NSW Audit Office - Awareness - Issue 2005 11 - December 2005
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English

NSW Audit Office - Awareness - Issue 2005 11 - December 2005

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AWARENESSAccounting and Auditing Developments ISSUE 11 - DECEMBER 2005AUDIT OFFICE 1 AUDIT OFFICE UPDATEUPDATEACCOUNTING 11 Auditor-General’s Report to Parliament 2005 – Vol FourUPDATESignificant items within the report included:AUDITING 15UPDATEPrivately Financed Projects The Audit Office has a number of suggestions to improve the INTERNATIONAL 16Privately Financed Project Contract Summaries required under the UPDATEGovernment’s Guidelines.OTHER ISSUES 18Compliance Review of Salary Packaging for Graded OfficersMISCELLANEOUS 20 The majority of agencies we reviewed have satisfactorily PUBLICATIONSimplemented the Premier’s Department policy.LEGISLATIVE 22 Two agencies are using service providers not approved under the CHANGESGovernment contract.PREMIER’S 23 Premier’s Department intends to discuss monitoring the policy with DEPARTMENTthe Government contractor, corporate service providers and central UPDATEagencies.TREASURY 24Compliance Review of Appointments to and the Operations of UPDATEBoardsAUDIT OFFICE 26 The Boards we reviewed substantially complied with the BETTER PRACTICErequirements. GUIDES Premier’s Department will have regard to our recommendations ACRONYMS & 27when the ‘Guidelines’ are next reviewed. ABBREVIATIONSDepartment of Education and Training Workers compensation premiums have significantly increased for both the Department and TAFE over the last four years. Five privately financed schools were opened during ...

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AWARENESSnitnna guA ditidAouccSIUS E11- D CEMEng Developments 0520R BE
AUDIT OFFICE 26 BETTER PRACTICE GUIDES ACRONYMS & 27 ABBREVIATIONS
TREASURY 24 UPDATE
ACCOUNTING 11 UPDATE AUDITING 15 UPDATE INTERNATIONAL 16 UPDATE OTHER ISSUES 18 MISCELLANEOUS 20 PUBLICATIONS LEGISLATIVE 22 CHANGES PREMIER’S 23 DEPARTMENT UPDATE
AUDIT OFFICE 1 UPDATE
Compliance Review of Appointments to and the Operations of Boards  The Boards we reviewed substantially complied with the requirements.  Premier’s Department will have regard to our recommendations when the ‘Guidelines’ are next reviewed.
Department of Education and Training  Workers compensation premiums have significantly increased for both the Department and TAFE over the last four years.  Five privately financed schools were opened during 2004-05 bringing the total to nine. Construction of a further nine schools has been approved.  The Department’s estimate of the backlog of school maintenance remained around $116 million.
Awarene siss published by The Audit Office of New South Wales, Level 15, 1 Margaret Street Sydney NSW 2000, GPO Box 12, Sydney NSWT2e0le01p h on e9275 7100F ax9275 7200 Emai l.uHdoigtaenr@ray.goTv.nswa.Wue bsit e.nitud.a.aov.gswuwww
AUDIT OFFICE UPDATE
Auditor-General’s Report to Parliament 2005 – Vol Four Significant items within the report included:
Privately Financed Projects  The Audit Office has a number of suggestions to improve the Privately Financed Project Contract Summaries required under the Government’s Guidelines.
Compliance Review of Salary Packaging for Graded Officers  The majority of agencies we reviewed have satisfactorily implemented the Premier’s Department policy.  Two agencies are using service providers not approved under the Government contract.  Premier’s Department intends to discuss monitoring the policy with the Government contractor, corporate service providers and central agencies.
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Health  Reviews of information management and technology projects identified poor procurement and management practices. The Department has taken action to address the issues.  The level of Area Health Services’ overdue creditors at 30 June does not reflect the situation that exists during other times of the year.  In 2005, all Area Health Services met emergency department response time benchmarks for the highest (T1) and lowest (T5) categories of urgency. Five of the eight Areas did not meet the intermediate categories.  The State’s average access block (the percentage of patients not admitted to an inpatient bed within eight hours of first being treated) improved from 32 per cent in 2003-04 to 30 per cent in 2004-05.  Some Area Health Services continue to prepare inaccurate program statements.  Cash flow difficulties at Greater Southern Area Health Service have affected its ability to acquire goods and services.
Department of Housing  An accrued interest liability of $86.7 million and an investment in bonds of $67.9 million were recognised in the Corporation’s financial report for the first time. This resulted from a recent analysis of certain Public Equity Partnership arrangements entered into with a private sector participant in the 1990s.  New South Wales had the second best turnaround of Australian public housing providers of 30 days in 2003-04 (33 days in 2002-03). Speedy turnaround allows greater use of available housing stock and contributes to the high NSW occupancy rate.  The Department advises that backlog maintenance, estimated at $750 million in 2001 has fallen to $606 million at 30 June 2005. This reflects the cumulative effect of expenditure under the Accelerated Improvement Program and continued spending on planned maintenance.
NSW Police  NSW Police no longer has management responsibilities for its property portfolio.
Roads and Traffic Authority  A private sector consortium funded, designed and constructed the 2.1 km, $680 million cross city tunnel, which links Kings Cross to Darling Harbour and also links the Eastern and Western Distributors. The tunnel was opened to the public in September this year.
The Audit Office of New South Wales
Overview of Rail Services  No target date has been set for the completion of the restructure of rail service entities. Significant progress has been made but considerable work is yet to be completed. Although a significant proportion of operational staff have transferred to RailCorp, RIC and SRA continue to perform many of the administrative functions they performed prior to the restructure.  To encourage more employees to accept voluntary redundancy, an enhanced voluntary redundancy package exists. Employees with 30 years of service can receive double the normal RIC or SRA redundancy entitlement.  Employees who are displaced and registered in the rail services Career Transition Centre are entitled to indefinite salary maintenance at their former substantive rate of pay, provided they cooperate with the redeployment process.
Rail Corporation NSW  RailCorp’s fleet size just meets its September timetable requirements highlighting the importance of the rollingstock acquisition program.  RailCorp’s current driver numbers are below target but RailCorp expect to correct this situation by 31 December 2005.  On 13 October 2005, RailCorp and the receiver for the Airport Link Company reached a final settlement of up to $106 million in compensation.  Reliability indicators including on-time running showed a further deterioration in performance in 2004-05. Results for September 2005 indicate a substantial improvement following the introduction of the new timetable.
Electricity Sector  Maximum electricity demand in New South Wales is starting to exceed the State’s total generating capacity of the State. However, ten per cent of this generating capacity is used only one per cent of the time.  The introduction of Australian Equivalents to International Financial Reporting Standards will decrease the reported net assets of the public sector electricity agencies by $2,059 million or 22 per cent.
Eraring Energy  In January 2002, a contractor lodged claims for extra costs relating to work at the Burrinjuck Hydro Power Station. The claims currently amount to $14.0 million. The matter is in arbitration.
Australian Inland Energy Water Infrastructure  Australian Inland Energy Water Infrastructure Corporation was dissolved on 1 July 2005. Country Energy assumed all the Corporation’s functions, assets and liabilities from that date.
The Audit Office of New South Wales3
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Energy Australia  EnergyAustralia entered into a partnership, which commenced on 7 July 2005, with IPower Pty Limited to sell electricity and gas to retail customers in South Australia and Victoria.
Sydney Water Corporation  Sydney Water has short listed three consortia to submit proposals to design, construct, operate and maintain a desalination plant. Sydney Water estimates that it could cost up to $2.0 billion to construct a 500 megalitre per day desalination plant and approximately $100 million per year to run it.  Sydney Water’s Internal Audit unit has reviewed the outcomes of the Corporation’s security upgrade program. It found several weaknesses. Sydney Water has initiated corrective action and believes that it will complete the security upgrade program by the end of 2005.  Over the last three years we have reported our concern about Sydney Water’s ability to fund the replacement of its system assets given the age and condition of the system and relevant pricing structures. The gap between the ‘replacement’ asset values and their cash generating capability is significant and may need further analysis by key stakeholders. IPART has recently granted real price increases to Sydney Water in its 2005-2009 determination. This will help to alleviate some of our concerns.
NSW Self Insurance Corporation  Reforms effective from 1 July 2005 are expected to reduce public sector insurance costs.  Surplus assets increased from $505 million to $780 million. Treasury has advised that it is monitoring trends and will consider options to reduce the surplus during 2005-06.
Further Information The full report is available from our Internet sitewown:w .audit.nsw.gov.a.u
Auditor-General’s Report to Parliament 2005 – Volume Five Significant items within the report included:
Attorney General’s Department  CourtLink, the Department’s new case management system, has been delayed by another year to the third quarter of 2007 because of renegotiation of the existing contract.
The Audit Office of New South Wales
Victims Compensation Fund Corporation  The Corporation continues to recover only a small proportion of restitution from convicted offenders.  The Corporation wrote off $2.2 mill io50( 1$1. -4002 ni stbed nioutitstref n million in 2003-04) largely due to the death or bankruptcy of the defendants.
Department of Commerce  The Department sold three of its businesses, office supplies, mail and printing, to the private sector.  Agencies’ usage of Smartbuy, the Department’s electronic procurement service has been less than original targets, but improved significantly late in the financial year. The Department is yet to revise the whole-of-government benefits to be realised through the implementation of Smartbuy.
Workers’ Compensation (Dust Diseases) Board  Liabilities for dust diseases increased by $202 million to $1,509 million.
NSW Businesslink Pty Ltd  With effect from 1 July 2004, NSW Businesslink ceased to be a division of the NSW Land and Housing Corporation when NSWbusinesslink (the department) and NSW Businesslink Pty Ltd (a State Government owned company established under theCorporations Act 200)1were created. The Company provides shared administrative services to NSW Land and Housing Corporation, the Department of Community Services and the Department of Ageing, Disability and Home Care.  Potential conflicts of interest exist, as three of the Company’s five directors are also the Directors-General of its only three clients.  The Company has yet to fully implement and test its business continuity plan and disaster recovery strategy.  To ensure the Company’s ongoing solvency, the Government issued a Letter of Comfort on 1 June 2004. The Letter guarantees that it will, if necessary, provide funds or facilities to enable the Company to meet its debts as and when they become due and payable.
NSW Businesslink  Of NSWbusinesslink employees who worked overtime during the year, 6.5 per cent were paid more than 25 per cent of their base salary in overtime. The highest amount of overtime paid was $91,571 and the most overtime worked was 1,268 hours.
The Audit Office of New South Wales5
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Building and Construction Industry Long Service Leave Payments Corporation
 The Corporation moved into a deficit financial position and needs to increase its levy on building and construction work.
Department of Juvenile Justice  The Department is reaching its capacity to accommodate juveniles in its centres.
Sydney Olympic Park Authority  The Authority recalculated the value of its right to receive the Telstra Stadium and Sydney Superdome, taking into account the new Treasury Guidelines. As a result, the value of the right to receive decreased by $213 million  The Authority reviewed its accounting treatment for the Royal Agricultural Society site at Sydney Olympic Park. NSW Treasury requires long-term leases to be treated as disposals, the Authority wrote-off assets of $398 million as a result.
State Transit Authority  The Authority’s fare revenue does not cover its operating costs.  The Authority expects Western Sydney Buses to record greater short-term losses than originally forecast.  Only 33 per cent of Sydney and three per cent of Newcastle bus routes are profitable.  The average age of the Authority’s bus fleet exceeds the Ministry of Transport’s requirement of no more than 12 years.
Sydney Ferries Corporation  Following its separation from the State Transit Authority, one of the challenges Sydney Ferries faces is tuor nt around its history of loss making.
Electricity Industry Overview - Updated  The Electricity Industry Overview published in Volume Four 2005 has been updated to reflect more recent industry data.
Parliamentary Contributory Superannuation Fund  The Fund remains the last open defined benefit superannuation fund in the New South Wales public sector. Legislation has been introduced to reduce entitlements for new members but leaving current members’ entitlements unaffected.
The Audit Office of New South Wales
 Unfunded liabilities (the difference between net assets held by the Fund and accrued superannuation benefits) decreased from $81.7 million at 30 June 2004 to $60.1 million at 30 June 2005, mainly due to improved returns on the Fund’s investments.
SAS Trustee Corporation – Pooled Fund  Unfunded liabilities (the difference between net assets held by the Fund and accrued superannuation benefits) increased from $17.4 billion at 30 June 2004 to $18.2 billion at 30 June 2005.  The Government also contributes funds to meet its superannuation liabilities through the Liability Management Ministerial Corporation (LMMC). If the funds in the LMMC were taken into account, unfunded liabilities would be $14.1 billion.  In the Police Superannuation Scheme, a higher proportion of members retire ‘hurt on duty’ which results in significant ongoing pension liabilities.
Crown Property Portfolio  The Portfolio increased the provision for remediation of the Main Steel Works site and the Kooragang Emplacement site by $39.1 million to $142.3 million at 30 June 2005, bringing it into line with latest remediation cost estimates.  The Government repurchased, after 15 years, the McKell building for $88.5 million.
Treasury  The Office of State Revenue (OSR) has been implementing a new computer system for its Fine Enforcement Branch. Phase 1 was originally due to be completed late in the 2004 calendar year. By April 2005, phase 1 was not delivered and most of the total project budget of $3.3 million has been spent. OSR is reassessing the project.  OSR identified that it has been without a satisfactorily tested disaster recovery plan for some years. It is currently spending $3.4 million over three years to address this.
Further Information The full report is available from our Internet sitewown:w .audit.nsw.gov.a.u
The Audit Office of New South Wales7
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Follow up Performance Audit: Purchasing Hospital Supplies
Background In 2002 we conducted an audit on buying hospital supplies – ‘Electronic Procurement of Hospital Supplies’ - as part of our series of audits on e-government. NSW Health was already implementing a Supply Chain Reform Strategy (SCRS) at that time. The strategy was to be completed by late 2003, and deliver $60-$80 million in savings. At the time, we found that with less than two years to meet the SCRS targets, the health sector had made only limited progress. Our report identified a range of issues and impediments and made a considerable number of specific recommendations. NSW Health accepted all our recommendation.s This report discusses NSW Health’s progress in improving its buying of hospital supplies using electronic systems as at November 2004.
Audit opinion The health sector in NSW has made some progress in reforming its purchasing practices. Since it began its Supply Chain Reform Strategy in 2000, NSW Health estimates that it has saved $60 million with increased efficiency and economy. To date, major improvements made to the way the NSW health sector purchases hospital supplies include:  increasing the proportion of purchases made with state contracts from 48% to 50%  reducing the number of warehouses from 74 to 26, and also reducing the inventory levels held in the warehouses by about one third  creating three groups of Area Health Services (Areas) that could act collectively to implement their own procurement initiatives. Good as this is, the savings are at the lower end of the estimated savings range, and significantly short of the $80 million upper estimate. And it has taken considerably longer than the 2003 time target. Encouragingly, there appears to be considerable potential for a great deal more to be achieved in this area. To that end, priority needs to be maintained on delivering results in this key area of reform. In our view, issues that have impeded progress, or which require priority attention, include:  finding successful models and processes for IT governance and change-management across the breadth of the health sector  finalising an electronic catalogue, which has been a persistent issue of difficulty now spanning 15 years
The Audit Office of New South Wales
 achieving consistency in implementing procurement business processes and systems  implementing a viable electronic marketplace system  extracting vital performance information, including whether the timeliness of receiving goods and services has improved  routinely paying all suppliers on time. This is another persistent issue for most Areas, causing lost discounts, and reducing the reliability of supply and the ability to negotiate better deals. Progressing the electronic procurement strategy is proving more complex than NSW Health originally anticipated. Most reforms of this type experience this. But in essence, this is not a technical issue. The key focus is procurement and governance reform. The key requirements for success reside in achieving a consistent procurement business model, effective change-management, and developing clarity of accountability and decision-making for progressing change. In the IT profession this is referred to as harmonising IT governance with business governance, and aligning IT strategy with the needs of the business. Our report highlights areas in which these key factors for success can be addressed.
Further Information Sean Crumlin, Director, Performance Audit,se an.crumlin@audit.nsw.gov.au or on 02 9275 7286. The full report is available from our Internet site on www.audit.nsw.gov.a.u
Bus Transitways: Liverpool to Parramatta Bus Transitway
Background Bus transitways are intended to improve public transport outcomes in selected areas. The Liverpool to Parramatta Transitway (LPT) is public infrastructure, built and owned by the State Government, and is the first of a planned network of rapid bus transitways for Western Sydney. The LPT was first announced in 1998, and was opened in February 2003. Competitive bidding was sought to run the bus services on the transitway between Liverpool and Parramatta, and the State Transit Authority (STA) won the eight-year contract. STA operates the LPT through a subsidiary company, Western Sydney Buses (WSB). The objective of this audit was to examine whether the LPT is being used as originally envisaged, and to determine factors for success and issues requiring careful management in planning future transitways. The audit focuses on two distinct aspects: the role of government agencies (particularly the Ministry of Transport and the Roads and Traffic Authority) in planning and building the transitway and the stations, and the STA’s operation of buses on the LPT.
The Audit Office of New South Wales9
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Audit Opinion The LPT project is promising, but results to date are mixed. On the positive side, the LPT project has demonstrated the potential of transitways and helped shape the new bus contracts currently being implemented. Lessons learnt from this transitway have also been applied to the North-West Transitway network. WSB has achieved a high level of customer satisfaction and strong growth in patronage. Operating losses are reducing, and the chances of the LPT becoming a profitable route in the medium term are promising. The potential for synergies with other planned transitways, and extensions of the current route to link with new growth areas, is also high. However there were three particular aspects of the initiating and planning process that were not well handled. First, governments must have sound information in order to decide which projects they will allocate funds to. The cost of the LPT to taxpayers grew substantially from the time it was first announced in 1998 - from $98 million to a final cost around $346 million. There were both major changes to the scope of the LPT project after its first announcement and large increases in the cost of the project at various stages. If the Government had better cost estimates available to it and a clearer understanding of the scope of the project at the time a decision was required, it may well have decided that there were other projects that gave greater public transport (or other) benefits for the money involved. Second, despite the LPT being a significant public investment, not all the benefits it was intended to achieve were defined in a measurable way. Hence it is difficult to evaluate its benefits against its costs and assess whether the project provides good value for money. Finally, the STA process in bidding for the bus service contract had two major shortcomings:  Senior STA management submitted the bid (and arguably won the contract) on the basis of needing no government subsidy over the contract period, whereas all other bidders required a subsidy. The ‘no subsidy’ bid was based, in turn, on patronage assumptions that were some 65% higher than the STA’s own (admittedly conservative) research suggested. The STA has been unable to find any documentation to support this higher patronage assumption.  This lack of documentation represents very poor management. More importantly, it leaves open the inferences that STA management used whatever patronage assumptions were needed to support a ‘no subsidy’ bid, and that STA management had not properly advised the STA Board of the bid assumptions and their inherent risks.
The Audit Office of New South Wales
 As the largest provider of bus services, the STA had a far greater ability than other bidders to absorb any losses that arose from LPT services. The lack of proper documentation about the bid decision-making process exposes the STA to the accusation that it used its market power to win the contract in a way that the other proponents could not match.
Summary of Recommendations We made a number of recommendations to ensure:  feasibility studies precede commitments to build projects  better management of project costs  transparency of commercial decisions  the use of transitways is maximised  systematic evaluation of transitway benefits.
Further information Sean Crumlin, Director, Performance Audiste,an.crumlin@audit.nsw.gov.aour telephone 02 9275 7286. The full report is available from our Internet site: www.audit.nsw.gov.a.u
ACCOUNTING UPDATE
Australian Accounting Standards (AASB) Update Meeting 9-10 November 2005
Post-Date-of-Transition Stapling Arrangements The Board discussed UIG Issue Summary 05/12 ‘Post-Date-of-Transition Stapling Arrangements’. The Board agreed that the UIG should prepare an Interpretation for consideration at the next AASB Board meeting.
Strategy for Future Approach for Public Sector Entities The Board has published a Strategy Paper on the future approach to standard setting for public sector entities. The Paper is considered a ‘living document’ and will be updated periodically as progress is made on its implementation and issues emerge. The Paper outlines a strategy for the orderly withdrawal of AASs 27, 29 and 31 for years ending on or after 30 June 2007, with early adoption of the effect of withdrawal permitted, and an ongoing strategy for dealing with public sector issues under the following headings:  Principles – outlines proposed broad principles to guide the Board’s future standard setting relating to not-for-profit public sector entities in the absence of
The Audit Office of New South Wales11
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