Part 2: Government Departments - Results of the 2002-03 Audits

Central government: results of the 2002-03 audits.


This article reports on the results of the 2002-03 audits of 43 government departments.1 Its purpose is to inform Parliament of the assurance given by the audits in relation to:

  • the quality of financial reports; and
  • the financial and performance management of departments.

Audit Opinions Issued

The Public Finance Act 1989 (the Act) specifies departments’ responsibilities in fulfilling the requirements for general purpose financial reporting. Sections 34A(3) and 35(3) of the Act require departments to prepare their financial statements in accordance with generally accepted accounting practice (GAAP).2

Section 38(1) of the Act and section 15 of the Public Audit Act 2001 set out the responsibility of the Auditor-General to issue an audit opinion on the financial statements of each department.

To form an opinion on the financial statements of departments, our audits are conducted in accordance with Auditing Standards published by the Auditor-General under section 23 of the Public Audit Act, which incorporate the auditing standards issued by the Institute of Chartered Accountants of New Zealand. The audits are planned and performed so as to obtain all the information and explanations considered necessary in order to provide sufficient evidence to give reasonable assurance that the financial statements are free from material mis-statements, whether caused by fraud or error. In forming our opinion, we also evaluate the overall adequacy of the presentation of information in the financial statements.

Of the 43 government departments audited, 41 received audit reports containing an unqualified audit opinion, as shown in Figure 2.1 on the next page.

Figure 2.1
Analysis of Audit Opinions 1999-2003

Year Ended 30 June 2003 2002 2001 2000 1999
Unqualified opinions 41 42 44 43 42
Qualified opinions 2 1 - - -
Total audit opinions issued 43 43 44 43 42

The total number of departments reduced to 43 in 2002 with the amalgamation of the Department of Work and Income into the Ministry for Social Development.

Qualified Audit Opinions

As shown in Figure 2.1 above, qualified audit opinions were issued on the financial statements for two departments. They were the Department of Conservation and the Ministry for the Environment. Department of Conservation

The Department of Conservation received a qualified audit opinion for the previous year, in respect of its valuation of visitor assets and recognition of fencing assets.3 Those matters were corrected in the financial statements for the year ended 30 June 2003, and the qualification for the 2003 year related only to the comparative information shown, i.e. the figures for the previous year. See also paragraphs 1.50-1.51 on page 20.

Ministry for the Environment

When the Ministry of Works and Development was disestablished in 1988, the Ministry for the Environment (MfE) inherited the function of being the land-holding department for about 860 land parcels totalling about 4300 hectares. The land includes river control reserves located on river and canal banks taken for flood protection purposes, and six soil conservation reserves. Except for one former soil conservation reserve for which the MfE has direct responsibility, the reserves are controlled and managed by Regional Councils.

The holding of this land on behalf of the Crown constitutes a non-departmental activity by the MfE, and the Treasury instructed departments to disclose non-departmental activities in the form of schedules to their annual financial statements from the year ended 30 June 2003 onwards. In preparing information on non-departmental activities for these schedules, departments are required to comply with GAAP.

The Ministry did not recognise the value of the land referred to in paragraph 2.8 in its non-departmental schedule of assets. Nor did it recognise the value of any obligations it has in respect of those landholdings in the non-departmental schedule of liabilities. These failures resulted in non-compliance with two financial reporting standards (FRS) that are part of GAAP.

Non-recognition of the landholdings was a departure from Financial Reporting Standard No. 3: Accounting for Property, Plant and Equipment. Not providing for any obligations that have arisen in respect of the landholdings was a departure from Financial Reporting Standard No. 15: Provisions, Contingent Liabilities and Contingent Assets.

The effect of these departures was to mis-state the schedules of non-departmental assets and liabilities. Any adjustment to those schedules would have a consequential effect on the schedules of non-departmental revenue and expenditure.

Our audit opinion accordingly included a qualification relating to the effect of not recognising the value of landholdings and any associated obligations in the non-departmental schedules. See also paragraphs 1.28-1.31 on page 16.

Financial and Service Performance Management

Since 1994, we have reported our assessments of certain aspects of management to the chief executive and to stakeholders in each department (such as the responsible minister, and the select committee which conducts the financial review of the department).

While conducting the annual audit, our auditors examine five aspects of financial management and service performance management. The purpose of this exercise is to identify specific areas of management where there are weaknesses, and to make recommendations to eliminate those weaknesses.

Financial Management

We assess the following aspects of financial management:

  • Financial control systems – the systems for monitoring expenditure and the management of assets.
  • Financial management information systems – the systems for recording, reporting, and protecting financial information.
  • Financial management control environment – management’s attitude, policies, and practices for overseeing and controlling financial performance.

Service Performance Management

Aspects of the management of service performance that we assess and report fall into two broad areas:

  • Service performance information and information systems – this covers the adequacy of monitoring and control systems for service performance information, the accuracy of the information produced by those systems, and whether the performance measures in the statement of service performance are being used as a management tool.
  • Service performance management control environment – this covers the existence of quality assurance procedures, the adequacy of operational policies and decisions, and the extent to which self-review of non-financial performance is taking place.

The Rating System

The rating system we use for the five management aspects is as follows:

Assessment Term Further Explanation
Excellent Works very well. No scope for cost-beneficial improvement identified.
Good Works well; few or minor improvements only needed to rate as excellent. We would have recommended improvements only where benefits exceeded costs.
Satisfactory Works well enough, but improvements desirable. We would have recommended improvements (while having regard for costs and benefits) to be made during the coming year.
Just Adequate Does work, but not at all well. We would have recommended improvements to be made as soon as possible.
Not Adequate Does not work; needs complete review. We would have recommended major improvements to be made urgently.
Not Applicable Not examined or assessed. Comments should explain why.

The Results

We assessed financial management and service performance management in each of the 43 departments. A summary of the assessments (215 in total – 5 for each department) is given in Figure 2.2 on the next page.

The 90 assessments of “excellent” (41.9%) show a further level of improvement in the latest year, and the combined total of 188 assessments (87.4%) that were either “excellent” or “good” show a similar improvement from the previous year. This indicates commendable achievement by the departments concerned.

No assessments of “just adequate” were issued in 2003, compared with one in 2002.

By way of further analysis, we compared our assessments for 2002-03 and 2001-02 for each of the 43 departments. The overall results are summarised in Figure 2.3 on page 31.

Figure 2.2
Summary of Assessments of Aspects of Financial Management and Service Performance Management in Departments for 2002-03

Aspect Assessed Excellent Good Satisfactory Just Adequate Not Adequate No. Total No.
No. % No. % No. % No. %
FCS 20 47 17 40 6 14 0 0 0 43
FMIS 19 44 20 47 4 9 0 0 0 43
FMCE 20 47 17 40 6 14 0 0 0 43
SPIS 12 28 24 56 7 16 0 0 0 43
SPMCE 19 44 20 47 4 9 0 0 0 43
Totals 2003 90 42 98 46 27 13 0 0 0 215
2002 85 40 97 45 32 15 1 0 0 215
2001 85 39 101 46 30 14 4 2 0 220
FCS - Financial Control Systems
FMIS - Financial Management Information Systems
FMCE - Financial Management Control Environment
SPIS - Service Performance Information Systems
SPMCE - Service Performance Management Control Environment

Figure 2.3
Assessments for 2002-03 compared to 2001-02

Aspects Assessed* Higher Same Lower Total
FCS 3 39 1 43
FMIS 1 41 1 43
FMCE 3 39 1 43
SPIS 4 39 0 43
SPMCE 2 41 0 43
Totals 13 199 3 215
% 6.0 92.6 1.4 100.0

* See Figure 2.2 for key to abbreviations.

The noteworthy features of the results shown in Figure 2.3 are:

  • A very high proportion (92.6%) of the assessments were maintained at the level of the previous year.
  • 13 of the assessments (6.0%) were higher in 2002-03 than in 2001-02.
  • 3 of the assessments (1.4%) were lower than in 2001-02.

The fact that 13 assessments were higher than in the 2001-02 year, compared with only 3 that were lower, confirms continuing overall improvement among departments. As we have observed previously, the trend to higher assessments restricts the scope for improvements of the same magnitude as in earlier years.

While theoretically possible, it is in practice difficult, for a variety of reasons, for all departments to attain a rating of “Excellent” for all aspects assessed. The reasons may include:

  • periodic restructuring;
  • complexity of departmental operations; and
  • sheer size of operations.

Our auditors will nevertheless be continuing to assist and encourage departments to make improvements, principally through the management letter issued at the end of an audit. For their part, chief executives and their staff will no doubt be motivated to continue striving for improvements.

We have now reported our assessments of management performance to Parliament and its select committees for each of the past 10 years. Our assessments have often been of considerable interest and are perceived as having high value to select committees when conducting their financial reviews of departments.

However, departments vary greatly in size and organisational structure. When we first reported results of the assessments to select committees, we took care to alert committees to those differences and urged them not to make comparisons between departments without being mindful of considerations (such as those mentioned in paragraph 2.26 above) which could explain reported differences in performance. Caution should continue to be exercised in using the assessments.

We have identified the need to refresh the five management aspects and consider the possibility of applying them in other sectors in the future. This is a specific area of research and development that we plan to undertake in 2004-05.

1: Comprising the 43 departments listed on page 96 of the Financial Statements, plus the Office of the Ombudsmen and the Commissioner for the Environment, but excluding the two Security and Intelligence departments, and the Auditor-General.

2: Generally accepted accounting practice is defined in section 2(1) of the Public Finance Act 1989.

3: See our detailed explanation in Central Government: Results of the 2001-02 Audits, parliamentary paper B.29[03a], pages 26-27.

page top