iCare: How did NSW Auditor General Margaret Crawford & officers miss obvious cashflow problems, which EY had detected

by Ganesh Sahathevan


iCare commenced operations in November 2015.
It seems to have run into  problems by the 2018-19 financial year, when it required a cash grant from the Crown that was almost 10 times more than that received in 2017-2018 financial year.


The evidence is on page page 205 of the 2018-2019 iCare Annual Report where it has been reported that the grant rose from $ 128,496,000 in the 2017-2018 financial year to  $ 1,163,496,000 in the 2018-2019 financial year.

The grant is provided pursuant to the Net Asset Holding Level Policy. NSW Treasury has defended its grant to iCare (or rather iCare managed funds) of $ 2 Billion in the 2019-2020 financial year, sighting:

• Lower than expected returns from investments resulting from the COVID-19 market downturn 
• Existing and anticipated historic abuse claims 
• COVID-19 presumptive legislation that creates a presumption in favour of workers who contract the disease 
• Shutdowns from COVID-19 resulting in payouts for business interruption.
 • Costs from the summer bushfires 
• Increases in medical costs and psychological claims in the workers compensation portfolio

These are not factors that were present in the pervious 2018-2019 financial year and  hence do not explain the 10 fold jump in the 2018-2019 financial year. The 10 fold increase in grant funding suggests cashflow problems and it is surprising that NSW Auditor General Margaret Crawford and officers did not see a problem. In fact, iCare even declared:
"...... the NSW Auditor General has found our premium income consistently runs ahead of our outgoings. Our finances are in a healthy state.”


In reality, EY had found  in a report commissioned by the Department Of Finance  that icare withdrew $500 million cash more than budgeted during December 2017 and said the implication was icare had “cashflow problems due to lower than expected premium collection.”

The question that the NSW Auditor General Margaret Crawford must answer is this: how were simple obvious cashflow problems missed, and was the EY report ignored?

TO BE READ WITH 

Sunday, August 16, 2020

Good audit practise requires even the NSW Auditor-General & officers to review publicly available information about their audit subjects: iCare and other NSW Audit deficiencies explained

by Ganesh Sahathevan

This writer has previously asked:
iCare NSW: How did Margaret Crawford's NSW Audit miss the obvious problems

The problems mentioned were all in the public domain for at least the past two years, but finally came to prominence last month as a result of an ABC 4 Corners expose.

Regardless of that expose and the resignation of its CEO in the course of a parliamentary inquiry iCare has in its defence turned to its NSW Audit report:

Referred to ICAC , iCare relies on statements by the NSW Auditor General Margaret Crawford to declare:"Our finances are in a healthy state"


The problem outlined above stems from the fact that Audit NSW ignored information in the public domain, a practise not uncommon within the NSW Public Service where even annual reports tabled in Parliament can be prepared to show exemplar performance regardless of what is reported by the media.

The practise has served the NSW Public service well, and has the added advantage of enabling public servants and politicians to maintain plausible deniability regardless of the circumstances.

Politics and auditing are however two different things, even for a public sector auditor like the NSW Audit Office and the Auditor General, Ms Margaret Crawford.Auditors are supposed to hold themselves to a higher standard(though it is noted that Ms Crawford is not an accountant, and not a member of any professional body of accountants and auditors.

The United States  Public Company Accounting Oversight Board (PCOAB)  provides guidance (which has been reproduced below) about the type of investigation of publicly available information auditors are meant to undertake when performing audits of public company audits. The concepts ought not be different for NSW public service entities. The case of iCare demonstrates what can happen when these basic concepts are ignored. 
The iCare audited is not exceptional. For another example from NSW  of where statutory board annual reports bear no resemblance to the public perception of the entity see:

Her Excellency Gov Beazley has a duty to ensure her government's books accurately reflect Her Excellency's words, acts, legal rights and liabilities (especially when the claims are made by a stat body chaired by the Lt Gov, the CJ NSW Tom Bathurst)

TO BE READ WITH 

Public Company Accounting Oversight Board (PCOAB)

AS 2110: Identifying and Assessing Risks of Material Misstatement

Amendments to paragraphs .28 and .52 and new paragraphs .28A and .60A have been adopted by the PCAOB and ap

Obtaining an Understanding of the Company and Its Environment

Objective

.03        The objective of the auditor is to identify and appropriately assess the risks of material misstatement, thereby providing a basis for designing and implementing responses to the risks of material misstatement.

Performing Risk Assessment Procedures

.04        The auditor should perform risk assessment procedures that are sufficient to provide a reasonable basis for identifying and assessing the risks of material misstatement, whether due to error or fraud,3 and designing further audit procedures.4

.07        The auditor should obtain an understanding of the company and its environment ("understanding of the company") to understand the events, conditions, and company activities that might reasonably be expected to have a significant effect on the risks of material misstatement. Obtaining an understanding of the company includes understanding:

1. Relevant industry, regulatory, and other external factors;
2. The nature of the company;
3. The company's selection and application of accounting principles, including related disclosures;
4. The company's objectives and strategies and those related business risks that might reasonably be expected to result in risks of material misstatement; and
5. The company's measurement and analysis of its financial performance.

11        As part of obtaining an understanding of the company as required by paragraph .07, the auditor should consider performing the following procedures and the extent to which the procedures should be performed:

• Reading public information about the company relevant to the evaluation of the likelihood of material financial statement misstatements and, in an integrated audit, the effectiveness of the company's internal control over financial reporting, e.g., company-issued press releases, company-prepared presentation materials for analysts or investor groups, and analyst reports;
• Observing or reading transcripts of earnings calls and, to the extent publicly available, other meetings with investors or rating agencies;