

Regional NSW 2023

Industry

Environment

Planning

Whole of Government

Asset valuation

Compliance

Cyber security

Financial reporting

Fraud

Information technology

Infrastructure

Procurement

Regulation

Risk

Service delivery

Shared services and collaboration

What this report is about

Results of the Regional NSW financial statements audits for the year ended 30 June 2023.

What we found

Unqualified audit opinions were issued on all completed audits in the Regional NSW portfolio agencies.

The number of monetary misstatements identified in our audits increased from 28 in 2021–22 to 30 in 2022–23.

What the key issues were

Effective 1 July 2023, staff employed in the Northern Rivers Reconstruction Corporation Division of the Department of Regional NSW transferred to the NSW Reconstruction Authority Staff Agency.

The Regional NSW portfolio agencies were migrated into a new government wide enterprise resourcing planning system.

The total number of audit management letter findings across the portfolio of agencies decreased from 36 to 23.

A high risk matter was raised for the NSW Food Authority to improve the internal controls in the information technology environment including monitoring and managing privilege user access.

What we recommended

Local Land Services should prioritise completing all mandatory early close procedures.

Portfolio agencies should:

ensure any changes to employee entitlements are assessed for their potential financial statements impact under the relevant Australian Accounting Standards
prioritise and address internal control deficiencies identified in audit management letters.

This report provides Parliament and other users of the Regional NSW portfolio of agencies financial statements with the results of our audits, 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 Regional NSW portfolio of agencies (the portfolio) for 2023.

Section highlights

Unqualified audit opinions were issued on all completed 30 June 2023 financial statements audits of the portfolio agencies. Two audits are ongoing.
The total number of errors (including corrected and uncorrected) in the financial statements increased compared to the prior year.
Portfolio agencies met the statutory deadline for submitting their 2022–23 early close financial statements and other mandatory procedures.
Portfolio agencies continue to provide financial assistance to communities affected by natural disasters.
A change to the NSW paid parental leave scheme, effective October 2023, created a new legal obligation that needed to be recognised by impacted government agencies. Impact to the agencies' financial statements were not material.

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 Regional NSW portfolio.

Section highlights

The 2022–23 audits identified one high risk and nine moderate risk issues across the portfolio. Of these, one was a moderate risk repeat issue.
The total number of findings decreased from 36 to 23 which mainly related to deficiencies in internal controls.
The high risk matter relates to the monitoring and managing of privilege user access at NSW Food Authority.

Appendix one – Misstatements in financial statements submitted for audit

1 June 2023

Published

Natural disasters

Community Services

Environment

Finance

Local Government

Planning

Transport

Treasury

Whole of Government

Asset valuation

Compliance

Financial reporting

Infrastructure

Regulation

Risk

Service delivery

What this report is about

This report draws together the financial impact of natural disasters on agencies integral to the response and impact of natural disasters during 2021–22.

What we found

Over the 2021–22 financial year $1.4 billion from a budget of $1.9 billion was spent by the NSW Government in response to natural disasters.

Total expenses were less than the budget due to underspend in the following areas:

clean-up assistance, including council grants
anticipated temporary accommodation support
payments relating to the Northern Rivers Business Support scheme for small businesses.

Natural disaster events damaged council assets such as roads, bridges, waste collection centres and other facilities used to provide essential services. Additional staff, contractors and experts were engaged to restore and repair damaged assets and minimise disruption to service delivery.

At 30 June 2022, the estimated damage to council infrastructure assets totalled $349 million.

Over the first half of the 2022–23 financial year, councils experienced further damage to infrastructure assets due to natural disasters. NSW Government spending on natural disasters continued with a further $1.1 billion spent over this period.

Thirty-six councils did not identify climate change or natural disaster as a strategic risk despite 22 of these having at least one natural disaster during 2021–22.

Section highlights

$1.4 billion from a budget of $1.9 billion was spent by the NSW Government in response to natural disasters during 2021–22.
Budget underspent for temporary housing and small business support as lower than expected need.

Section highlights

83 local council areas were impacted by natural disasters during 2021–22, with 58 being impacted by more than one type of natural disaster.
$349 million damage to council infrastructure assets at 30 June 2022.

21 December 2022

Published

Transport and Infrastructure 2022

Transport

Asset valuation

Financial reporting

Information technology

Infrastructure

Management and administration

Procurement

What the report is about

Result of the Transport and Infrastructure cluster agencies' financial statement audits for the year ended 30 June 2022.

What we found

Unmodified audit opinions were issued for all Transport and Infrastructure cluster agencies' financial statements.

An 'other matter' paragraph was included in TAHE's Independent Auditor's Report for its 30 June 2022 financial statements which draws attention to Transport and Asset Holding Entity's (TAHE) reliance on government-funded customers.

We included an ‘emphasis of matter’ paragraph in the Independent Auditor’s Report for State Transit Authority of New South Wales’ (the authority) 30 June 2022 financial statements, which draws attention to the financial statements being prepared on a liquidation basis as the authority’s principal activities ceased operations on 3 April 2022.

What the key issues were

The 2021–22 audits identified five high-risk findings:

detailed business modelling to support returns from TAHE
valuation of assets at TAHE
control of assets at TAHE
accounting and valuation of tree assets at Centennial Park and Moore Park Trust and Parramatta Park Trust.

Access and licence fees - TAHE

Revised commercial agreements were signed between TAHE, the operators and Transport for NSW on 23 June 2022 to reflect increased access and licence fees detailed in the 18 December 2021 Heads of Agreement.

TAHE’s ability to generate the expected return of 2.5% based on the current modelling is heavily reliant on the government funding the public rail operators (TAHE's customers).

There are risks that:

TAHE will not be able to recontract for access and licence fees at a level that is consistent with current projections
future governments' funding to TAHE's key customers will not be sufficient to fund payment of access and licence fees at a level that is consistent with current projections
TAHE will be unable to grow its non-government revenues.

Valuation of assets - TAHE

Although TAHE's selected valuation of assets falls within an acceptable range, there remains a significant gap between what has been assessed as an acceptable range and TAHE's range.

What we recommended

Control of assets - TAHE

While we accepted TAHE’s position on control for the current year, NSW Treasury and TAHE should continue to monitor the risk that control of TAHE assets could change in future reporting periods. TAHE must continue to demonstrate control of its assets or the current accounting presentation would need to be reconsidered.

This report provides Parliament and other users of the Transport and Infrastructure cluster’s financial statements with the results of our audits, 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 Transport and Infrastructure cluster (the cluster) for 2022.

Section highlights

Unqualified audit opinions were issued on all Transport and Infrastructure cluster agencies' financial statements.
An 'Other Matter' paragraph was included in the Transport Asset Holding Entity of New South Wales' (TAHE) Independent Auditor's Report to draw attention to TAHE's reliance on government-funded customers.
An 'Emphasis of Matter' paragraph was included in the State Transit Authority of New South Wales' (the authority) Independent Auditor's Report to draw attention to management’s disclosures that State Transit Authority of New South Wales' financial statements for the year ended 30 June 2022 were prepared on a liquidation basis as the authority’s principal activities ceased operations on 3 April 2022.
While TAHE's valuation of assets at 30 June 2022 was within an acceptable range of valuation outcomes, there remained significant differences in assumptions used when compared with relevant market benchmarks.
Sydney Metro corrected two prior period errors of $1.5 billion and $51 million in accounting and valuation of assets, and double counting of assets capitalised in infrastructure as well as assets under construction respectively.

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 cluster.

Section highlights

The number of findings reported to management decreased from 87 in 2020–21 to 59 in 2021–22.
Repeat findings accounted for 54.2% of management letter points. Many repeat findings related to controls over payroll, including management of annual leave and processing of timesheets, management of conflicts of interests, weaknesses in controls over information technology user access administration and password management.
One new high-risk issue was identified in 2020–21, and four high-risk repeat issues remained.
The five high-risk issues arose from the audit in the cluster, with respect to:
- control over TAHE assets and operations (repeat)
- TAHE detailed business modelling to support returns (repeat)
- valuation of trees (repeat for Parramatta Park Trust and Centennial Park and Moore Park Trust)
- TAHE asset valuations.

Appendix one – Misstatements in financial statements submitted for audit

Copyright notice

15 December 2022

Published

Planning and Environment 2022

Environment

Industry

Local Government

Planning

Asset valuation

Compliance

Financial reporting

Information technology

Infrastructure

Internal controls and governance

Management and administration

Risk

What the report is about

Result of the Planning and Environment cluster agencies' financial statements audits for the year ended 30 June 2022.

What we found

Unmodified audit opinions were issued for all completed 30 June 2022 financial statements audits of cluster agencies. Seven audits are ongoing.

Disclaimed audit opinions were issued for the 2010–11 to 2015–16 financial statements of the Water Administration Ministerial Corporation (WAMC), as management was unable to certify that the financial statements exhibit a true and fair view of WAMC's financial position and financial performance.

Qualified audit opinions were issued for WAMC's 2016–17 and 2017–18 financial statements due to insufficient evidence to support the completeness and valuation of water meters infrastructure assets, the impairment of water meters, and the completeness of buildings at Nimmie Caira.

Unqualified audit opinions were issued for WAMC's 2018–19 and 2019–20 financial statements.

The Department of Planning and Environment (the department) assessed 45 Category 2 Statutory Land Managers (SLM) did not meet the reporting exemption criteria and therefore were required to prepare 2021–22 financial statements. None of these 45 Category 2 SLMs prepared and submitted their 30 June 2022 financial statements by the statutory reporting deadline.

All 119 Commons Trusts have never submitted their financial statements for audit as required by the Government Sector Finance Act 2018 (GSF Act).

NSW Treasury has confirmed that the Catholic Metropolitan Cemeteries Trust (CMCT) is a controlled entity of the State. To date, CMCT has not met its obligations to prepare financial statements under the GSF Act and it has not submitted financial statements to the Auditor-General for audit.

What the key issues were

Since 2017, the Audit Office has recommended the department address the different practices across the local government sector in accounting for rural firefighting equipment. Despite repeated recommendations, the department did little to resolve this issue. At the time of writing, 32 of 118 completed council audits received qualified audit opinions on their 30 June 2022 financial statements.

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

The department implemented the CrownTracker system as a replacement for CLID. The project was finalised in June 2022, but it has not achieved the intended outcomes.

Nine high-risk issues were identified across the cluster related to the findings outlined above and weaknesses in IT general controls, financial reporting, governance processes and internal controls.

Recommendations were made to address these deficiencies.

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

financial reporting
audit observations.

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

This chapter outlines our audit observations related to the financial reporting of agencies in the Planning and Environment cluster (the cluster) for 2022.

Section highlights

Unqualified audit opinions were issued for all completed 30 June 2022 financial statements audits of cluster agencies. Seven audits are ongoing. The audit of the Catholic Metropolitan Cemeteries Trust(CMCT) has not been able to commence, despite repeated requests to do so.
The audits of the Water Administration Ministerial Corporation's (WAMC) financial statements for the years ended 30 June 2011 to 30 June 2020 were completed in November 2022. These audits had been long outstanding due to insufficient records and evidence to support the transactions and balances of WAMC, particularly for the earlier years. In recent years, management commenced actions to improve WAMC's governance and financial management, and finalise the outstanding audits.

Disclaimed audit opinions were issued on the 2010–11 to 2015–16 financial statements as management was unable to certify that the financial statements exhibit a true and fair view of WAMC's financial position and financial performance.

Qualified audit opinions were issued for the 2016–17 and 2017–18 financial statements due to insufficient evidence to support the completeness and valuation of water meters infrastructure assets, the impairment of water meters, and the completeness of buildings at Nimmie Caira.

Unqualified audit opinions were issued for the 2018–19 and 2019–20 financial statements.

The 2020–21 and 2021–22 WAMC audits are in progress.
The Department of Planning and Environment (the department) assessed 45 Category 2 Statutory Land Managers (SLM) did not meet the reporting exemption criteria and therefore were required to prepare 2021–22 financial statements. None of these 45 Category 2 SLMs prepared and submitted their 30 June 2022 financial statements by the statutory reporting deadline.

All 119 Commons Trusts have never submitted their financial statements for audit as required by the Government Sector Finance Act 2018 (GSF Act).

The department needs to do more to ensure Category 2 SLMs and Commons Trusts meet their statutory reporting obligations.

The department and Category 2 SLMs should finalise their reporting exemption assessments earlier to allow sufficient time for the non-exempted SLMs to prepare and submit annual financial statements by the statutory reporting deadline.
NSW Treasury has met with the Catholic Metropolitan Cemeteries Trust (CMCT) to consider their perspective as part of confirming CMCT is a controlled entity of the State for the purposes of financial reporting. NSW Treasury has confirmed that the CMCT is a controlled entity of the State. This means that the CMCT is statutorily obliged under section 7.6 of the GSF Act to prepare financial statements in accordance with the GSF Act and Treasurer's Directions, and give them to the Auditor-General for audit pursuant to the Government Sector Audit Act 1983 (GSA Act). Section 34 of the GSA Act requires the Auditor-General to furnish an audit report on these financial statements.

The department wrote to CMCT to request it work with, and offer full assistance to, the Auditor-General in the exercise of her duties. To date, the CMCT has not met its obligations to prepare financial statements under the GSF Act as it has not submitted its financial statements to the Auditor-General for audit despite repeated requests, and has not provided access to its books and records for the purposes of a financial audit. The CMCT contends that they are not a GSF agency as defined by the GSF Act and therefore not a controlled entity of the State.
Six agencies required to perform early close procedures did not complete a total of 11 mandatory procedures. Incomplete procedures included the delayed resolution of matters raised in prior years and two agencies did not record movements in the fair value of physical assets in the financial statements.

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 Planning and Environment cluster.

Section highlights

Since 2017, the Audit Office of New South Wales has recommended that the Department of Planning and Environment (the department) address the different practices across the local government sector in accounting for rural firefighting equipment. Despite repeated recommendations, the department did little to resolve this issue, and in 2022, 32 of 118 completed audits of councils received qualified audit opinions on their 2022 financial statements.
Consistent with the department’s role to assess councils' compliance with legislative responsibilities, standards or guidelines, the department should intervene where councils do not recognise rural firefighting equipment.
There continues to be significant deficiencies in Crown land records. The department should implement an action plan to ensure the Crown land database is complete and accurate.
The number of findings reported to management decreased from 161 in 2020–21 to 132 in 2021–22. Eight high-risk findings were identified during 2021–22, of which six were repeat issues. One new high-risk finding related to deficiencies in governance processes and internal controls identified as a part of the Water Administration Ministerial Corporation's 2011–2020 financial statements audits.
The department and NSW Treasury did not comply with section 35 of the Energy and Utilities Administration Act 1987 (EUA Act). However, complying with the EUA Act could create non-compliance with other pieces of legislation. Amendments to the EUA Act have been made to resolve this inconsistency. The amendment took effect from April 1999.

Appendix five – Councils received qualified audit opinions

Copyright notice

8 December 2022

Published

Regional NSW 2022

Environment

Industry

Planning

Asset valuation

Compliance

Financial reporting

Fraud

Information technology

Infrastructure

Internal controls and governance

Management and administration

Regulation

Risk

Shared services and collaboration

What the report is about

Result of the Regional NSW cluster agencies' financial statement audits for the year ended 30 June 2022.

What we found

Unmodified audit opinions were issued for Regional NSW cluster agencies. Two audits are ongoing.

What the key issues were

The Department of Regional NSW (the department) and Local Land Services (LLS) accepted changes to their office leasing arrangements managed by Property NSW.

These changes resulted in the collective derecognition of $100.6 million of rights-of-use-assets and $110.4 million of lease liabilities.

In 2021–22, the cluster agencies continued to assist communities in their recovery from recent weather emergencies, including significant flooding in New South Wales.

The Northern Rivers Reconstruction Corporation was established in May 2022 to rebuild communities in the Lismore and Northern Rivers region impacted by floods.

The number of matters reported to management decreased from 36 in 2020–21 to 14 in 2021–22.

Five moderate risk issues were identified and 14% of reported issues were repeat issues.

One moderate risk issue was a repeat issue related to Local Land Services' annual fair value assessment of the asset improvements on land reserves used for moving stock.

This report provides Parliament and other users of the Regional NSW cluster financial statements with the results of our audits, 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 Regional NSW cluster (the cluster) for 2022.

Section highlights

Unqualified audit opinions were issued on the financial statements of cluster agencies. Two audits are ongoing.
Cluster agencies completed all required early close procedures.
Changes to accommodation arrangements managed by Property NSW on behalf of the department and cluster agencies resulted in the collective derecognition of approximately $100.6 million in right-of-use assets and corresponding lease liabilities totalling $110.4 million from the balance sheets of these agencies.
Cluster agencies continue to provide financial assistance to communities affected by natural disasters.

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 Regional NSW cluster.

Section highlights

The 2021–22 audits identified five moderate issues across the cluster. One moderate risk issue was a repeat issue related to Local Land Services' annual fair value assessment of the asset improvements on land reserves used for moving stock.
Of the four newly identified moderate rated issues, one related to internal control deficiencies and improvements and three related to financial reporting.
The number of findings reported to management has decreased from 36 in 2020–21 to 14 in 2021–22.

Appendix one – Misstatements in financial statements submitted for audit

Appendix one – Misstatements in financial statements submitted for audit

20 May 2022

Published

COVID-19: response, recovery and impact

Community Services

Education

Health

Justice

Premier and Cabinet

Transport

Treasury

Whole of Government

Cross-agency collaboration

Financial reporting

Management and administration

Service delivery

Shared services and collaboration

What the report is about

This report draws together the financial impact of COVID-19 on the agencies integral to responses across the state government sector of New South Wales.

What we found

Since the COVID-19 pandemic hit NSW in January 2020, and until 30 June 2021, $7.5 billion was spent by state government agencies for health and economic stimulus. The response was largely funded by borrowings.

The key areas of spending since the start of COVID-19 in NSW to 30 June 2021 were:

direct health response measures – $2.2 billion
personal protective equipment – $1.4 billion
small business grants – $795 million
quarantine costs – $613 million
increases in employee expenses and cleaning costs across most agencies
vaccine distribution, including vaccination hubs – $71 million.

The COVID-19 pandemic significantly impacted the financial performance and position of state government agencies.

Decreases in revenue from providing goods and services were offset by increases in appropriations, grants and contributions, for health and economic stimulus funding in response to the pandemic.

Most agencies had expense growth, due to additional operating requirements to manage and respond to the pandemic along with implementing new or expanded stimulus programs and initiatives.

Response measures for COVID-19 have meant the NSW Government is unlikely to meet targets in the Fiscal Responsibility Act 2012 being:

annual expense growth kept below long-term average revenue growth
elimination of State’s unfunded superannuation liability by 2030.

Fast facts

First COVID-19 case in NSW on 25 January 2020
COVID-19 vaccinations commenced on 21 February 2021
By 31 December 2021, 25.2 million PCR tests had been performed in NSW and 13.6 million vaccines administered, with 93.6% of the 16 and over population receiving two doses
During 2020–21, NSW Health employed an extra 4,893 full-time staff and incurred $28 million in overtime mainly in response to COVID-19
During 2020–21, $1.2 billion was spent on direct health COVID-19 response measures and $532 million was spent on quarantine for incoming international travellers

Section highlights

Up to 30 June 2021, $7.5 billion has been spent by state government agencies for health and economic stimulus.
Revenue increased for most agencies as falling revenue from providing goods and services was offset by additional funding from appropriations, grants and contributions.
Expenses increased as most agencies incurred additional costs to manage and respond to the pandemic along with delivering stimulus and support programs.
Borrowings of $7.5 billion over the last two years helped to fund the response to COVID-19.

Section highlights

NSW Government unlikely to meet targets in Fiscal Responsibility Act 2012.

6 May 2022

Published

Transport 2021

Transport

Asset valuation

Compliance

Financial reporting

Information technology

Infrastructure

Internal controls and governance

What the report is about

The results of the Transport cluster agencies’ financial statement audits for the year ended 30 June 2021.

What we found

Unmodified financial statement audit opinions were issued for all Transport cluster agencies. Resolution of issues delayed signing the Transport Asset Holding Entity of NSW (TAHE) until 24 December 2021. Matters relating to TAHE are also reported in the report on State Finances 2021.

Emphasis of Matter - TAHE

An Emphasis of Matter paragraph was included in TAHE's audit opinion to draw attention to uncertainty associated with:

future access and licence fees that are subject to re-signed agreements
an additional $4.1 billion of funding that is outside the forward estimates period
a significant portion of the fair value of TAHE’s non-financial assets is reflected in the terminal value, which is outside the ten-year contract period to 30 June 2031, and the risk that TAHE will not be able to negotiate contract terms to support current projections.

TAHE's transition from RailCorp also changed its valuation of assets to an income approach, resulting in a $20.3 billion decrease to the fair value. The fair value decrease was because the cash flows were not sufficient to support the previous recorded value.

TAHE corrected a misstatement of $1.2 billion relating to the valuation of its assets. This followed significant deliberation on key judgements and assumptions, with TAHE adopting risk assumptions in its valuation that were not in line with comparable benchmarks.

Emphasis of Matter - State Transit Authority of New South Wales

An Emphasis of Matter paragraph was included in the State Transit Authority of NSW's (the Authority) audit opinion to draw attention to the financial statements not prepared on a going concern basis. This was because the NSW Government put the Authority's bus contracts out to competitive tender and accordingly, management assessed the Authority's principal activities are not expected to operate for a full 12 months after 30 June 2021.

The implementation of AASB 1059 ‘Service Concession Arrangements: Grantors’ resulted in a net increase in assets of $23.5 billion across the Transport cluster.

The 2020–21 audits identified six high-risk and 45 moderate risk issues across the cluster. Fourteen of the moderate risk issues were repeat issues, including information technology controls around management of user access for key financial systems and payroll processes.

The high-risk issues, in addition to those related to TAHE and previously reported in the report on State Finances 2021, include:

absence of conflict of declarations related to land acquisition processes at Transport for NSW
no evidence of conflict of interest declarations obtained by TAHE from consultants and contractors regarding involvement in other engagements.

What we recommended

TAHE needs to:

finalise revised commercial agreements to reflect fees detailed in a Heads of Agreement signed on 18 December 2021
prepare robust projections and business plans to support the required rate of return.

NSW Treasury and TAHE should monitor the risk that control of TAHE assets could change in the future.

Transport for NSW needs to significantly improve its processes to ensure all key information is identified and shared with the Audit Office.

Transport agencies should implement a process to ensure conflicts of interest declarations are completed for land acquisitions and applied consistently across the cluster.

Transport agencies should implement a process to capture all contracts and agreements entered to ensure:

agencies are aware of contractual obligations
financial reporting implications are assessed, particularly with respect to leases, revenue and service concession arrangements.

Fast facts

The Transport cluster plans and delivers infrastructure and integrated services across all modes of transport. This includes road, rail, bus, ferry, light rail, cycling and walking. There are 11 agencies in the cluster.

$128b road and maritime system infrastructure assets as at 30 June 2021
100% unqualified audit opinions were issued on agencies 30 June 2021 financial statements
26 monetary misstatements were reported in 2020–21
$24.9b rail systems infrastructure assets as at 30 June 2021
6 high-risk management letter findings were identified
37% of reported issues were repeat issues

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

financial reporting
audit observations.

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

This chapter outlines our audit observations related to the financial reporting of agencies in the cluster for 2021.

Section highlights

Unqualified audit opinions were issued on all Transport agencies' financial statements.
An 'Emphasis of Matter' paragraph was included in the Transport Asset Holding Entity of New South Wales' (TAHE) Independent Auditor's Report to draw attention to significant uncertainty associated with the judgements, estimates and assumptions supporting the valuation of TAHE’s property, plant and equipment (PPE) and intangible assets.
In 2020–21, the former RailCorp transitioned to TAHE, a for-profit state-owned corporation. When TAHE became a for-profit entity, it was required to change its valuation approach. The value of a for-profit entity's assets cannot exceed the cash flows they might realise either through their sale or continued use. This change in the basis of valuation resulted in a decrease of $20.3 billion in the fair value of the assets. The decrease in fair value was because the cash flows, which support measurement under the income approach, were insufficient to support the previous valuation based on the current replacement cost of those assets.
TAHE also corrected a misstatement of $1.2 billion relating to the valuation of its assets after significant deliberation on key judgements and assumptions, with TAHE adopting higher risk assumptions in its valuation when compared to the relevant market benchmarks.
On 18 December 2021, a Heads of Agreement (HoA) was signed between TAHE, Transport for NSW, Sydney Trains and NSW Trains. This HoA reflected TAHE's intention to negotiate higher access and licence fees in order to meet the shareholding ministers' revised expectation of a higher rate of return. This matter resolved the treatment of a significant accounting issue in the State’s consolidated (whole-of-government) financial statements. Refer to the Report on State Finances tabled on 9 February 2022. The expectation of an additional $5.2 billion in fees added to the valuation of TAHE's PPE and intangibles, with a final value of $17.15 billion.
The implementation of AASB 1059 ‘Service Concession Arrangements: Grantors’ resulted in a net increase in assets of $23.5 billion across the cluster. AASB 1059 had a significant impact on Transport for NSW, Sydney Metro, Sydney Ferries and TAHE's 2020–21 financial statements.
TAHE corrected a misstatement of $97.2 million relating to the application of AASB 1059 'Service Concession Arrangements: Grantors' for the Airport Link Company Contract.

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 cluster.

Section highlights

The number of findings reported to management increased from 56 in 2019–20 to 73 in 2020–21.
Thirty-seven per cent were repeat findings. Many repeat issues related to information technology controls around user access management and payroll processes. These included deficiencies in the monitoring of privileged user access to key financial systems, review of user access to key financial systems and segregation of duties between preparer and reviewer for new employee hires.
Six new high-risk issues were identified in 2020–21, an increase of three compared to last year.
One high-risk issue related to conflicts of interests not being declared by all officers involved in the land acquisition process at Transport for NSW.
Five high-risk issues arose from the audit of TAHE, with respect to:
- control over TAHE assets and operations
- asset valuations
- access price build up
- detailed business modelling to support returns
- conflict of interest management.
Based on the access and licence agreements signed at 30 June 2021 between TAHE, Sydney Trains and NSW Trains, our review of the expected returns calculated by NSW Treasury did not support the assumption that there was a reasonable expectation that a sufficient rate of return could be achieved from the NSW Government's investment in TAHE.
On 14 December 2021 the shareholding ministers' increased their expectations as to TAHE's target average return from 1.5 per cent to the expected long-term inflation rate of 2.5 per cent.
On 18 December 2021 the revised shareholder expectations were confirmed in a signed Heads of Agreement. The Heads of Agreement will increase access fees paid by rail operators to TAHE by $5.2 billion.
TAHE's access and licence agreements specified fees that were well short of the IPART regulated maximum (ceiling price).
The finalisation of the access and licence agreements with Sydney Trains and NSW Trains resulted in a significant write-down of TAHE's asset value by $20.3 billion. The revaluation loss will need to be recovered as part of the shareholders’ rate of return of 2.5 per cent in order to sustain the whole-of-government accounting treatment of cash contributions recorded as an equity contribution and not a grant expense.
There was a significant adjustment to TAHE’s valuation between the financial statements originally submitted for the audit and the final, signed financial statements due to differences in risk assumptions resulting in a correction of a $1.2 billion misstatement.

Findings reported to management

The number of findings reported to management has increased, and 37 per cent of all issues were repeat issues

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

In 2020–21, there were 73 findings raised across the cluster (56 in 2019–20) and 37 per cent of all issues were repeat issues (43 per cent in 2019–20).

In view of the recent performance audit ‘Managing Cyber Risks’ and compliance audit ‘Compliance with the NSW Cyber Security Policy’ involving the cluster, it is noted with concern that the most common repeat issues related to weaknesses in controls over information technology user access administration and password management. Moderate risk issues included completeness and accuracy of contract registers, accounting for assets and management of supplier and payroll masterfiles.

A delay in implementing audit recommendations increases the risk of intentional and accidental errors in processing information, producing management reports, and generating financial statements. This can impair decision-making, affect service delivery and expose agencies to fraud, financial loss and reputational damage. Control deficiencies may also mean agency staff are less likely to follow internal policies, inadvertently causing the agency not to comply with legislation, regulation, and central agency policies.

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

Risk rating	Issue
Information technology
Moderate: 7 new, 4 repeat**	The financial audits identified opportunities for agencies to improve information technology processes and controls that support the integrity of financial data used to prepare agencies' financial statements. Of particular concern are issues associated with: monitoring of privileged user access user access management password configuration management.
Low: 4 new, 1 repeat***
Internal control deficiencies or improvements
High: 1 new*	The financial audits identified internal control deficiencies across key business processes, including: declarations of conflicts of interest over land acquisitions (see further details below) management of contracts and agreement register accounting for assets management of payroll and supplier masterfiles payroll processes.
Moderate: 15 new, 8 repeat**
Low: 2 new, 5 repeat***
Financial reporting
High: 3 new*	The financial audits identified opportunities for agencies to strengthen financial reporting, including: asset valuations (see further details below) detailed business modelling to support returns (see further details below) access price build-up (see further details below) timely capitalisation of completed assets.
Moderate: 3 new, 1 repeat**
Low: 2 new***
Governance and oversight
High: 1 new*	The financial audits identified opportunities for agencies to improve governance and oversight processes, including: control over TAHE assets and operations governance over Cyber Security.
Moderate: 2 new**
Non-compliance with key legislation and/or central agency policies
High: 1 new*	The financial audits identified the need for agencies to improve its compliance with key legislation and central agency policies, including: conflict of interest (COI) management outdated policies and procedures incomplete probation procedures.
Moderate: 4 new, 1 repeat**
Low: 1 new, 7 repeat***

* High-risk from the consequence and/or likelihood of an event that has had, or may have a negative impact on the entity.
** Moderate risk from the consequence and/or likelihood of an event that has had, or may have a negative impact on the entity.
*** Low risk from the consequence and/or likelihood of an event that has had, or may have a negative impact on the entity.
Note: Management letter findings are based either on final management letters issued to agencies.

2020–21 audits identified six high-risk findings

High-risk findings were reported at the following cluster agencies.

Agency	Description
2020–21 findings
Transport for NSW (new finding)	Declaration of conflicts of interest in the land acquisition process In 2021, we conducted a performance audit over the Acquisition of 4–6 Grand Avenue, Camellia which examined: whether Transport for NSW conducted an effective process to purchase 4–6 Grand Avenue, Camellia whether Transport for NSW has effective processes and procedures to identify and acquire property required to deliver the NSW Government’s major infrastructure projects. The report made several recommendations over Transport for NSW’s internal policies and procedures to guide the land acquisition process. As part of the financial audit, we obtained an understanding of key controls and processes relating to the acquisition of land, relevant to the audit of the financial statements. We found that conflicts of interests were not always declared by all officers involved in the land acquisition process. Furthermore, processes for declaring conflicts of interests are not consistently applied across cluster agencies. Out of a sample of 19 land acquisitions tested, we identified: 14 instances where there was no evidence of declarations of conflicts of interests made by the team members involved in the acquisition process 2 instances where conflicts of interest declarations were completed by key members of the acquisition team only at a project level 1 instance where conflicts of interest declarations were only completed by the property negotiator and the valuer, but not the other members of the acquisition team. Management advised that the land acquisition processes, at the time of the land acquisitions, did not require formal conflicts of interests to be declared as they believe that as per Transport for NSW code of conduct, declaration is only required where the staff member considers that a potential or perceived Conflict of Interest exists. However, Transport for NSW's Procurement Policy requires the documentation of formal declarations from all staff involved in procurement activities to formally disclose any conflicts of interest or state that they do not have a conflict of interest. This matter has been included as a high-risk finding in the management letter as absence of rigorous and consistent management of conflicts of interests, and non-compliance with established policies increases the risk that Transport for NSW may be exposed to reputational damage or financial losses in relation to land acquisitions. Furthermore, this may result in lack of probity or value-for money considerations during the land acquisition process. Further details are elaborated below under 'Land acquisitions'.
Transport Asset Holding Entity of New South Wales (new finding)	Control over TAHE assets and operations The State-Owned Corporations Act 1989 maintains that all decisions relating to the operation of a statutory state-owned corporation (SOC) are to be made by or under the authority of the board. However, under the Transport Administration Act 1988 (TAA), the functions of TAHE may only be exercised under one or more operating licences issued by the portfolio minister. The current Operating Licence confers terms and conditions for TAHE to carry out its functions, and imposes constraints on TAHE, including (but not limited to): railway operations not permitted transport services not permitted TAHE must not carry out maintenance of its assets. Such operating licences are short term in nature, and the TAA allows the transport minister (portfolio minister) to grant one or more operating licences to TAHE and may amend, substitute, or impose, amend or revoke conditions of the operating licence. For the current year, the legal form of the arrangements established in its first year of operation imply TAHE has control over the assets based on the Implementation Deed and the agreements signed with the public operators. However, risks remain as TAHE is in its early stages, and the actual substance of operations will need to be observed and considered. Given the restrictions that can be placed on the entity through the Operating Licence, and the ability to make further changes to the Operating Licence and Statement of Expectations set by the portfolio minister, there is a risk there could be limitations placed on the Board of Directors to operate with sufficient independence in its decision-making with respect to the operations of TAHE. Over time, this may further impact the degree of control required by TAHE to satisfy the recognition criteria over its assets. It may also fundamentally change the presentation of TAHE’s financial statements. Future limitations to the degree of control TAHE, and its Board, can exercise over its functions may impact the degree of control TAHE has over its assets going forward. As part of the 2021–22 audit, we will monitor and assess whether, in substance, these assets continue to be controlled by TAHE and whether, in substance, TAHE can operate as an independent SOC. We require management continue to demonstrate that TAHE continues to maintain control over its assets and has the ability to operate as an independent SOC. Further details are described below under 'Transport Asset Holding Entity'.
Transport Asset Holding Entity of New South Wales (new finding)	Asset valuation The final updated valuation was based on cash flows that were in a signed Heads of Agreement, which stated that it set out the proposed indicative future access and licence fees which will form the basis of the negotiations between TAHE, Transport for NSW, Sydney Trains and NSW Trains, who will work together to review access fees and licence fees payable under the agreements and to make all necessary changes to the Operating Agreements by 1 July 2022. This adds uncertainty in the cash flows. It is crucial that TAHE formalises these updated fees in legally binding signed access and licence agreements with the relevant parties as soon as possible. Refer below for further details on the Heads of Agreement.
Transport Asset Holding Entity of New South Wales (new finding)	Conflict of interest (COI) management For procurement transactions through direct negotiation with single quotes, there was no evidence of COI declarations obtained from the consultants and contractors regarding involvement in other engagements. Contractors and consultants are required to declare actual COI. However, there was no requirement to confirm nil conflict of interest. In addition, there is a risk that perceived COI may not be adequately assessed or managed. TAHE is expected to operate as an independent SOC and would need to ensure any perceived or actual conflict of interest is adequately addressed. Management should implement a process to: ensure conflicts of interest declarations are completed when engaging all consultants and contractors (including involvement with other engagements and confirmation of nil conflicts of interests) ensure probity is undertaken to identify any actual or perceived conflicts of interest. The declarations should consider individuals and relationships that may create, or may be perceived to create, conflicts of interest.
Transport Asset Holding Entity of New South Wales (new finding)	Detailed business modelling to support returns On 18 December 2021, Transport for NSW, TAHE and the operators, Sydney Trains and NSW Trains entered into a Heads of Agreement (HoA). This HoA forms the basis of negotiations to revise the pricing within the existing 10-year contracts and deliver upon the shareholders' expectation of a return of 2.5 per cent per annum of contributed equity, including recovering the revaluation loss incurred in 2020–21. TAHE needs to revise its business plan and include detailed business modelling that supports the shareholding ministers' revised expectations of return (2.5 per cent return on the State’s equity injections and recovery of the write-down of assets over the average useful life of those assets) and align the business plan and Statement of Corporate Intent. This requires more detailed projections, estimates and plans that support how TAHE expects to recover the asset write-down and expected returns to government. The current modelling for ten years needs to be enhanced with modelling over the expected recovery period of approximately 33 years.
Transport Asset Holding Entity of New South Wales (new finding)	Access price build-up Management explained that in determining access and licence fees for the agreements with Sydney Trains and NSW Trains, assets prior to the commencement of equity injections in 2015–16 were excluded from the calculations. Management explained the premise being that these assets were previously funded by government through capital grants. The replacement and refurbishment of these assets is expected to be through government funded maintenance performed through the public rail operators and/or the equity injections from NSW Treasury rather than through access and licence fees.

The number of moderate risk findings increased from prior year

Forty-five moderate risk findings were reported in 2020–21, representing a 73.1 per cent increase from 2019–20. Of these, 14 were repeat findings, and 31 were new issues.

Key moderate risk findings related to:

weaknesses in user access management to key financial systems
management of contracts and agreements register
management of supplier and payroll masterfiles
accounting for assets
control deficiencies at service organisations
segregation of duties relating to the hiring of employees
conflict of interest management
annual leave management
review of internal audit charter
disaster recovery planning.

Transport Asset Holding Entity of New South Wales

Background

The establishment of TAHE was originally announced by the NSW Government in the 2015–16 State Budget. On 1 July 2020, the former Rail Corporation New South Wales (RailCorp), a not-for-profit entity, transitioned to the Transport Asset Holding Entity of New South Wales (TAHE), a for-profit statutory state-owned corporation under the Transport Administration Act 1988. There was no change in the structure of TAHE as a new entity was not created. Ownership remains fully with the government. TAHE, and the former RailCorp, were both classified as Public Non-Financial Corporation (PNFC) entities within the Total State Sector Accounts.

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

From 1 July 2015, the government announced the creation of TAHE (a dedicated asset manager). Funding for new capital projects was to be provided through equity injections and was no longer recorded as an expense to the GGS budget, even though the business model was yet to be determined. The change, as explained in the 2015–16 State Budget, was due to the expectation that the former RailCorp will transition to TAHE, which was intended, over time to provide a commercial return. That Budget also highlighted how the change, which was largely a change in the basis of accounting, was intended to improve the GGS budget result each year. In total, the GGS has contributed approximately $11.1 billion to TAHE since 2015–16. This includes the equity injections from the GGS to TAHE made in the current year of $2.4 billion.

NSW Treasury initially set a timetable for the stand-up of TAHE of 1 July 2019, which included finalising the business model, operating model and contracts for the use of TAHE's assets. The enactment of the Transport Administration Act 1988 resulted in RailCorp transitioning to TAHE on 1 July 2020, 12 months after its originally planned operational date. Contributions paid to the former RailCorp and subsequently to TAHE by the GGS were treated as equity investments from July 2015 forward. This treatment continued, despite delays in settling the business model. In 2020, the Audit Office raised a high-risk finding due to the significance of the financial reporting impacts and business risks for NSW Treasury and TAHE.

The business model adopted and the flow of funds between transport agencies in the GGS and PNFC sectors is shown in the diagram below. For further details refer to the Report on State Finances 2021.