The NSW Audit Office report on four NSW integrity agencies (the Independent Commission Against Corruption, the NSW Electoral Commission, the NSW Ombudsman, and the Law Enforcement Conduct Commission) comments
The audit found that the current approach to determining and administering annual funding for the integrity agencies presents threats to their independent status. The approach used by NSW Treasury and DPC is consistent with the legislative and Constitutional framework for financial management in New South Wales, but it does not sufficiently recognise that the roles and functions of the integrity agencies that are the focus of this audit are different to other departments and agencies. Specific mechanisms that present threats to the independence of the integrity agencies include the absence of transparency in decisions about funding for the integrity agencies, the means of applying efficiency dividends and budget savings and reform measures, the process of providing additional funding from DPC to the integrity agencies, and requests for the integrity agencies to report to DPC on their activities and outcomes.
The Auditor-General outlined the principles that inform the report’s recommendations in order to strengthen the financial arrangements for the integrity agencies. These principles are:
- There should be structured oversight by Parliament of the performance and financial management of the integrity agencies.
- Parliament’s role in the budget process should be expanded to ensure Cabinet is provided with more independent advice on the funding requirements for the integrity agencies.
- There should be transparency to Parliament and the relevant agency for decisions made about funding for the integrity agencies.
- The integrity agencies should be required to demonstrate their accountability as prudent managers of their financial resources.
The report also notes that the NSW Parliament should be consulted when considering the report’s recommendations.
The report
also included NSW Treasury and the Department of Premier and Cabinet (DPC) because both departments are involved in the processes that lead to decisions about funding for the integrity agencies and managing access to this funding.
The Hon. Don Harwin MLC, Special Minister of State, requested this audit under section 27(B)(3)(c) of the Public Finance and Audit Act 1983.
It is relevant in relation to my recent submission to the Victorian Parliament's Integrity & Oversight Committee regarding Victoria's Integrity Agencies and in relation to incapacitation of the Australian National Audit Office after the ANAO has recurrently highlighted substantive problems with Commonwealth government administration.
The report states
The NSW Government, through the Treasurer, is responsible to the citizens of New South Wales for the prudent and responsible management of the state’s finances. The annual budget is the primary process that the NSW Government uses for financial management. Decisions about funding for the integrity agencies are made through this budget process. NSW Treasury provides guidance to all government departments and agencies, including the integrity agencies that are the focus of this audit, on the Government’s priorities for the budget. NSW Treasury also reviews and provides advice to the Expenditure Review Committee of Cabinet on proposals for funding through the budget.
The integrity agencies are subject to the application of ‘efficiency dividends’ and ‘budget savings and reform measures’, which limit their access to the full funding that has been approved by Parliament. NSW Treasury and DPC manage the application of these limits to the integrity agencies. The integrity agencies are grouped within the DPC ‘cluster’, which is an administrative arrangement created by the NSW Government. Clusters do not have legal status but are used for administrative and financial management. DPC has provided additional funding during the financial year to some of the integrity agencies in the years covered in this audit. DPC also oversees the involvement of the integrity agencies in developing and reporting on their outcomes. This is a requirement of NSW Treasury’s outcome budgeting reforms, which are currently being implemented.
Each of the integrity agencies is overseen by a parliamentary committee that includes members of both houses of the NSW Parliament. These committees are responsible for reviewing the performance of the integrity agencies that they oversee. They do not have a role in funding decisions. ICAC and LECC each have additional oversight from an Inspector. The Inspector of the ICAC’s role is to oversee the operations and conduct of ICAC to ensure that it complies with the law. The Inspector of the LECC’s role is to oversee the way LECC carries out its functions, with a focus on the legality of LECC’s use of its powers. Neither of these Inspectors has a role in funding decisions.
The Audit Office of NSW is an independent integrity agency that receives some of its revenue through the NSW Government’s budget process and sits within the DPC cluster. We have taken the following actions to preserve our independence and mitigate potential conflicts of interest that could arise in conducting this audit:
- not considering or commenting on the financial arrangements for our office
- requesting a deferral of our office’s evidence to an inquiry by the NSW Legislative Council’s Public Accountability Committee that is considering the budget process for integrity agencies. The inquiry includes the four integrity agencies that are the subject of this audit and our office
- seeking independent legal advice on the framework for the financial arrangements for the integrity agencies
- using additional internal review processes to provide quality assurance to audit conclusions.
Conclusion
The current approach to determining annual funding for the integrity agencies presents threats to their independent status. The approach is consistent with the legislative and Constitutional framework for financial management in New South Wales, but it does not sufficiently recognise that the roles and functions of the integrity agencies that are the focus of this audit are different to other departments and agencies. The government of the day is responsible to the citizens of New South Wales for the prudent and responsible management of the state’s finances. Accordingly, the government of the day has a central role in decisions about funding for departments and agencies and in determining the financial management processes to be applied. This is clearly established in the legislative framework and conventions for managing public funds in New South Wales. This system is primarily designed to determine the funding for departments and agencies that are responsible to ministers. It is less appropriate for integrity agencies because it does not provide additional protection against the risk that funding decisions could be influenced by previous or planned investigations by the integrity agencies. This risk has the potential to limit the ability of the integrity agencies to fulfil their legislative mandate. The extent and nature of this risk differs for each of the integrity agencies. This is outlined in the key findings section below and described in detail in Chapters 2–5 of this report.
Aspects of the financial management mechanisms used to administer funding for the integrity agencies create tensions with their independent status. These mechanisms include the means of applying efficiency dividends and budget savings and reform measures, the provision of additional funding from DPC to the integrity agencies, and requests for the integrity agencies to report to DPC on their activities and outcomes. NSW Treasury and DPC have administered efficiency dividends and budget savings and reform measures to the integrity agencies. This results in the integrity agencies not being able to access the full funding approved by Parliament. There are two competing interpretations of appropriation legislation that lead to different conclusions about whether there is a clear legal basis for doing this. NSW Treasury and DPC focus on the fact that the Appropriation Act provides funding for the integrity agencies to a Premier, rather than the agency, and does not state that a Premier must provide the full amount of funding approved to the agency. This interpretation leads to the view that a Premier can restrict access to appropriation funding that was approved by Parliament. An alternative interpretation of the Appropriation Act would consider factors specific to the integrity agencies that differentiate them from other agencies subject to these measures. These factors include that the integrity agencies are independent of ministerial control, accountable to Parliament for performing specific legislated functions, and some may conduct investigations that involve a Premier, or DPC or NSW Treasury. If this alternative interpretation is used, then the reduction of the integrity agencies’ access to appropriation funding approved by Parliament could diminish the independent status of the integrity agencies and limit their ability to fulfil their legislative mandate.
DPC has given additional funding to three of the integrity agencies in recent years in response to requests from the agencies. If the integrity agencies require additional funding during the year, the only mechanism available is to seek funding from DPC. This creates a potential threat to the independence of the integrity agencies. Asking DPC to make decisions about funding allocations between an integrity agency and another agency in the DPC cluster is inappropriate because DPC is not responsible for the functions or actions of an integrity agency. It is also possible that DPC could be the subject of an investigation conducted by an integrity agency. DPC has advised that it considers these risks more theoretical than real.
DPC’s provision of $2.5 million in additional funding to ICAC in 2019–20 may not have been consistent with the Appropriation Act 2019 (the Act), because of a change to the Act compared to previous appropriation legislation. The additional funding that was provided to ICAC in 2019–20 by DPC had been appropriated to DPC under Part 2 of the Act. The Act specified that funding appropriated under Part 2 could only be used for the purposes specified in that Part. ICAC receives its appropriation under Part 4 of the Act. It is contestable as to whether the purpose of an appropriation under Part 2 of the Act would include providing funding for an agency that receives an appropriation under another part of the Act. The integrity agencies have been asked to report on activities and outcomes to DPC as part of the outcome budgeting reforms that are being implemented by NSW Treasury. This is inconsistent with their independent status because the integrity agencies are accountable to Parliament for their activities, not DPC or a Premier.
Our audit also assessed the integrity agencies’ systems for planning, budgeting and monitoring the efficiency of their work. We did not find major deficiencies in the management practices of the integrity agencies. We did identify opportunities for improvement in each agency. These are specific to the circumstances of each agency and are outlined in the key findings section below and Chapters 2–5 of this report.
Key findings are
The role of the Executive Government in deciding annual funding for the integrity agencies presents threats to their independence The financial arrangements used to determine the funding for the integrity agencies are based on the legislative and Constitutional framework in New South Wales. These arrangements reflect the fact that the government of the day is responsible for managing the state’s finances. Under this framework, the government of the day initiates funding legislation, funding is given to a minister for the services of the agencies, and the minister retains ultimate accountability to Parliament for the expenditure of the funding. Accordingly, the Executive Government – through Cabinet, NSW Treasury and DPC - is involved in the processes that determine the funding for the integrity agencies that are the focus of this audit. This system principally exists to enable funding decisions for NSW Government departments and agencies. These departments and agencies are created by the Executive Government and ministers oversee them directly.
The role of the integrity agencies includes providing independent scrutiny of the Executive Government. Work done by the integrity agencies can potentially have a negative impact on the NSW Government, or individual ministers or senior public servants. As a result, there is a risk that the previous or planned work of the integrity agencies could influence the decisions made about their funding.
The existing safeguards to this risk are not sufficient. Decisions about funding for integrity agencies are not transparent and there are no mechanisms for the agencies to question or challenge decisions made. The NSW Parliament reviews appropriation legislation but is not involved in the process of developing the annual NSW budget and does not see budget proposals that were made by the integrity agencies during the budget development process. Agencies can report to their parliamentary committees, but these committees do not have a role in decisions about their funding. The impact of potential threats to the independence of the integrity agencies, and their ability to fulfil their legislative mandates, is specific to each agency due to differences in their functions and jurisdiction. These are discussed separately for each agency in this report.
The legal basis for restricting the integrity agencies’ access to appropriation funding is contestable
Limits on access to the full appropriations approved by Parliament have been applied to the integrity agencies in recent years. These have been set by the ERC and administered by NSW Treasury and DPC. There are two competing interpretations of appropriation legislation that lead to different conclusions about whether a Premier has a clear legal basis for restricting access to funding that has been appropriated for the integrity agencies.
NSW Treasury and DPC have interpreted the Appropriation Act in a way that concludes a Premier is able to restrict the integrity agencies’ access to appropriation funding. This interpretation is based on the following key points:
• The Appropriation Act specifically appropriates funding to a Premier, rather than to the head of an integrity agency. This reflects the established Westminster convention that a minister is ultimately accountable to Parliament for the expenditure of public funds.
• The Appropriation Act specifies a maximum amount of funding that can be withdrawn for the services of each of the integrity agencies, but it does not specify that a Premier must provide the full amount of funding approved to the agencies.
• The Government Sector Finance Act 2018 contemplates the existence of unused appropriations by making provision for the return of any funds that are not used within the financial year to the Consolidated Fund.
NSW Treasury and DPC’s interpretation is consistent with relevant financial legislation and financial administration conventions in New South Wales, but it does not sit well alongside the legislated role and functions of the integrity agencies. An alternative approach to interpreting the Appropriation Act would consider the contextual factors and legislation specific to each integrity agency. These include:
• The appropriations for the integrity agencies are made under a discrete Part of the Appropriation Act. This indicates an intention to distinguish between appropriations for integrity agencies and appropriations for other government departments and agencies.
• The integrity agencies are established by separate Acts of Parliament which give them independence from ministers. This is different to the arrangements for other departments and agencies, which are established by Executive order and cannot act independently of their minister.
• The Appropriation Act provides for appropriations to a Premier for the services of the integrity agencies that are specified in legislation. The integrity agencies are accountable to Parliament for performing these functions.
• An integrity agency may undertake an investigation that involves a Premier or DPC or NSW Treasury.
If this alternative interpretation is used, then a Premier would require an express source of power to limit the availability of appropriation funding to the integrity agencies. If a Premier could reduce the integrity agencies’ access to funding that was appropriated by Parliament, their independence could be compromised and their ability to fulfil their legislative mandate could be diminished.
The system for providing additional funding to the integrity agencies creates potential threats to their independence
ICAC, NSWEC and NSWO each received additional funding from DPC during the financial year in the period 2014–15 to 2018–19. To access this funding, the heads of the integrity agencies wrote to the DPC Secretary requesting additional funding and providing a brief description of the reason it was needed. Most of the requests for additional funding related to the cost of conducting work that was not anticipated at the time the annual appropriations for the integrity agencies were set.
If the integrity agencies require additional funding during the year, the only mechanism available is to seek funding from DPC. This creates a potential threat to their independence. Asking DPC to make decisions about funding allocations between an integrity agency and another agency in the DPC cluster is inappropriate because the integrity agencies are not accountable to DPC and DPC is not responsible for the functions or actions of the integrity agencies. In addition, it is possible that DPC could be the subject of an investigation conducted by an integrity agency. There are no criteria or guidelines for integrity agencies seeking additional funding from DPC. This means there is very little transparency to Parliament about the requests made and the reasons that they were granted.
DPC’s provision of additional funding to ICAC in 2019–20 may not have been consistent with the Appropriation Act 2019
DPC provided an additional $2.5 million to ICAC in 2019–20 in response to ICAC’s request for funding to cover the cost of a public inquiry that arose during the financial year. This was provided outside the annual budget process. DPC sourced the funding from within its appropriation funding from that year.
DPC received its appropriation funding under Part 2 of the Appropriation Act 2019. Section 25 of the Act stated that this funding could only be used for the purposes specified in Part 2 of the Act. The appropriation for ICAC was made under Part 4, a different part of the Appropriation Act 2019. It is contestable as to whether the purpose of the appropriation for DPC could extend to giving additional funding to ICAC, which was funded under a different part of the Act.
The Appropriation Acts in the years 2014–15 to 2018–19 did not include provisions stating that funding appropriated under Part 2 could only be paid out for the purposes specified in Part 2. This indicates that the additional funding provided from DPC to integrity agencies in those years would not necessarily have been inconsistent with the relevant Appropriation Acts.
Asking the integrity agencies to report to DPC on their activities and outcomes is inconsistent with the independence of the integrity agencies Outcome budgeting was introduced as a management practice in New South Wales in 2017–18. Under this approach to budget development, agencies are required to link their budget submissions to a ‘state outcome’. The state outcomes are assigned by NSW Treasury to the departments that have been designated as ‘principal departments’ for each cluster. These departments are then responsible for achieving the outcomes assigned to them. The integrity agencies have been asked by DPC to develop plans and report to it against the state outcome of ‘accountable and responsible government’. DPC is accountable to the Premier and the Cabinet for delivering this outcome. The outcome itself is broad enough to be consistent with the general role and functions of the integrity agencies. However, the integrity agencies are not subject to direction by a minister or department in their activities and report directly to Parliament on their functions. This makes it inappropriate for the integrity agencies to be asked to report against objectives and outcomes that are set by the NSW Government and administered by DPC.
Some comparable jurisdictions give parliament a more direct role in funding for integrity agencies
In several comparable jurisdictions, parliamentary committees provide advice on the budgets for integrity agencies. In some of these jurisdictions, the heads of integrity agencies are formally classified as Officers of Parliament to signify a more direct relationship with Parliament. The use of these mechanisms in other jurisdictions is intended to provide a clearer distinction between integrity agencies and other government departments and agencies. This aims to provide additional safeguards to the independence of integrity agencies, while also improving the transparency of the decision-making for integrity agency budgets and improving the transparency of integrity agency performance to Parliament and the public.
ICAC’s financial arrangements and management practices
ICAC’s legislation establishes it as an independent agency that is accountable to Parliament. Decisions about the annual appropriation for ICAC are made by Cabinet, with advice from NSW Treasury. Members of Cabinet or NSW Treasury could be the subject of, or more broadly affected by, an ICAC investigation. NSW Treasury advises that it provides ICAC's funding submissions directly to Cabinet without making changes. However, NSW Treasury does provide separate advice to Cabinet on these submissions. There is no independent advice on ICAC’s funding requirements and there is no transparency to Parliament about the reasons for decisions made about ICAC’s budget. The absence of these safeguards in the current financial arrangements creates a threat to ICAC’s independence and has the potential to limit its ability to fulfil its legislative mandate.
ICAC submitted budget proposals seeking increases to its appropriation funding in several recent years. The budget proposals related to funding to expand its workforce to respond to increases in the volume and complexity of its work. Some of these proposals were rejected without reasons being provided. There are no formal mechanisms available to ICAC to question or challenge these decisions. The process available to ICAC to request additional funding outside the annual budget creates further risks to its independence, as described above.
ICAC’s management practices are suitable for its needs. Its staff use structured processes for prioritising work against its legislative mandate and it has conducted recent reviews to assess its operational efficiency. ICAC's internal budgeting processes are adequate but could be improved with better documentation of the reasons for its budget decisions.
NSWEC’s financial arrangements and management practices
NSWEC’s legislation states that it should conduct elections and investigate potential breaches of electoral law independently and be accountable to Parliament. Decisions about the annual appropriation for NSWEC are made by Cabinet. It is possible that NSWEC’s investigations of electoral integrity could include members of Cabinet or the political party that holds government. There is a risk that decisions about its funding could be influenced by the conduct of these investigations. If realised, this would be a threat to NSWEC’s independence and ability to fulfil its legislative mandate. NSWEC has not received the full funding amount it has requested in recent years. There is inadequate transparency about how funding decisions were made and there are no formal mechanisms to question or challenge these decisions.
The conduct of elections is a key element of a democratic system and under-funding this function could have serious implications. NSWEC’s requests for additional appropriation funding are assessed alongside the priorities of the government of the day. Its role transcends these immediate priorities and there is a risk that its funding requirements may not be prioritised.
NSWEC’s management practices are suitable for its needs. Its internal budgeting processes and efficiency programs are clear and well documented. NSWEC has identified options to improve its operational and corporate efficiency but has not implemented all of these.
NSWO’s financial arrangements and management practices
NSWO’s legislation makes it clear that it should operate independently of the agencies it oversees and be accountable to Parliament. NSWO’s investigations do not include members of Cabinet, except in relation to Public Interest Disclosures made about a minister, so the risk that decisions about its budget could be affected by its investigations is relatively lower. However, NSWO's investigations can comment on and make recommendations about government policies, which may have been endorsed by Cabinet or an individual minister, and its investigations cover systemic issues for which ministers and the heads of government departments are responsible. NSWO faces a further challenge in its ability to make compelling budget proposals under the current financial arrangements. Its funding requests are assessed alongside the government’s priorities, but its work is unlikely to align directly with these priorities.
NSWO’s management practices are suitable for its needs. NSWO has assessed its operational and corporate efficiency recently and has implemented major changes to its operating model in response to this. Its internal budgeting process is adequate but could be improved by being documented more thoroughly.
LECC’s financial arrangements and management practices
LECC’s legislation states it should operate independently of the agencies it oversees and be accountable to Parliament. LECC’s jurisdiction does not include members of Cabinet, NSW Treasury or DPC. However, LECC’s investigations have the potential to have an impact on a Minister for Police, who is a member of Cabinet, and the government of the day. There is a risk that decision makers for LECC’s funding could be influenced by these considerations. While LECC has not sought increases to its appropriation funding in recent years, there are no formal mechanisms to question or challenge these decisions if it did have concerns about its funding in the future. Unlike the other integrity agencies in this audit, LECC is not classified as a separate GSF agency under the Government Sector Finance Act 2018. This difference means that LECC has less independence from the Executive Government, because LECC would have to comply with a Treasurer’s Direction even if it believes it is not consistent with the independent exercise of its functions.
LECC's management practices are suitable for its needs. LECC's internal budgeting processes are clear and documented and it has identified and implemented operational and corporate efficiency savings in several areas. LECC published a new strategic plan in July 2020. Over the first three years of its operations from 2017, LECC had not conducted effective strategic planning, which made it difficult for LECC to demonstrate that it had a cohesive approach to its operations across the agency during this time.
The resultant recommendations are
1. Acknowledging that the government of the day is responsible for the financial management of the state, NSW Treasury and DPC should implement a funding model for the integrity agencies that addresses potential threats to their independence while ensuring their accountability. This should be based on the following principles:
- The integrity agencies are required to demonstrate their accountability as prudent managers of their financial resources.
- Parliament’s role in the budget process should be expanded to ensure Cabinet is provided with more independent advice on the funding requirements for the integrity agencies.
- There should be transparency to Parliament and the relevant agency for decisions made about funding for the integrity agencies.
- There should be structured oversight by Parliament of the performance and financial management of the integrity agencies.
2. NSW Treasury and DPC should reassess whether the process used to apply efficiency dividends to the integrity agencies is consistent with appropriation legislation and the independence of the integrity agencies.
3. NSW Treasury and DPC should ensure that the use of cluster-based financial management arrangements does not diminish the independence of the integrity agencies and is consistent with the requirements of appropriation acts and other relevant legislation. This includes ensuring that:
- the provision of additional funding to the integrity agencies outside the budget process is consistent with appropriation legislation and includes sufficient safeguards to protect the independence of the integrity agencies
- any request for the integrity agencies to report on activities and outcomes as a part of outcome budgeting reforms is consistent with their independence.
