The year in review

I have much pleasure in presenting our report on the Audit Office’s performance for the 1999-2000 financial year.

Public Reports

Once again the Audit Office had an extremely busy and successful year. We produced 13 (1999 – 10) substantive public reports – covering the results of annual audits, planned special audits and unplanned special investigations.

The following reports achieved a high public profile:

• Inquiry into Events Surrounding the Chartering of Aircraft by the Department of Work and Income (October 1999);
• Inquiry into Gisborne District Council and the London Media Launch of Gisborne 2000 First Light (April 2000);
• Airways Corporation Of New Zealand Limited: Review Of Certain Matters Concerning The National Air Traffic Services (UK) Consortium (June 2000); and
• Student Loan Scheme – Publicly Available Accountability Information (June 2000).

Following Up Previous Reports

We also put significant effort into following up previous reports (such as Health Benefits Limited: Payment of Claims for Pharmaceutical Service Subsidies), and encouraging the Executive, select committees and various other seminars and working groups to debate and implement our previously published “think pieces” such as Governance Issues in Crown Entities (November 1996) and The Accountability of Executive Government to Parliament (June 1999).

It is particularly encouraging that the State Services Commission has been working on the Government’s initiative to produce new legislation for Crown entities. Hopefully, this will avoid a repeat of the issues arising in the various high-profile inquiries (such as Inquiry into Certain Events Concerning the New Zealand Tourism Board and Report on the Expenditure of the Chief Executive, and Expenditure Control Systems in the New Zealand Qualifications Authority) we reported on in 1999. In addition, the Commission has been actively considering the “capability” issues we raised in The Accountability of Executive Government to Parliament.

Putting Impact Evaluation on the Agenda

This year we produced another “think piece” report entitled Impact Evaluation – Its Purpose and Use (March 2000). This report demonstrates the value of impact evaluation as a practical tool to enhance the quality of decision-making by the Government and Parliament and optimise the effectiveness of public expenditure. I am hopeful that this report will encourage debate on the need for effective identification of expectations and achievements, especially of outcomes, and consequent improvement in non-financial performance reporting.

Providing Positive Guidance

We also produced a number of reports aimed at providing positive guidance to particular sectors of our audit portfolio. Examples are:

• Towards Service Excellence: The Responsiveness of Government Agencies to Their Clients (August 1999);
• Contracting Out Local Authority Regulatory Functions (November 1999); and
• Governance and Oversight of Large Information Technology Projects (April 2000).

Although each of these exercises used “live” case studies, our primary aim was to provide guidance for those public entities embarking on similar projects in the future.

Emphasising Environmental Issues

We also gave increasing emphasis during the year to environmental issues. We produced a joint study with the Parliamentary Commissioner for the Environment entitled Local Government Environmental Management: A Study of Models and Outcomes (August 1999), and a report entitled Information Requirements for the Sustainable Management of Fisheries (December 1999) which complemented a wider-ranging study by the Commissioner.

Contracting with Non-governmental Organisations

Sometimes we perform significant amounts of work that do not actually give rise to a detailed report. Earlier this year I was asked by a Member of Parliament to investigate a number of allegations relating to the Waipareira Trust. My ability to respond to this request was severely limited by my lack of power to audit a private sector organisation. However, from the work we did in the public entities contracting with the Trust, it was apparent that there is a consistent lack of good quality specification and monitoring of the performance of non-governmental organisations (NGOs) by the entities funding them.

I recommended that the Government develop guidance for contracting with NGOs – especially for the delivery of health and social services. It is encouraging that the Government has accepted this recommendation, and the work is to be led by the Treasury in consultation with the State Services Commission and ourselves.

Other Highlights

Our public reports present the most visible side of our activity. However, about 85% of what we do relates to financial audits of the more than 3,800 public entities that we audit. As foreshadowed in our last annual report, I am very pleased to report that we have significantly improved the arrears situation for these audits. (Arrears are generally caused by small entities not completing their financial statements for audit in a timely manner.)

We completed 312 more audits than in the previous year, and our arrears have reduced from 1,038 to 646. This is the result of strenuous efforts by both auditors in the field and staff in the Office of the Auditor-General (OAG).

All this activity was achieved with the distraction of the OAG temporarily vacating its offices for four months while they were completely refurbished. The fit-out was completed on time and on budget. The new design concept led to improved floor layouts and space that is user-friendlier. All staff enjoy natural light and views with an open plan concept allowing flexibility for future changes. What’s more, our annual outgoings have been significantly reduced.

Lastly, after strenuous efforts by the Treasury, Parliamentary Counsel and my Office, the Public Audit Bill was introduced to Parliament in March 2000. Submissions are due to be considered by the Finance and Expenditure Committee in September. We have been considering the policy and operational implications of its passage, and we will present a new business plan to the Officers of Parliament Committee when it is finally enacted (hopefully later this year).

Achieving Our Goals

Part Two of this report details our performance in achieving the six goals we set ourselves for 1999-2000. Items that deserve special mention here are:

Completing Annual Audits Professionally and On Time

As already mentioned, we were particularly successful in making major inroads into the “audit arrears” problem that I have mentioned in previous years. However, our performance in the timely issue of audit management letters still needs improvement. We set ourselves high targets but we have not always been successful in meeting them. I have taken steps to improve this performance and I expect to report significant progress in our 2000-2001 annual report.

We aim to carry out quality assurance reviews of each Approved Auditor’s performance once during their threeyear contract period, and we are on target to achieve this coverage. Our reviews found that, generally, work was of a good quality. For the few exceptions, we took appropriate follow-up action.

Continuously Improving our Audit and Contract Management Processes

We strive to achieve continuous improvement in our audit processes and the OAG’s relationships with Approved Auditors in both Audit New Zealand and private sector auditing firms. Achievements during 1999-2000 were:

• Continuing with our policy of exposing a significant part of our audit portfolio to competitive tendering – approximately 89% (by audit hours) of the portfolio has been invited to participate. Excluding schools, four tender rounds were held – resulting in 10 tenders being won by Audit New Zealand and 11 by private sector auditing firms, and 120 entities electing to renegotiate with their existing audit service provider. Approximately 2,600 schools were invited to go to tender and about 75% chose to renegotiate with their existing audit service provider.
• Continuing to support our auditors (in both Audit New Zealand and private sector auditing firms) by updating our Manual for Audit Service Providers, providing training on a range of accounting and auditing issues in convenient locations throughout New Zealand, and publishing our informal newsletter the Watchdog.

Relationship with Parliament

Through our ongoing interaction with select committees and central agencies we monitor areas of parliamentary interest and emerging issues within the Executive. This helps us determine what planned special audits and studies we might carry out.

We also place considerable emphasis on our relationship with Parliament, especially in the first year of a new Parliament. Recent initiatives include:

• discussing the quality and effectiveness of our relationship with a number of select committee chairpersons;
• providing briefings to incoming select committees on roles and relationships; and
• putting more emphasis on “marketing” our reports with key stakeholders.

For some time I expressed concern that Parliament had no formal mechanism to consider our reports. So I was very pleased when the Finance and Expenditure Committee decided to form a subcommittee with the task of considering our reports or referring them on to the relevant select committee. Hopefully this will provide a higher level of engagement with the issues raised in our reports.

Relationship with Local Government

We continue to use the wide-ranging skills of my Local Government Advisory Group to check that our strategic planning identifies the critical issues facing local government and that our planned work is both relevant and credible.

We also continue to use independent experts to act on the steering committees for certain specialised projects – for example, Contracting Out Local Authority Regulatory Functions and Local Government Environmental Management: A Study of Models and Outcomes.

Last year local authorities were required for the first time to report under the requirements of the new financial management regime. This placed a huge workload on councils and auditors, and I am pleased to say that both parties rose to the challenge. As a result, local authorities’ financial management has significantly improved.

However, there are still two issues causing some concern to the sector and us:

• first, valuing and accounting for infrastructural assets; and
• secondly, the requirement for projected operating revenues to cover projected operating expenses (including depreciation).

The sector is addressing the first of these issues, but we believe legislation is needed to resolve the second.

“Closing the Gaps”

The Government’s “Closing the Gaps” initiatives – particularly, the need for government departments to report against these initiatives in their annual report – are presenting challenges to all concerned. We have issued supplemental guidance to our auditors to help departments meet their requirements.

My own Office is also required to report. We do not have any programmes targeted solely at improving outcomes for Maori or Pacific Island peoples or at-risk groups. But, for a number of years I have required that we are well informed about the issues in these sectors in order that we can:

• maintain an effective and credible relationship with the Maori Affairs Committee (we have had a dedicated sector manager position for over seven years); and
• design appropriate special audits and studies (for example, Review of Maori Trust Boards (1995 and 1998), The Settlement of Claims under the Treaty of Waitangi (1995), and Delivering Effective Outputs for Maori (1998)).

In addition, as I discuss later, we are building on our own internal “Effectiveness for Maori” initiatives.

Management Performance

Part Three of the report highlights our performance under the headings of:

• financial performance; and
• human resources.

It then discusses how the two business units of the Office – the Office of the Auditor-General and Audit New Zealand – have met their respective key objectives for 1999-2000 as set out in our Forecast Report.

Our results continue to demonstrate an encouraging degree of success in achieving our goal of being a leading example of a public sector organisation in terms of performance, financial management and accountability.

Financial Performance

We achieved an operating surplus of $803,000, compared with a forecast of $569,000 and last year’s figure of $593,000. All expenditure was within appropriation and budget.

Our working capital situation is usually adequate, but it is subject to large seasonal fluctuations. We are in the process of making arrangements with the Treasury to manage these fluctuations more effectively.

In recent years we have successfully managed within static appropriations for the discretionary part of our business (Output Class D1). However, this is now placing increasing strain on the Office, and we have not always been able to achieve all we planned or have been asked to do.

We have signalled our intention to approach the Officers of Parliament Committee with a new business plan later this year. The plan will seek additional funding to help us satisfy the increasing demands from Parliament and external enquirers, and the likely impact of increased responsibilities under the soon-to-be-enacted Public Audit Act.

Human Resources

In the past year we continued our development of human resource and professional development policies and practices.

Particular areas of emphasis include:

• continuing to improve the working environment for our employees by measures such as identifying hazards within our refurbished premises and developing effective emergency plans;
• introducing a leadership development programme for senior staff of Audit New Zealand;
• creating secondment opportunities with other Audit Offices in Canada, the United Kingdom and Australia; and
• continuing our policy of sending at least one senior staff member to a senior management development course.

Effectiveness for Maori

We are reviewing our own Effectiveness for Maori strategy – during the year we formulated an internal strategy, drafted action plans, and decided to establish an Advisory Forum comprising Office representatives and tangata whenua.

This process builds on the initiatives that I made in the previous year to consult with a range of stakeholders on the Office’s role and its relevance to Maori.

OAG Management Objectives

The OAG has reported against its six key management and development objectives set out in the Forecast Report.

Highlights include:

• Considering the Office’s strategic priorities, including how demands on the Office are changing and whether we need to rethink our products and services.
• Reconsidering our operational priorities and skill requirements – especially in the light of the likely implications of the new audit legislation.
• Developing and implementing a Technical Advice Register, an electronic document management system and an intranet.

Audit New Zealand Management Objectives

Audit New Zealand has also reported against its six key management and development objectives as set out in the Forecast Report. Highlights include:

• Achievement of its 1999-2000 Business Plan.
• Development of a draft strategic plan for 2000-2003 that aims to make it the leading provider of audit and assurance services to the public sector.
• Approval by Parliament of a capital injection of $1.2 million to fund the introduction of computer-based audit support tools.

Input to Public Sector Accounting and Auditing Development

The Office continues to play a leading role in the development of public sector accounting and auditing standards – both in New Zealand and internationally.

This year has again been a busy one. Highlights include:

• Continuing participation by one of my Assistant Auditors- General, Kevin Simpkins, in the Public Sector Committee of the International Federation of Accountants. Previously Kevin had been one of New Zealand’s two technical advisers. In June he was appointed New Zealand’s representative for the next term.
• Continuing participation in international working groups on the audit of privatisations, environmental auditing, and the development of accounting standards.
• Continuing duties as Secretary-General of the South Pacific Association of Supreme Audit Institutions (SPASAI).
• Continuing participation of senior staff in the technical committees of the Institute of Chartered Accountants of New Zealand.

In addition, I attended the Commonwealth Auditors- General Conference in South Africa in October last year and the inaugural meeting of the Auditors-General Global Working Group in Washington in February.

The Global Working Group was an initiative of the Comptroller General of the United States to promote informal dialogue among the Auditors-General of a small number of countries facing similar issues and challenges. It was fascinating to observe the similarity of the “external” or “national” issues facing governments and how they are closely tied or linked with the “internal” issues and challenges facing audit offices. Issues that were discussed included fiscal discipline, globalisation, quality of life, government performance and accountability, structure of government, impacts of economic reform, and e-government.

Personnel

I am very pleased that Kevin Brady was appointed Deputy Controller and Auditor-General in February of this year. Kevin has had a long and outstanding career with the Office and is widely known and respected, especially in local government circles in New Zealand and overseas.

I am also pleased that this month Angela Hands joins our senior management team as Assistant Auditor-General: Special Audits and Studies. Angela is on secondment from the National Audit Office in the United Kingdom and has wide experience in performance auditing and carrying out special studies.

Looking Forward to 2000-2001

The following issues – which are set out in detail in the Office’s Forecast Report 2000-2001 – are high on my list of things to achieve this year:

• Maintaining the high productivity of the Office, but also ensuring that our capability is maintained and enhanced. We will continue our efforts in consolidating and improving internal processes and systems, particularly in the area of knowledge management.
• Implementing the mandate changes that will come into force when our new legislation is enacted – this will have resource implications for the Office.
• Balancing the increasing demand for unplanned inquiries with our planned programme of special audits and studies.
• Commissioning an external peer review of the Office.

Appreciation

Finally, I thank my Deputy, Assistant Auditors-General, Directors of Audit New Zealand and the OAG, all my staff, and the private sector auditors who work on my behalf for their hard work and dedication in contributing to what I believe has been a particularly demanding but successful year for the Office.

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