The Year's Highlights

I have much pleasure in presenting my annual report on the Audit Office’s performance for the 2002-03 financial year.

The environment in which we operate continues to change – bringing new challenges. This annual report confirms that we have adapted well to those challenges and have produced high-quality work for Parliament and the people of New Zealand.

Public Audit Act 2001

The passing of the Public Audit Act 2001, and subsequent changes to accounting standards, have resulted in a number of new entities coming under our mandate and subject to our audit. The application of the ‘control test’, which determines whether an entity is a public entity within our mandate, is in many cases quite complex.

We have spent considerable time reviewing entity documentation, such as Trust Deeds, to ascertain whether entities do indeed fall within our mandate. As a result, approximately 350-400 additional entities have been identified since the Public Audit Act was passed. Many of these will report for the first time under the new regime for the year ended 30 June 2003.

At the same time, we have undertaken a complete review of all our work – especially those areas of additional work undertaken at the request of public entities – to ensure that it falls within our mandate.

Attest Audit

Giving assurance on the annual financial reports prepared by public entities continues to be the largest part of our work. This year, our auditors issued a total of 4192 audit reports compared with 3650 in the previous year.

While it does not always have the high profile of our inquiry and performance audit work, the audit of annual financial reports is a critical part of the accountability process. In the past year, the number of entities that have not produced financial reports for audit has fallen. Production of the financial report is the entity’s responsibility, not ours. Nevertheless, we have used our influence to encourage those that are in arrears to be accountable to their communities. We have had some success, but there is still a way to go.

At the same time, we have continued to ensure that those in a governance role, including Select Committees, are aware of the issues that have come to our attention as part of the annual audit process. We have produced a record number of reviews and estimates examinations through the year. Feedback from Select Committees and other stakeholders confirms that our efforts are highly valued.

Performance Audits and Inquiries

Each year, after widely consulting with Select Committees and other stakeholders, and based on our own Strategic Audit Planning and stakeholder feedback, we prioritise and allocate resources to a number of performance audits.

In our Statement of Objectives for 2002-03, we said we would complete at least 10 performance audits. We were not able to complete all those planned audits, for two main reasons:

• the complex nature of the projects and the corresponding time taken to complete them; and
• the number of enquiries we have been asked to undertake.

In many instances, there is no-one other than the Auditor-General who can provide the independence and level of assurance to the public in relation to the concerns that they have. However, the resources we have are limited and the inquiry work has to be undertaken from the same pool of resources used for our performance audits. While the number of inquiries has not grown, the complexity of them has. Consequently, we have had to reprioritise the allocation of our resources to cope with the inquiry work. A number of inquiries have not been resolved as quickly as we would have liked.

I intend, through our strategic planning, to identify what might be an appropriate resource base. I will then ask Parliament what level of output is required, and to provide for greater resource in the future for this important element of our work.

Audit Service Providers

During 2002-03, we continued to ensure that all of our effort is properly focused. One key step was to ensure that the two business units of the Audit Office – the Office of the Auditor-General and Audit New Zealand – work closer together to produce the best audit results.

Audit New Zealand has played a much greater role in our strategic planning to ensure that its front-line experience is better used. Similarly, we have signified a need for a much closer working relationship with the private sector auditing firms that undertake work on our behalf.

An impediment to working collaboratively with our Audit Service Providers has been the contestability regime that we have operated for the last 10 years. I have decided that we should now move towards an allocation model for audits in the core public sector (government departments, local authorities, Crown entities, the health sector, and the tertiary education sector) to remove that impediment. The new process will be introduced in 2003-04.

Internal Governance

In order to improve our internal governance, I established an Audit Committee – made up predominantly of people from outside the Audit Office. The committee will provide me with independent advice on the quality of the activities of management, internal controls, responsible resource use, and risk management.

I have also established an internal audit function to support the Audit Committee in conjunction with our independent external auditor.

Financial Results

Our total spending for the year was $39,548,000, compared with $36,808,000 in 2001-02. All expenditure was within appropriation, and we will return an operating surplus of $151,000 to the Crown, compared to a forecast surplus of $61,000.

Our working capital situation, which is subject to seasonal fluctuations, meant that we had to make use of the available overdraft facility of $0.5 million through the period March to July 2003. This facility, together with our careful management of accounts payable and receivable, has enabled us to better manage a very difficult cashflow situation in the later part of the financial year.

Looking Forward to 2003-04

Our Annual Plan 2003-04¹ sets out our work programme and other plans for achievement for the current year. As well as continuing our statutory functions of conducting and reporting on audits, some particular areas of focus will be:

• preparing our Strategic Business Plan for 2004-07;
• implementing our governance and risk management framework;
• planning to provide the required capability for changes in our operating environment, particularly in the local government area; and
• implementing changes as a result of the proposed audit allocation regime.

Appreciation

In conclusion, I would like to thank the staff of the Office of the Auditor- General and Audit New Zealand, those in the private sector auditing firms that work for us, and the Audit Committee for their professionalism and excellence during the last 12 months. We have a highly competent and dedicated staff and audit service providers and their efforts have been appreciated.

Kevin Brady

1: Parliamentary paper B.28AP(03), 2003.