The Year in Review
I have much pleasure in presenting my report on the Audit Office’s performance for the 2001-02 financial year.
Valedictory: David Macdonald
David Macdonald retired on 3 May 2002 after 7 years as Auditor-General. He took office in 1995 after the resignation of Jeff Chapman, at a time of considerable difficulty for the Office. By the end of his term, he could take considerable satisfaction from the accomplishments of the Office during his tenure, and its position on his retirement:
- Numerous high profile reports published on issues of public concern, and used as a basis for improvements in public sector processes and performance.
- Robust processes for competitively appointing, and monitoring, auditors of public entities. Linked to this, Audit New Zealand and private sector firms doing sound audits, and reducing a longstanding backlog of arrears to a more manageable level.
- Passage of the Public Audit Act 2001, which puts the Office on a sound legislative footing for the foreseeable future.
- Internal processes and financial position in sound condition, so we could genuinely say that we “practise what we preach”.
- Both the productivity and the reputation of the Office at very high levels, and the Office generally in good heart.
I am also pleased to be able to report positively on the issues that David identified as high on his list of things to achieve in his final year. The Office:
- largely implemented the portfolio and mandate changes that came into force with the passage of the Public Audit Act;
- largely completed its responses to the recommendations of the external peer review conducted in February-March 2001; and
- increased its productivity and its capability, and demonstrably used the additional funding provided to the Office well.
Public Reports
| Highlights | |||
|---|---|---|---|
| 2002 | 2001 | 2000 | |
| Number of public reports | 18 | 12 | 13 |
| Cost ($000) | 2,937 | 2,339 | 2,342 |
Once again we had a busy and successful year, using additional funding provided by Parliament to publish the greatest number of reports and volume of material on record.
We produced 18 substantive public reports – covering the results of annual audits, planned special audits and unplanned special investigations. A number of reports published during the year achieved a high public profile, and some have already resulted in notable changes in public sector processes – in particular:
- Parliamentary Salaries, Allowances and other Entitlements – Final Report (published July 2001); and
- Ministry of Defence: Acquisition of Light Armoured Vehicles and Light Operational Vehicles (August 2001).
Delivery of Central Government Programmes
A significant number of our major reports published this year looked at delivery of specific Government programmes.
The range of sectors, organisations, and issues across which we reported and made recommendations for improvement is shown by the list below:
- Providing and Caring for School Property (September 2001);
- The Police: Dealing with Dwelling Burglary (September 2001);
- New Zealand Defence Force: Deployment to East Timor (November 2001);
- Ministry of Heath: Progress in Implementing the Recommendations of the Cervical Screening Inquiry (February 2002);
- Purchasing Primary Health Care Provided in General Practice (March 2002); and
- Bringing Down the Road Toll: the Speed Camera Programme (May 2002).
These reports have been considered and responded to at various levels, by the departments concerned, by an Officials’ policy group made up of the heads of the central agencies, and by Select Committees. We expect to comment on the impacts of some of these reports in future Annual Reports.
Responding to Local Concerns
We produced two public reports, and numerous reports to individual local authorities, on significant local issues raised during the year. Most of these reports identified issues that the authority needed to address. The two public reports were:
- Thames Coromandel District Council: Asset Registers and Other Matters (July 2001); and
- Taupo District Council: Funding of the Interim Establishment Board and the Lake Taupo Development Trust (April 2002).
Supporting Better Practice
As well as the Parliamentary Salaries report referred to above, we produced three other reports aimed at providing positive guidance for public entities:
- Reporting Public Sector Performance (July 2001);
- Procurement : A Statement of Good Practice (published only on our web site, July 2001); and
- Severance Payments in the Public Sector (May 2002).
All three of these reports have been well received, and should be influential in improving practice.
Reporting Audit Results and Sectoral Issues
Each year we produce compendium reports, primarily summarising the results of financial statement audits in the Central Government and Local Government sectors. In 2001- 02, we published two on Central Government (in December 2001 and June 2002), and substantially completed the Local Government report, which was not published until September 2002.
Highlights of the reports included articles on progress towards an E-society, financial management issues in the New Zealand Fire Service, and regulatory functions and the sustainability of essential services in local authorities.
In May 2002 we also published Local Government – Looking Back and Looking Forward. This report took a retrospective and prospective look at issues in the sector which arose during, were addressed, or were outstanding at the end of, David Macdonald’s term as Auditor-General.
Financial Report Audits
| Highlights | |||
|---|---|---|---|
| 2002 | 2001 | 2000 | |
| Audits completed | 3,650 | 4,007 | 4,272 |
| Audit costs ($m) | 31.914 | 31.362 | 30.407 |
| Timeliness of audit reports (excluding school boards) | 68% | 68% | 61% |
| Timeliness of management reports | 96% | 95% | 88% |
| Audits outstanding at year end | 543 | 395 | 646 |
Our public reports provide the visible side of our activity. However, about 85% of what we do relates to financial report audits of the more than 3,700 public entities that we audit.
The timeliness of both audit reports and management reports has improved in the last two years. However, there is still a lot of improvement required in the timeliness of audit reports.
I am disappointed to have to report that arrears for financial report audits have not improved. Strenuous efforts have been made over the previous two years by auditors in the field and staff in the Office of the Auditor-General to encourage entities to produce their statements in a more timely manner, enabling our auditors to complete the audits. As a result, we had by last June reduced the number of arrears from over 1,000 to a manageable number.
This year, school boards of trustees had problems with new requirements to account for provisions for cyclic maintenance, which delayed completion of their financial reports. The number of school board audits incomplete at 30 June rose from 153 in 2001 to 326. By 31 August 2002 the number had reduced to 231, and we do not expect the problem to recur next year.
Other audits incomplete reduced from 242 in 2001 to 217, meeting our objective of reducing the number to below 220, although we had hoped for a better result.
Achieving Our Operating Goals
| Highlights |
|---|
| Auditor-General’s Auditing Standards published in May 2002. |
| Performance audits begun in the Crown sector as a result of extension of our mandate. |
| Two audit tender rounds successfully completed. |
| A “capability snapshot” developed to describe the OAG’s fitness for its role in the immediate future. |
| Responses to the 2001 peer review of the Audit Office largely completed. |
Part Two of this report (starting on page 27) details our performance in achieving the three operating goals we set ourselves for 2001-02. Items that deserve special mention here are:
Continuing to Deliver Excellent Audit Services
We published the Auditor-General’s Auditing Standards by way of a report to the House of Representatives in May 2002, as required by section 23 of the Public Audit Act 2001.
The Standards establish the minimum requirements for annual audits conducted on behalf of the Auditor-General, by supplementing the Institute of Chartered Accountants of New Zealand’s ethical and professional standards with additional statements and specific standards where Institute standards do not exist.
We aim to carry out quality assurance reviews of each Appointed Auditor’s performance once during their threeyear contract period. We remain 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.
We continued to place emphasis on communicating effectively with those interested in our work. We gave numerous briefings to select committees and other audiences on our reports, and continued to consider how we can better evaluate the impact of the reports.
The Public Audit Act extended our mandate so that we can now plan and conduct performance audits across the whole public sector. We identified five possible audits in our Forecast Report for 2001-02, made good progress on one of these (infection control in publicly owned hospitals), and began to determine the scope of three others.
Adjusting to Reflect our Changing Environment
Obtaining and processing intelligence about developments in the public sector is a core part of our business. This year, we put special effort into:
- setting up a Health Advisory Group to act as a sounding board for the Auditor-General on developments in the health sector;
- advising the Local Government and Environment Select Committee on the Local Government Bills it has been considering;
- keeping contact with central agency initiatives on developing government structure and processes;
- developing papers and a published article on issues associated with increasing use of information technology in government; and
- making good progress on a project to improve our electronic communication with auditors.
Leading by Example
We continue to try to demonstrate best practice as a public entity in the areas of performance, financial management and accountability. Highlights for the year were:
- We continued with our policy of exposing a significant part of our audit portfolio to competitive tendering. Two tender rounds were held this year – resulting in 9 tenders being won by Audit New Zealand, 4 by private sector auditing firms, and 73 entities electing to renegotiate with their existing audit service provider.
- We continued to develop processes for measuring our own outcomes, and made progress on measuring and reporting our capability. We report on these measures in this report – including (for the first time) an experimental “capability snapshot” of the Office of the Auditor-General (pages 60-65).
- We made good progress on responding positively to the findings and recommendations of a peer review of our activities undertaken by member officers of the Australian Council of Auditors-General in February-March 2001.
Management Performance
| Highlights |
|---|
| We spent $36,808,000, and are returning to the Crown the operating surplus of $679,000. |
| New funds provided by Parliament were successfully applied to an increased number of special studies and, consequently, an increased number of reports. |
| Audit New Zealand implemented substantial changes in its governance, performance management, and audit approach. |
Part Three of this report (starting on page 69) highlights our performance under the headings of: • financial performance; and • human resources.
It then discusses how the two business units of the Audit Office – the Office of the Auditor-General (OAG) and Audit New Zealand – have met their respective key objectives for 2001-02 as set out in our Forecast Report.
Our results continue to demonstrate 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
Our total spending for the year was $36,808,000, compared with $35,543,000 in 2000-01. We will return an operating surplus of $679,000 to the Crown, compared with a forecast of $270,000.
We approached the Officers of Parliament Committee with a new business plan late in 2000. The plan successfully sought additional funding to help us satisfy the increasing demands from Parliament and external enquirers, and the impact of increased responsibilities under the Public Audit Act. The first tranche of additional funding in the 2001-02 year enabled us to achieve our highest year on record for number of reports, and volume of material, published.
Human Resources
In the past year we continued our development of human resource and professional development policies and practices. Major areas of emphasis were:
- for the OAG, following up a review of capability requirements by carrying out action plans for building capacity to meet future needs, and in particular increasing our capacity for innovation and learning;
- for Audit New Zealand, completing work on the second phase of its people strategy, Project Enable. This project focused on four areas:
- refocusing the audit approach;
- reshaping the business;
- improving business processes; and
- leading change in culture, competencies and behaviour.
OAG and Audit New Zealand Management Objectives
The OAG and Audit New Zealand have reported against their key management and development objectives set out in the Forecast Report. The highlights have been covered above.
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 our Deputy Auditor-General (Kevin Simpkins) as New Zealand’s representative on the Public Sector Committee of the International Federation of Accountants.
- Continuing participation in international working groups on environmental auditing and the development of accounting standards.
- Continuing duties as Secretary 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, we hosted the third meeting of the Auditors- General Global Working Group in Wellington in February 2002. This working group was set up to promote informal dialogue among Auditors-General of countries facing similar issues and challenges. The Auditors-General of the United States, Canada, the United Kingdom, Australia, South Africa, Japan, India, Germany, the Netherlands, and Sweden attended.
Looking Forward to 2002-03
Our Annual Plan 2002-03 sets out our plans for achievement for the coming year. During my tenure as Auditor-General, I intend to emphasise the following areas of performance and development:
- maintaining a viable and strong Audit New Zealand;
- maintaining an attest audit function that stakeholders can have confidence in;
- continuing to practise what we preach, particularly in terms of our own capability;
- maintaining our credibility and independence;
- being seen as an essential part of the system of government;
- engendering real change and improvement in the public sector; and
- making a major contribution to improving public sector accountability.
In implementing our 2002-03 Annual Plan, I have asked my senior managers to take these general directions into account, and we will report on progress against them in next year’s Annual Report.
Appreciation
Mr Tony Frankham of Auckland has acted as independent evaluator of the integrity of our regime for tendering audits since it was set up in 1992. He has provided valuable advice and assurance over the decade. At the conclusion of his time as evaluator, I have asked him to become chairperson of the Audit Committee I am setting up for the Office.
Finally, for both David Macdonald and myself, I thank all the staff of both the OAG and Audit New Zealand for their hard work and dedication in contributing to a very successful year for the Office.