Part 5: Changes to the Controller function

Central government: Results of the 2003-04 audits.

The Public Finance Amendment Act 2004 (“the Amendment Act”) makes significant changes to the Controller function of the Controller and Auditor- General.

In this part, we explain the Controller function, and the changes that will occur.


Parliament passed the Amendment Act on 16 December 2004. It is the first substantial revision of the Public Finance Act 1989 for a decade. The Amendment Act, among other changes, reforms the system of parliamentary appropriations, and changes and enhances the Controller function.

We worked closely with Treasury and State Service Commission officials during the Bill’s development, and advised the Finance and Expenditure Committee on its examination of the Bill. We provided independent advice to the Committee on several aspects, including changes to the Controller function.

What is the Controller function?

The office of Controller originated centuries ago in the United Kingdom, and became an important element in the Westminster system of parliamentary supremacy. The original purpose of the office was to receive and hold public revenues until they were issued, under the authority of Parliament, for the service of the State.1 The role later evolved into one of verifying that any release of public money to the Executive was lawful and in accordance with an appropriation by Parliament.

The New Zealand Parliament adopted the role in 1865. Since then, the Controller’s primary function has been to certify, before the event, that all payments of public money from the Crown bank account into a departmental bank account are in accordance with a warrant issued by the Governor- General, and that there is an appropriation or other statutory authority against which each payment can be charged. If the Controller refuses certification, no money can be released into the departmental bank account.2

The constitutional importance of the role is reflected in section 22(c) of the Constitution Act 1986, which provides that –

It shall not be lawful for the Crown, except by or under an Act of Parliament, … to spend any public money.

The system of appropriations is the means by which Parliament gives effect to the principle set out in section 22(c). An appropriation is a particular form of statutory authorisation by Parliament, which authorises the Crown (or an Office of Parliament) to incur public expenditure. The system of appropriations enables Parliament to control the ability of the executive branch of government to incur expenditure, and to hold it to account for its performance in doing so.

Why the Controller function needed changing

Until 1989, all appropriations were expressed in terms of an authority to spend public money. Thus, a certification by the Controller was a pre-condition for any expenditure under an appropriation. However, with the introduction of accrual accounting by the Public Finance Act 1989, most appropriations came to be expressed in terms of an authority to incur expenses or liabilities.

Under the accrual approach, expenditure is charged against an appropriation at the time the expenditure (operating or capital, measured in accounting terms) is incurred. The lawfulness of the expenditure is also judged, against the terms of the appropriation, with reference to that event. Yet the spending of public money to meet the expense or liability (for example, payment of a contractual obligation entered into some time previously) may not happen until some time afterwards. The Controller’s certification addresses only that payment.

In this way, accrual appropriations reduce the Controller’s ability to act as a check on the lawfulness of public expenditure.

To address this problem, the Controller and Auditor-General’s other function – that of the auditor of public accounts – evolved during the 1990s through what has become known as an audit of appropriations. Although undertaken substantially after the event, the audit involves obtaining assurance that a department has met all the requirements of each appropriation during a financial year. We describe this process in greater detail in paragraphs 5.19-5.25 on pages 54-55.

In the meantime, the Treasury recognised the need to change the Controller function to meet the requirements of the accrual accounting environment.3 The move to fully accrual-based appropriations under the Amendment Act gave Parliament an opportunity to modernise and strengthen the function.

Changes to the Controller function from 1 July 2005

The changes to the Controller function and how it will operate are explained below. The changes take effect from 1 July 2005.

Removal of warrant and certification procedures

The Public Finance Act required:

  • periodic certification by the Controller and Auditor-General to the Governor-General that payments to be made out of the Crown bank account (under a warrant signed by the Governor-General) could lawfully be made; and
  • regular (in practice, daily) certification that amounts to be paid out of the Crown bank account were pursuant to a warrant by the Governor-General, and that there was an appropriation or other authority against which each payment could be charged.

The Amendment Act does away with the system of warrants and certification procedures.

Power to direct a Minister to report to the House of Representatives

The Amendment Act introduces a new power for the Auditor-General to direct a Minister to report to the House of Representatives if the Auditor-General has reason to believe that any expenditure has been incurred that is unlawful or not within the scope, amount or period of any appropriation, or other authority (section 65Z).

Power to stop payments from bank accounts

The Auditor-General’s power to stop payments from the Crown bank account is unchanged. However, there is an additional power to stop payments out of departmental bank accounts (section 65ZA). This amendment recognises that incurring expenditure, and the payment of expenditure, also occurs at a departmental level.

The audit of appropriations – now a statutory requirement

As mentioned in paragraph 5.12, the function of Controller is most substantially exercised in the audit of appropriations as part of the departmental annual financial audit. In practice, this is how most appropriation issues are detected. The relevant auditing standard (published by the Auditor-General under section 23 of the Public Audit Act 2001) is AG-2: The Appropriation Audit and the Controller Function. This standard requires our appointed auditors of government departments, as part of the annual audit, to audit all appropriations to:

  • determine whether expenditure is within an appropriation;
  • test whether expenditure charged against an appropriation has actually been incurred for the purposes for which it was appropriated; and
  • ensure that expenses incurred are for lawful purposes.

Under the standard, appointed auditors must perform audit procedures to gain assurance that the requirements of the appropriation have been adhered to. Particular areas of interest in an appropriation audit include departmental budgetary procedures, systems and procedures for monitoring performance against appropriation, and cost allocation systems.

Appointed auditors must perform this audit work during the financial year. Specific reporting to the Office of the Auditor-General (OAG) is required. The appointed auditor must advise the OAG whenever a breach of appropriation has occurred, or is likely to occur, or where any unlawful action has been identified. If any unlawfulness is identified, this enables the OAG to raise the matter with the department. If necessary, the Auditor-General will consider whether, acting in “Controller” mode, he should exercise the power to stop payments out of the Crown bank account.

The Amendment Act amends section 15 of the Public Audit Act 2001, to ensure that the appropriation audit will be carried out as a matter of statutory duty in future, rather than as an aspect of the financial report audit that the Auditor- General currently chooses to require by his auditing standards.

The audit of appropriations also ensures that any breach of appropriation will be disclosed in the financial statements and, if necessary, reported:

  • in the audit report (and/or the management letter to the department following the audit);
  • in our report to the Minister on the results of the audit; and
  • to the Select Committee conducting the financial review.

The Auditor-General may also choose to report to Parliament on matters arising from the appropriation audit, and the Controller function.


Unlike other aspects of an annual audit, the audit of appropriations is not subject to any threshold of materiality. This means that any breach of appropriation, however small, will be the subject of a report.

Monthly reports by the Treasury

There is a new requirement for the Treasury to supply monthly reports to the Controller and Auditor-General, to enable the Auditor-General to examine whether expenses and capital expenditure have been incurred in accordance with an appropriation or other authority (section 65Y).

There is also an explicit recognition in section 65Y of the Auditor-General’s powers, under Part 4 of the Public Audit Act 2001, to access such information as the Auditor-General may require to independently verify the Treasury report.

The requirement for the Treasury to supply monthly statements expands an existing practice, whereby statements are provided to the OAG for the months of March to June, inclusive, of each financial year.

The monthly statements will generally reveal information only about a breach of the financial amount of an appropriation. Appointed auditors and the OAG will continue to rely on other information, obtained in the course of the appropriation audit, to detect breaches of appropriation arising from expenditure that may be for an unlawful purpose or inconsistent with an appropriation or other authority.

Our view of the changes

As we advised the Finance and Expenditure Committee during its consideration of the changes to the Controller function, the periodic certification function in respect of the Governor-General’s warrant is largely symbolic and has little practical value as a check on public expenditure.

Similarly, although the daily certification carried out by the Controller and Auditor-General provides an independent check on Treasury procedures, it is in effect an internal control check in addition to the Treasury’s own procedures. It has limited use in relation to the Controller and Auditor-General’s function of safeguarding the integrity of appropriations, because the incurring of expenditure (operating and capital, departmental and non-departmental) against appropriation occurs at a departmental level.

We therefore advised the Committee that we were comfortable with the abolition of the Governor-General’s warrant and the daily certification procedures – despite their time-honoured constitutional significance. But, in our view, the Controller function remains significant in constitutional terms even without those procedures. Indeed, the changes to the Controller function under the Amendment Act significantly enhance it.

Two of the changes help to preserve the constitutional importance of the role. Both were made on our recommendation. The first is the statutory confirmation, in section 65Y, that the Auditor-General’s powers under Part 4 of the Public Audit Act can be used to independently verify the Treasury’s monthly reports (see paragraph 5.27). This provision removes any inference that the Auditor-General relies on the Executive for accurate information upon which to exercise a constitutionally independent function. Secondly, the amendment to section 15 of the Public Audit Act (see paragraph 5.22) elevates the appropriation audit to having a statutory base, instead of being based merely on a requirement of the Auditor-General’s auditing standards.

Although the Controller function will no longer exist as a prior check on expenditure, its effectiveness in the accrual accounting environment was always questionable. The power to stop release of funds from the Crown bank account, although infrequently exercised, remains as a valuable deterrent – and is enhanced by its extension to include funds being paid from departmental bank accounts. The new power to direct a Minister to report to the House of Representatives on an appropriation breach is another significant enhancement of the function.


In our view, the changes coming into effect on 1 July 2005 will maintain the constitutional significance of the Controller function as a statutory safeguard on the integrity of appropriations, as well as enhance its operation in practice.

1: See Jennings, Parliament, 2nd Edition, 1961, page 323.

2: Public Finance Act 1989, old section 22 (repealed by the Amendment Act, but in force until 30 June 2005).

3: See, for example, Towards a Reconfiguration of the Controller Function, a paper prepared for the Treasury in April 1993 by Rt Hon Sir Geoffrey Palmer.

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