A report into the state's finances focusing on the controversial Transport Asset Holding Entity has been released a day before a public accountability committee inquiry into the entity is set to continue.
Auditor-General Margaret Crawford has released her independent report on the state's finances, which "was significantly delayed by protracted disagreement over the treatment of the government's cash contribution to TAHE", she noted.
In the report she accuses Treasury of trying to inflate the value of TAHE, saying it "presented late, unsophisticated, and inaccurate forecasts to the Audit Office, all of which sought to support the desired outcome of higher projected returns".
Treasury submitted three different versions of estimated returns that Ms Crawford says contained "errors, omissions, and/or poor logic".
"Most importantly, none were able to demonstrate that a realistic rate of return would be derived from the (general government sector's) investment in TAHE," Ms Crawford says.
Rail operators Sydney Trains and NSW TrainLink, funded by the government, pay government-owned TAHE to access railways and use the trains that run on them.
Departing Treasury secretary Michael Pratt told a parliamentary inquiry into TAHE in December that the entity "was created to pursue government policy on micro economic reform to bring about the most optimal structure for the management of transport assets".
One of Ms Crawford's "significant uncertainties" that delayed approval of the state's finances was whether the rail operators would be adequately funded to pay access fees to TAHE in the future, required for the entity to turn a profit.
Ms Crawford also noted there was an "undue reliance" on external consultants, giving rise to the risk that "agencies shop for opinions from multiple experts in order to receive advice that matches the outcome being sought".
She recommended Treasury "consider whether there is sufficient competent oversight of its use of consultants and assess the risk of an over dependence on consultants at the cost of internal capability".
Mr Pratt faced scrutiny at the December hearing after he was accused of "bullying" by former KPMG consultant Brendan Lyon, who says he was pressured to change a report that showed the budget would be about $10 billion worse off than claimed.
Mr Pratt told the inquiry that Mr Lyon was not a qualified accountant, and separate KPMG teams had been engaged by Treasury and then Transport for different purposes.
Mr Lyon and his team strayed into an area "where there was no capability" for them to engage in the work they did and there "was a whole set of assumptions that were wrong", Mr Pratt said.
NSW Treasury executive director of transport Cassandra Wilkinson said Mr Lyon wasn't asked to change his opinion, just to correct the figures.
Premier Dominic Perrottet, who oversaw the establishment of TAHE during his time as Treasurer, defended the entity again on Wednesday, saying it is "in line with the approach taken" in Queensland and Victoria.
"So there's nothing that's out of the ordinary in relation to the approach, if there are nuances that the government could take on board of course, we will," Mr Perrottet says.
The opposition and Greens say Ms Crawford's independent audit is "scathing".
The inquiry into TAHE is set to resume with another hearing on Thursday.
Committee chair David Shoebridge said on Wednesday that Ms Crawford's report "delivered a ruthlessly clinical assessment" of the government's "budget mess".
It is "essential" Thursday's hearing proceed so the committee "can put the Audit Office's damning conclusions to Treasury and Transport officials", Mr Shoebridge says.
