Posted on November 24, 2022 by Sue Puckeridge 3

Auditor General’s performance audit powers extended to certain State and local council contractors

The Government Sector Audit and Other Legislation Amendment Bill 2022 (Bill) has been passed by the NSW Parliament and is awaiting assent.

Purpose of the Bill

The Bill amends the Government Sector Audit Act 1983 and the Local Government Act 1993 so as to implement the recommendations of the Public Accounts Committee, Quadrennial Review of the Audit Office of NSW report No. 10/57  September 2022 (see here).  It aligns the NSW Auditor-General’s performance audit powers (as opposed to financial audit powers) with other States and Territories by extending those powers to non-government entities that carry out government funded activities for and on behalf of the State and local government.  The aim is to enable the Auditor -General to assess whether such activities are being carried out effectively, economically, efficiently and lawfully.

Presently, the Auditor-General cannot directly examine the use of public resources by non‑public sector entities, engaged by government agencies or local councils, to exercise functions or provide other public services on their behalf. Scrutiny is limited to the agencies and councils.  Once the Bill becomes operative, whether the body delivering the services is a government or non-government entity will be irrelevant.

Importantly, a performance audit under the Bill may only be carried out to the extent that it assesses the operations of the relevant entity in relation to achieving the State or local government purpose.  That is, the audit is not a full performance audit of the entire entity.

Under the Bill, the Auditor-General will:

• have autonomy to select the subject matter for performance auditing;
• formally engage with a relevant entity on the scope, focus of the performance audit and on the content of their draft report;
• have power to inspect the records and to interview staff of non-public sector entities;  and
• be required to table the performance audits in Parliament.  This reflects the present requirement for performance audit reports currently undertaken by the Auditor-General.

A “relevant entity” is broadly defined to be an entity that receives money or other resources, whether directly or indirectly from:

• in the case of the State – an entity that would otherwise be auditable under the Government Sector Audit Act 1983, or
• in the case of local government – the Council.

for a particular purpose (State purpose or local government purpose the case may be).   

Additionally, to be a relevant entity the entity must have either:

1. agreed to use the money or other resources in achieving the State purpose or local government purpose, or
2. have entered into a contract that relates to the State purpose or local government purpose.

The entity must not otherwise be the subject of an audit conducted under another provision of the Government Sector Audit Act 1983 in the case of the State or the Local Government Act 1993 in the case of a council.

The definition of “relevant entity” is intended to focus on non-public sector entities using public resources to provide goods or services to the public.

Arrangements which could be subject to a performance audit include outsourcing, public-private partnerships, grants, subsidy or entitlement funding models and lease arrangements where the lessee has obligations related to the maintenance or safe operation of public assets. For example, a not-for-profit organisation that has received a grant from the State to carry out a specific purpose or the manager of the local sports centre that operates the centre on behalf of the Council could be subject to a performance audit.

Secrecy Controls

While secrecy controls applicable to information held by the Auditor‑General will apply to protect information the Auditor-General obtains as part of a performance audit, the Bill removes a previous exclusion of Cabinet information and legal professional privilege from the application of the power to access and compel the production of documents. Consequently, Cabinet information or other documents subject to legal professional privilege which are the subject of a claim of legal professional privilege, can be disclosed if the Auditor-General authorises disclosure.  This is despite the Legislative Review Committee in its report of 15 November 2022 raising concerns about the removal of the ability to claim legal professional privilege given that it is key immunity under common law and the fact that the use of confidential information obtained by the Auditor General is not clearly defined.

However, the Auditor General can only authorise the disclosure of such documents:

• upon forming the opinion that disclosure is in the public interest and necessary for the exercise of the Auditor -General’s functions, and
• if the Premier has been given 28 days notice of the intention to disclose the information, and
• the Premier has not, within 28 days, issued a certificate that in the Premier’s opinion, the disclosure of the information is not in the public interest.

The Bill gives no guidance as to how the Premier is to determine whether disclosure of a legal advice obtained by a relevant entity is in the public interest and the Auditor-General is under no obligation to inform the relevant entity of the intention to disclose confidential information.

Both State agencies and councils may wish to consider whether the terms and conditions of their template contract documents with relevant entities need to be amended to require contractors to cooperate with the Auditor General when carrying out of a performance audit.

The Bill will commence upon its assent. The Bill as agreed by both houses of Parliament can be found here.

If you wish to discuss the issues raised in this post, please leave a comment below or contact Sue Puckeridge on 02 8235 9702.