If you sell AI to a NSW agency, work in one, or are a citizen whose services are increasingly delivered through one, the question that matters is not whether government uses AI. It does, at scale: 357 tools, piloted or fully implemented, across 21 of the 26 agencies that account for 95 per cent of the state's budgeted expenditure. The question is whether the scaffolding around those tools exists. The Auditor-General's answer, in chapter 7 of the Internal controls and governance 2025 report, is: mostly not yet.
The scorecard, straight from the audit
Source: NSW Auditor-General, Internal controls and governance 2025: Procurement and technology, chapter 7 governance table (percentage of AI-adopting agencies that considered each element). "Formal reporting" is the 29 per cent with policy or procedures for monitoring and reporting on AI use; the report notes a further figure, 52 per cent, for agencies that had done at least some reporting to senior management. Accessed 11 July 2026.
The report's own reading of the gap is direct: "Only 38% of agencies have established formal AI policies or embedded consideration of AI into existing policies." Some agencies told the audit they rely on the whole-of-government AI Ethics Policy instead, and the report answers that squarely: "in isolation, it is unlikely to be sufficient", because agency-level policy has to cover ownership and scope, roles and responsibilities, and "how and to whom to report misuse or concerns."
Inventory is the other quiet finding. Fifteen of the 21 AI-adopting agencies keep a centralised inventory of their AI tools; six do not, meaning they cannot produce a consolidated list of the AI they run. And only 29 per cent of agencies report having a strategy for AI at all, which the audit connects to its broader point: "AI has not yet been integrated as a strategic or operational tool" across the sector.
The framework is mandatory. Compliance is close, not complete.
NSW is not governing AI from a blank page. Circular DCS-2024-04, in force since 1 July 2024, makes the state's five-principle AI Ethics Policy and the NSW AI Assessment Framework mandatory across an AI system's lifecycle, with projects over $5 million (or funded by the Digital Restart Fund) additionally registered with the Department of Customer Service under the Digital Assurance Framework.
Against that rulebook, the audit's sample found near-compliance with the letter and gaps in the ceremony: 13 of 15 relevant agencies with AI projects under $5 million had completed the assessment tool, but one of those had it approved without the required senior officer sign-off. All three agencies with projects above $5 million had completed and approved assessments; one had not registered its project with the Department of Customer Service as required. Small numbers, but they are exactly the checks the framework exists to make routine.
Since the audit's cut-off, the framework itself has moved: on 27 January 2026 the NSW Government relaunched the AI Assessment Framework in a modernised form, a 16-question structured initial assessment that generates a risk score and the list of mandatory assurance activities, with a deep-dive toolkit for higher-risk cases and, for the first time, explicit coverage of agentic AI. The relaunch answers one audit criticism, the old assessment's length and subjectivity, and answers none of the policy, inventory, reporting or procurement gaps, which sit with each agency rather than with the tool.
Why this matters beyond NSW
Every Australian government is deploying AI behind a framework that claims assurance; NSW is simply the first whose independent auditor has counted the gap between the framework and the floor. The count says adoption is running roughly two years ahead of governance: two thirds of agencies have assigned accountability and trained staff, one third have adjusted the risk and IT machinery, one in twenty has worked out how to buy AI properly, despite most of those 357 tools being procured rather than built. The Audit Office has a dedicated performance audit of AI governance scheduled for 2026-27. On these numbers, it will not be short of material.