Part 2: Work programme

Annual plan 2005-06.

Proposed performance audits and studies for 2005-06
Proposed management actions for 2005-06
Other contributions to better public sector administration

Introduction

The following description of our proposed work programme for 2005-06 includes:

core work of the Office, and major changes which may affect our delivery of this core work;
discretionary work (performance audits and studies) the Office will undertake during the planning period;
our proposed research and development, and product development programme for the year;
how the Office intends to act on its Strategic Plan initiatives during the term of the planning period (our “management actions”); and
other contributions the Office will make towards better public sector administration.

By providing this depth of information, we aim to assist Parliament to better understand the work of the Office, and to provide a basis for greater accountability for the achievement of our Strategic Plan.

Core work of the Office

The core work of the Office is in 3 key areas, known as our “Output Classes”. They cover:

reports and advice arising from the exercise of the function of legislative auditor;
Controller function and appropriation audit; and
provision of audit and assurance services.

Assurance products and services

There are 10 core assurance products and services that contribute to these output classes. They are:

Annual audits
The majority of our work and effort relates to the conduct of annual audits of the financial reports of public entities. We carry out about 4000 audits each year. During 2005-06, the major changes to annual audits will come from the implementation of LTCCPs, NZ IFRS, ISA and the PFAA. The significance of these changes is discussed on page 12.
Controller function and appropriation audit
The function of Controller and the audit of appropriations are concerned with providing independent assurance to Parliament that expenses or capital expenditure of departments and Offices of Parliament have been incurred (or public money spent) within the scope, amount and period of the appropriation or other statutory authority, and are for lawful purposes. There have been some changes to the Controller function and appropriation audits arising from the PFAA that we will implement in 2005-06. Primarily, the Auditor-General will no longer certify warrants and Controller statements. Instead, the Auditor-General will examine monthly statements provided by the Treasury, and provide them to Appointed Auditors for their use in the audit of appropriations.
Advice to Parliament
We report and provide advice to MPs – in Select Committees, or as Ministers, or individual MPs – on the results of audits and inquiries. Mostly this is done through financial reviews and Estimates examinations. We anticipate no major changes to this area of work during 2005-06.
Inquiries
The Office responds to enquiries from taxpayers, ratepayers, or individual MPs on matters that we consider appropriate to investigate. Between 150 and 300 enquiries are received every year. Some – usually between 6 and 10 – become the subject of a major inquiry. Our Strategic Plan noted the increasing complexity and volume of enquiries during the last 5 years, and the significant demands this was placing on the Office. In the past, we dealt with major inquiries by re-prioritising other planned work in the areas of performance audits, research and development, or product development. We received additional funding from Parliament to expressly fund our work in this area. We need to do further work during 2005-06 to improve our timeliness and to manage the additional resources for responding to enquiries.
Approvals under the Local Authorities (Members’ Interests) Act 1968
The Office is empowered to grant exemptions from the statutory prohibition against local authority members voting on and discussing matters in which they have a pecuniary interest, and to approve extensions of the limits that apply to contracting between a local authority and its members. We respond to about 80 enquiries a year on these matters and other issues relating to administration of the Act. We anticipate no major changes to this area of work in 2005-06.
Advice and liaison
Advice and liaison on matters of public sector finance, governance, and accountability with central government agencies, public entities, and other sector groups is an integral part of the Office’s involvement and presence in the public sector. The workload in this area continues to grow, as a result of both the volume and complexity of proposals on which our views are sought. Select Committees are also keen to obtain our independent perspective on legislation in respect of public finance, governance, and accountability, and we are regularly invited to accept appointment as advisors to Committees for this purpose.
Working with the accounting and auditing profession
The Office plays an important role in representing public sector interests in working with the accounting and auditing profession, both in New Zealand and internationally. A number of our senior staff represent the Auditor-General on committees, including the ICANZ Professional Practices Board and Financial Reporting Standards Board, and the National Asset Management Steering Committee. The decision that NZ IFRS will be adopted in the public sector by 2007 has significant implications for the Office.
Wider assurance work
Wider assurance work is the audit work undertaken by Audit NZ in response to particular needs of public entities (and accordingly is paid for by them). For example, Audit NZ is often asked to provide independent assurance for tender processes for large or sensitive projects in the public sector. In 2002, we reviewed the consistency of this wider assurance work with the Auditor-General’s mandate under the Public Audit Act 2001. Our Strategic Plan confirmed that this wider assurance work forms an important part of the overall level of assurance that we provide to the public sector. It is our intention to ensure that, during 2005-06, this work is more strategically aligned through our Strategic Audit Planning process.
Performance audits and studies
Performance audits and studies are significant audits covering valuefor- money or issues of effectiveness and efficiency. They enable the Auditor- General to provide greater breadth and depth of assurance in the areas we have identified as key themes. Performance audits are resource intensive and often span more than one year. In our Strategic Plan, we identified that Parliament was asking us to do more performance audits and studies in order to better address the key themes emerging from our Strategic Audit Planning process. We received additional funding to increase the number of performance audits and studies we do each year from 10 to 21 by 2006.
International liaison and involvement
The Office has had strong involvement with our international counterparts and various working groups. In particular, we make a significant contribution to the training and development of our South Pacific counterparts. We also make significant contributions to Asian countries, actively work with our Australian counterparts at State and Federal Government level, and are active members of the International Organisation of Supreme Audit Institutions (INTOSAI) working group on environmental auditing. In our Strategic Plan we acknowledged both the value and cost of maintaining this international involvement and liaison. During 2005-06, we intend to keep the level of our involvement at a similar level. However, we will target our efforts to ensure we get the most benefit for the work of the Office as a whole.

Our Strategic Audit Planning process

We undertake a comprehensive process of Strategic Audit Planning (SAP) in order to develop our annual work programme.

This year, we enhanced our SAP process to more fully include the issues and risks that exist in the environment in which we work, and to better use the knowledge and experience of people working in and for the Office. We also sought to use the full range of our assurance responses around the key issues and risks, and to increase the nature and number of our performance audits.

Background to the Strategic Audit Planning process

Sector groupings

To assist in the management of our work, we sort public entities by sector, within 2 broad groups – Parliamentary and Local Government. Entities within the Parliamentary Group are categorised along the same subject lines as Parliamentary Select Committees. Entities within the Local Government Group are organised in a similar way. We give our sector managers responsibility for monitoring all significant activities within their assigned sectors, and for consulting with relevant stakeholders. Audit NZ and other ASPs contracted by the Auditor- General also have sector specialists.

The 2004 Strategic Audit Planning process

This year we piloted enhancements to our SAP process as proposed in our Strategic Plan. This has resulted in significant improvements to the process. During 2005-06, we intend to implement revisions arising from a postimplementation review of our pilot process. The 5 key steps used in our SAP process this year were:

Step 1: Public entity and sector environmental scanning
Our sector managers reviewed changes and trends in:

legislation;
governance and accountability requirements;
the accounting and auditing profession;
information and reporting;
entity management practices; and
the broader environment within which public entities operate.

The sector managers then:

surveyed current and forecast activities by all public entities within each sector;
formed preliminary views on the key issues and risks, and possible assurance responses; and
identified what other relevant work is being done, or has been done, by other agencies, and/or what we have already done in respect of those issues and risks or related issues and risks.

Step 2: Consultation with Audit Service Providers
Consistent with our intention to take up opportunities for greater involvement, communication, and knowledge-sharing between people working in and for the Office, a workshop was held with ASPs to review the preliminary issues and risks, and possible assurance responses. This enabled a broader perspective to be considered at an earlier stage. Sector managers undertook further review after this workshop.

Step 3: Prioritisation of issues and risks, and proposed assurance responses
In order to give priority to the most important issues and risks affecting public entities within the Auditor-General’s mandate, we identified required actions – the responses to those issues and risks that we must address. The criteria for identifying the required actions were:

any function that the Auditor-General has a responsibility to undertake under the Public Audit Act 2001;
any function that the Auditor-General has a responsibility to undertake under other legislation (such as the audit of LTCCPs, and audit performance matters in relation to the Electricity Commission);
any work that the Auditor-General has publicly committed to undertake, where the factors that gave rise to that commitment are still valid;
“second-stage” work associated with work that has already started and which must be completed to ensure that value will be achieved through our work;
any work where there is a clear requirement to update a position that the Auditor-General has previously taken on a matter (for example, updating out-of-date guidance); and
any work where an exceptional matter has arisen on which the Auditor- General needs to take a position in order to maintain the integrity of the audit opinions that we issue.

We then gave priorities to all remaining actions. The criteria for prioritising were:

public benefit – the benefit to the public from addressing the issue or carrying out the assurance response;
performance improvement – the extent to which the performance of the sector concerned could be improved through addressing the issue or carrying out an assurance response;
significance – the significance of the issue or assurance response (from the aspect of materiality as well as public profile); and
role fit – the extent to which the issue or assurance response related to our role.

A number of iterations occurred as an integral part of our peer review process.

Step 4: Developing the 3-year programme
Consideration was then given to the most appropriate phasing and sequencing of assurance responses. This took into account:

the most effective way to address the key issues and risks, using our full range of assurance responses (see pages 46-47);
the resource implications of the proposed assurance responses; and
our current work programme.

From this basis, we drafted a 3-year programme, then the proposed work programme for 2005-06. By using this approach, we were able to give broader consideration to the “best” assurance responses that we could apply to the key issues and risks affecting public entities within the Auditor-General’s mandate.

Step 5: Consultation with Parliament and other stakeholders
Our Preliminary Draft Annual Plan formed the basis for consultation on the Auditor-General’s proposed work programme for 2005-06. On the basis of feedback received, we reviewed and amended our proposed work programme for 2005-06 before completing the statutory Draft Annual Plan. There was then a further opportunity for feedback by the Speaker and Select Committees before finalising this Annual Plan.

Areas of major audit and assurance interest

The Auditor-General has undertaken to increase the outputs of his Office during the next 3 years. To assist Parliament’s understanding of the context of our proposed annual work programme, we have commenced work on identifying what we consider will be the areas of major audit and assurance interest, and the key issues and risks that will affect public entities within the Auditor-General’s mandate during the next 3 years.

Areas of interest

As part of enhancements to our SAP process, we commenced work to identify areas of major audit and assurance interest that warrant consideration by the Office during the next 3 years. The following is our initial view on these areas. We intend to do further work in 2005-06 to develop these themes. In alphabetical order, these initial areas are:

Capability – the ability of public entities to achieve the outcomes that they are seeking now and in the future through their people, resources, and systems.
Financial performance and management – the effective and efficient financial management and performance of public entities.
Governance/accountability – the suitability of governance and accountability arrangements within public entities.
Legislative compliance – the extent of compliance by public entities with relevant legislation (both statute and regulation).
Performance (including waste) – the ability of public entities to deliver operational outputs, and to do so in a manner that applies resources economically and minimises waste.
Performance reporting – the ability of public entities to respond to changes in reporting requirements and methods.
Probity (including fraud) – the appropriateness of the actions and behaviours of public entities/officials.

In addition, after more detailed analysis, we have identified key issues and risks affecting public entities at a public-sector-wide level. These are detailed below.

Public-sector-wide issues and risks

We are already undertaking specific research and development projects to progress 3 issues that affect the public sector:

New Zealand International Financial Reporting Standards (NZ IFRS);
Long-Term Council Community Plans (LTCCPs); and
implementation of the Public Finance Amendment Act 2004 (PFAA) and the Crown Entities Act 2004 (CEA).

We identified the following key issues and risks as having a significant effect on the whole of the public sector:

Asset and infrastructure management
Many of our public entities own and operate significant infrastructural assets that are of vital importance to the country, as well as being significant in the financial performance of the relevant entity. Key infrastructural assets have shown signs of stress or have been identified as being at risk. The management and state of assets has therefore been a key focus for our audit work for some years, and remains a key issue and risk.
Decision-making and consultation
In both central and local government, there has been public concern about the extent of analysis and consultation to support major projects, such as capital development projects, or significant decisions. In addition, issues have arisen in local government around business cases for decisions such as land purchases and investments in economic development initiatives, and the extent to which such initiatives are appropriately governed and managed. Legislation requires a number of public entities to undertake consultation as part of decision-making. While there has been no significant change in case law for some years, good practice is evolving and legislation changes have reinforced the public’s expectation of greater levels of consultation.
Contracting of public services to NGOs
We have been extensively involved in issues relating to contract and other funding arrangements between Government and non-government organisations (NGOs) since 2000, when a range of issues was raised relating to the Waipareira Trust. The level of scrutiny of NGO contracting has continued to increase. In our 2003 report of an inquiry into the management of funding arrangements with several NGOs connected with Donna Awatere- Huata MP, we outlined some of our expectations of public entities that contract with, or provide funding to, NGOs. This included expectations of how they should ensure proper accountability, transparency, and best use of public money. Since the report was published, we have continued to develop guidance on a “risk-based” approach to managing NGO contracts. The Treasury also published revised Guidelines for Contracting with Non-Government Organisations for Services Sought by the Crown.

In addition, in the local government area, we have identified a practice that has involved the use of community groups and “arm’s length” trusts to deliver a range of Council/community outcomes, which in some instances involve large assets (such as stadiums).
Performance planning and reporting (including sustainable development reporting)
Our Annual Plan 2004-05 identified performance planning and reporting as a key strategic risk and issue. A coherent strategy with integrated audit responses based on our 2001 report Reporting Public Sector Performance is required to respond to these developments. Auditors also need the requisite tools to audit this information when it falls within the scope of our audit responsibility.
Pricing of public services
Many services provided by public entities are funded by way of charges on the users of the services. In some instances, such charges are governed by specific regulation. In other instances, charges are to be set in accordance with general principles, with legislative compliance issues being raised in respect of both. Levies that incorporate either a “public good” or an economic pricing approach in order to influence the behaviour of users of services (for example, court fees or environmental user charges) fall within the latter category. We published guidelines on setting fees and charges in 1989, and there is a need to update this guidance. There is also a need to consider whether public entities are effectively and appropriately setting charges to give economic signals about the use of services and avoidance of other behaviours.
Probity
The Public Audit Act 2001 provides for the Auditor-General to consider and report on “any act or omission showing or appearing to show a lack of probity or financial prudence by a public entity or one or more of its members, office holders, and employees” (referred to below as “probity”). There is increased interest and scrutiny by taxpayers and ratepayers of how public resources are and should be prudently used, and how public officials should behave. Probity has many aspects. It encompasses such matters as the adequate identification and management of conflicts of interest, and the controls in public entities around sensitive expenditure.

The range of our assurance responses

The range of assurance responses that we can use to address the key issues and risks includes:

Performance audits – These are significant audits covering issues of effectiveness, efficiency, compliance, waste, and/or probity. Typically, they take 9-18 months to complete. They provide greater depth and breadth of assurance than can be gained through an annual audit. While performance audits tend to be one-off, we may conduct similar performance audits of a number of public entities, or over a number of years within the same entity, or we may carry out a follow-up performance audit to assess the extent of progress by an entity or sector in response to our recommendations from an earlier performance audit.
Areas of focus or specific work as part of annual audits – We provide guidance to auditors who carry out annual audits on our behalf through “audit briefs”. In addition, we may require auditors to undertake specific work as part of the annual audit – either generally for all public entities within a sector, or specifically within an entity. In this instance, our auditors may be asked to provide general or entity-specific “returns” on their findings.
Reports to Parliament – Under the Public Audit Act 2001, the Auditor-General is required to report annually to the House of Representatives on matters arising from the exercise of his functions, duties, and powers. This is normally achieved by separate reports for Central Government and Local Government. Articles in these reports can include the results from general or entity-specific returns, and we may also report in more detail on specific issues of concern.
“What we expect” studies and best practice guidance – From time to time, we have published “best practice” guidance on areas of major audit interest, frequently in circumstances where no other published guidance exists.
Other – There are a number of other possible assurance responses that we may choose to address key issues and risks. These may include consultation with relevant central agencies, providing advice on accountability regimes and auditing standards, or the completion of work to further scope an issue and formulate our response. In this document, this category also includes research and development activity. As a result of increased funding from Parliament, we are now able to more pro-actively respond to the changes in our environment and the profession by undertaking research and development, and product development.

Deploying the full range of our assurance responses around key issues and risks

Our Strategic Plan identified the need for us to apply the full range of our assurance responses to key issues and risks that we consider require attention.

The use of the full range of our assurance responses is called an “integrated audit approach”. Through our SAP process, we have taken a 3-year view of the key issues and risks. This considers such questions as:

How well defined is our position in relation to the issue or risk? If it is not well defined, we may propose some initial research and development, before the implementation of other assurance responses.
How aware are our auditors currently of the issue or risk? If there is a low level of awareness, our efforts will be designed to raise the profile of the issue/ risk in the next year (year one).
Do we currently have enough information on the extent/scale of public entity or sector performance in relation to the issue or risk? If not, a general or entity-specific return may be sought in year one and in the following year (year 2). The results of such returns would then most likely form the basis for an article in a report to Parliament in the following year (year 3). They may also result in more specific advice being provided to Appointed Auditors for the next year’s annual audits.
Would the issue or risk benefit from more intensive examination through a performance audit? If yes, then this may also involve consideration of whether there should be a single or multiple public entity examination, and/ or a multi-year, rolling programme of performance audits.
Is adequate guidance available to public entities on the issue or risk? If not, we may initiate a best-practice guide or update existing guidance.

Proposed performance audits and studies for 2005-06

Selection of performance audits for 2005-06

Developments and issues arising during 2005-06 could influence the actual implementation of these proposed performance audits. It is therefore possible that some of the selected audits may not be started or completed.

A full assessment of each proposed performance audit will be made at the time that the audit is scheduled to begin, and at appropriate intervals as the audit progresses. This assessment will consider the ongoing relevance and timeliness of the proposed performance audit, and how it fits with any unplanned work that may arise as a priority, such as major inquiries.

In the event that we choose not to continue with a proposed performance audit, the Auditor-General may determine alternative performance audit(s) to be carried out. We will report on variations to our proposed performance audit programme as part of our Annual Report.

Performance audits to be completed in 2005-06

The following performance audits will be completed in 2005-06:

E-government – review progress against objectives and targets.
Management of heritage collections.
Housing New Zealand Corporation – property portfolio management.
Sea container surveillance.
The Treasury – effectiveness for Māori.
Health sector IT – progress against the WAVE report.
Review of the New Zealand Qualifications Authority’s quality assurance processes.

(All the performance audits listed above are described in our Annual Plan 2004-05.)

Department of Conservation’s land holding and purchasing policies.

(This performance audit is described in our Annual Plan 2003-04.)

Overseas development assistance.
Review of the Health Funding Package.
Dwelling burglary – follow-up performance audit.
Economic development funding (West Coast).
Ministry of Defence – major acquisition projects.
New Zealand Debt Management Office – Treasury management policies and practices.
Resource Management Act 1991 consultation relating to major Crown capital developments.
School property maintenance – follow-up performance audit.
Annual performance audit of a selected grant programme.

(The performance audits listed above are described on pages 51-56).

Proposed performance audits to start in 2005-06

We have identified a range of performance audits to start in 2005-06, as listed below. The final number will depend on resource allocation and the number of projects finalised in 2004-05.

Prisoner mental health treatment.
Youth at risk.
Primary health care.

(The performance audits listed above are described in our Annual Plan 2004-05).

Annual performance audit of a selected grant programme.
Call centres.
Combating immigration fraud.
Disasters – the maintenance and capacity of flood protection assets.
Local authority decision-making.
Management of diabetes.
Management of employee fraud.
Ministry of Social Development – debt collection.
Revitalisation of Te Reo Māori.
Transit New Zealand – State highway maintenance.
Sustainable development – implementation of the Programme of Action.

(The performance audits listed above are described on pages 56-62).

“What we expect” studies and best practice guidance in 2005-06

We plan to produce 4 guidance reports that set out our views on how we expect public entities to act in certain circumstances. They are:

Procurement guidelines update.
Rates postponement – reverse mortgages.
Sensitive expenditure guidelines.
Contracting of public services to non-government organisations (NGOs).

(The studies listed above are described on pages 62-64).

Descriptions of proposed performance audits and other reports for 2005-06

On the following pages, we describe in more detail the proposed performance audits and reports that have been added to our work programme since those outlined in our Annual Plan 2004-05.²

Overseas development assistance

Background
NZAID is the agency responsible for international assistance to developing countries. It was created on 1 July 2002 after a consultant’s review recommended that aid should have a more distinct identity, separate from the Ministry of Foreign Affairs and Trade (MFAT). NZAID’s main focus is on the Pacific region, but it also supports projects in Asia, Africa, and Latin America. In 2004-05, the agency will distribute about $259 million.

What is the potential impact of this performance audit?
Our proposed performance audit would assess how well NZAID administers 2 or 3 overseas development programmes, and might also assess how well NZAID monitors the effectiveness of the programmes. The audit would provide Parliament with assurance about how effectively NZAID is administering the overseas development programme. A briefing would be offered to the Foreign Affairs, Defence and Trade Committee.

Review of the Health Funding Package

Background
In February 2002, the Minister of Health announced that, for each of the next 3 years, $400 million would be added to the health-funding baseline. This represented a significant increase, and allowed District Health Boards to have certainty of funding for a 3-year period. However, there has been uncertainty about where the additional funds have been spent. In part, this uncertainty flows from the complicated nature of the Vote: Health.

What is the potential impact of this performance audit?
Our proposed performance audit would clarify the uncertainty by describing in detail where and how the additional funds have been allocated. The audit would aim to provide detailed information to both Parliament and the public about how the additional funding has been allocated. However, it would not try to determine whether the additional funding has led to improved health outcomes. The Health Committee would be offered a briefing on our report.

Dwelling burglary – follow-up performance audit

Background
Burglary accounts for about 1 in 10 of all recorded offences. Fear of being burgled ranks high, and many people consider that burglary is a specific problem in their area. The Police have responded to public concerns by making reduction of burglary an operational priority, and by undertaking special initiatives to improve the management and investigation of burglary. In 2001, we reported the results of our performance audit The Police: Dealing with Dwelling Burglary. During consultation for our Annual Plan 2004-05, MPs asked us to follow-up our 2001 report.

What is the potential impact of this performance audit?
Our proposed follow-up performance audit would review specific actions by the Police in response to our recommendations in 2001. The audit would provide assurance to Parliament about whether there have been improvements in the management of dwelling burglary since our 2001 report. The Law and Order Committee would be offered a briefing.

Economic development funding (West Coast)

Background
The West Coast received substantial funding in compensation for lost revenue from a ban on native forest logging. The West Coast community had expectations of substantial benefit. However, there have been at least 2 high-profile failures associated with the subsequent use of this funding. The Auditor-General has been involved in an extensive inquiry arising from the financial collapse of a plastics factory, but declined to review the failed sock factory initiative. We are concerned that, while there has been high-profile publicity of the failure of particular initiatives, there is no overview of how the economic development funding has been invested and applied.

What is the potential impact of this performance audit?
Our proposed performance audit would examine how the West Coast economic development funding has been invested and applied. The audit would take a region-wide and long-term view of the custodianship and use of the funding, and would aim to provide assurance to Parliament on whether the funding has been governed and managed appropriately. The Local Government and Environment Committee would be offered a briefing on the outcomes of our audit.

Ministry of Defence – major acquisition projects

Background
Acquisition projects managed by the Ministry of Defence (MoD) are complex. The total value of such projects currently under way is about $2 billion. In 2001, we reported on the acquisition of Light Armoured Vehicles (LAVs) and Light Operational Vehicles (LOVs). In that report, we made recommendations for improvements. In early 2005, we reported on a follow-up audit of the LAV project. Given the size and scale of these projects, we continue to maintain an interest in this area.

What is the potential impact of this performance audit?
Our proposed performance audit would examine recent major acquisition projects of the MoD, and assess performance against the cost estimates, timetables, and technical requirements that were approved by Cabinet. The audit would aim to provide assurance to Parliament on how effectively the MoD is managing its acquisition projects, and would identify any significant variations from what was approved by Cabinet and the reasons for these variations. The Foreign Affairs, Defence and Trade Committee would be offered a briefing on the outcomes of our audit. Depending on the findings, future performance audit work on specific acquisition projects may be appropriate. (The UK National Audit Office carries out this type of audit annually, and we may consider a similar approach).

NZ Debt Management Office – Treasury management policies and practices

Background
The New Zealand Debt Management Office (NZDMO) is responsible for the efficient management of the Crown’s debt and associated assets within an appropriate portfolio and risk management framework. In 1994, we carried out an audit of the NZDMO, focusing on the management and control environment, and on the procedures for managing the Crown’s debt portfolio. Some submissions to the Finance and Expenditure Committee for the Public Finance (State Sector Management) Bill queried, in particular, whether there were sufficient controls in place around the NZDMO’s financial market activities, and raised concerns about off-balance-sheet financing arrangements.

What is the potential impact of this performance audit?
Our proposed performance audit would examine whether the NZDMO is carrying out its role and responsibilities effectively and efficiently, and assess the control environment and controls in place in relation to NZDMO activities. The audit would aim to provide assurance to Parliament on how well the NZDMO is operating. The audit would be part of an integrated audit approach to “Treasury management policies and practices, and use of derivative instruments”.

Resource Management Act 1991 – consultation relating to major Crown capital developments

Background
There is a high risk of inefficient public spending and/or legal action if consultation about capital works is mishandled. This issue arose partly in response to complaints about $1.5 million of consultation costs incurred by the Department for Corrections in regard to Spring Hill prison. Such issues are likely to arise for any government departments wishing to undertake substantive capital works, so this audit is highly desirable.

What is the potential impact of this performance audit?
Our proposed performance audit would examine consultation with parties affected by Crown capital works. We would be seeking to raise the level of understanding of effective and efficient consultation processes that achieve positive and defendable outcomes. The relevant Select Committee(s) would be offered a briefing on the outcomes of our audit.

School property maintenance – follow-up performance audit

Background
In August 2001, we published a performance audit report on management of the school property portfolio by the Ministry of Education (MOE). In our 2001 report, we identified concerns around the MOE’s monitoring of the use of the portion of the operational grant funding for property maintenance purposes to adequately maintain the Crown-owned property used by schools. Given the size of the school property portfolio (it is valued in excess of $7.5 billion for land and improvements, and represents a significant asset in the Crown balance sheet), we continue to have an interest in this area.

What is the potential impact of this performance audit?
We propose a follow-up performance audit to examine the extent to which the recommendations of our 2001 report have been addressed by the MOE, in the context of the current capital funding and planning framework. The audit would aim to provide assurance to Parliament about how effectively this asset is being managed by the MOE. The Education and Science Committee would be offered a briefing on the outcomes of our performance audit.

Annual performance audit of a selected grant programme

Background
Our 2004-05 performance audit of New Zealand Trade and Enterprise (NZTE) identified significant deficiencies in how NZTE manages some grant programmes. It is likely that such deficiencies are not limited to NZTE. During the next 3 years, we intend to carry out a series of performance audits of selected grant programmes.

What is the potential impact of this performance audit?
Each performance audit in this series would examine a grant programme that is administered by one or more public entities, to determine whether it is being administered in an effective and efficient manner. Each audit in the series would aim to provide assurance to Parliament on how effectively and efficiently grant programmes are being administered. Each performance audit would also aim to improve the administration of grant programmes by recommending changes to policies and procedures to address any deficiencies identified. The relevant Select Committee(s) would be offered a briefing on the outcomes of our audit. A “what we expect” study or best-practice guide may also be developed in the future.

Call centres

Background
Government departments are increasingly using call centres as mechanisms for communicating with citizens. Performance against measures, such as response times and percentage of lost calls, varies between organisations. Similarly, technology platforms vary, as do controls over the quality of information provided by call centre operators.

What is the potential impact of this performance audit?
Our proposed performance audit would examine the performance of selected call centres against best-practice criteria. The audit would aim to provide assurance to Parliament about how effective and efficient call centres are in servicing customers’ needs. The audit would aim to improve the performance of Government departments that use call centres, by sharing good practice, and encouraging opportunities for increased efficiencies through greater coordination between departments. The relevant Select Committee(s) would be offered a briefing.

Combating immigration fraud

Background
In 2003-04, immigration fraud detected by the New Zealand Immigration Service (NZIS) increased significantly. Immigration fraud worldwide accounts for a profit of US$10 billion a year, second only to narcotics and arms dealing. Our appointed auditor has observed an increase in allegations of wrongdoing by NZIS staff at the NZIS’s overseas branches during the past 2 years. A number of these allegations have been proven.

What is the potential impact of this performance audit?
Our proposed performance audit would assess the immigration fraud detection and prevention processes of the NZIS. The audit would aim to provide assurance to Parliament about how effectively the NZIS manages the risk of immigration fraud. The audit would also aim to improve the effectiveness and efficiency of NZIS’s management of immigration fraud risks. The Transport and Industrial Relations Committee would be offered a briefing.

Disasters – maintenance and capacity of flood protection assets

Background
Two significant civil emergencies – both floods – occurred within 6 months in 2004. These emergencies stretched existing flood protection schemes, and community and national response capabilities. The affected communities are still coping with flow-on effects. There has also been some criticism of Regional Council flood protection schemes and their ability to protect local communities. There is high public and community awareness of the 2004 floods, and a clear expectation that relevant local authorities will maintain adequate flood protection schemes. In a 1998 report to Parliament, we raised concerns about local authorities in relation to the management of flood protection assets.

What is the potential impact of this performance audit?
Our proposed performance audit would review the site management practices of relevant local authorities, asset management practices for flood-related assets, and procedures when floods occur. The audit would assess the effectiveness of flood protection assets associated with the 2004 floods, and would aim to improve the management of such assets by local authorities. The Local Government and Environment Committee would be offered a briefing.

Local authority decision-making

Background
The Local Government Act 2002 (the Act) provides principle-based decision-making obligations that local authorities are endeavouring to understand and embed into management processes. Local authorities face risks if their decisions can be shown to be unreasonable or if due process has not been observed. After the Act was passed in 2002, it was followed by a series of high-level guidance material produced by sector organisations and the Department of Internal Affairs. A need for more specific advice has emerged as local authorities have developed more experience in implementing the Act. We have dealt with a number of complex ratepayer enquiries in regard to local authorities’ decision-making obligations, and consider that we now have sufficient experience to distil and reflect good practice emerging from the sector.

What is the potential impact of this performance audit?
Our proposed performance audit would aim to provide advice to local authorities on their principle-based decision-making obligations. The Local Government and Environment Committee would be offered a briefing on the outcomes of our audit.

Management of diabetes

Background
There is an increased incidence of diabetes in New Zealand – in particular, Type 2 or so-called “adult-onset” diabetes. Improved diabetes management is a key focus for the health sector, and for primary health care, as one of the 7 key service priorities of the Ministry of Health for 2003-04. The Ministry implemented an annual review programme (commonly referred to as “Get Checked”) in mid-2000. The “Get Checked” programme is a major initiative that aims to monitor and continuously improve both the care of, and outcomes for, people with diabetes. Failure of this programme has the potential for expensive consequences.

What is the potential impact of this performance audit?
Our proposed performance audit would examine the effectiveness of the “Get Checked” programme in terms of ongoing management and impact evaluation. The audit would provide assurance to Parliament about the performance of a major diabetes identification and control initiative. The Health Committee would be offered a briefing on the outcomes of our audit.

Management of employee fraud

Background
In 2000, we surveyed 43 government departments to see whether they had policies and procedures for minimising the likelihood of employee fraud, and to assess how they had dealt with cases that had occurred. Fewer than half of the departments had formal policies for managing fraud. On completion of our survey in 2000, we said that we would maintain our interest in this area. In addition, the recent developments in auditing standards internationally and in New Zealand show that greater responsibilities will be placed on auditors in relation to considering fraud in audits of financial statements.

What is the potential impact of this performance audit?
Our proposed performance audit would examine and assess the fraud control arrangements in place within government departments, to identify if any improvements have been made since 2000. Alternatively, we could look more broadly at arrangements throughout the public sector or selected “at-risk” sectors/ entities. The audit would raise the profile of fraud management in the public sector, with a view to improving performance and practice in this area. The performance audit would be part of an integrated audit approach to the key issue/risk of fraud, including 2 other proposed performance audits (immigration fraud in 2005-06, and benefit fraud in 2006-07), potential for a best-practice guide on fraud management, and updating our auditing standard on probity.

Ministry of Social Development – debt collection

Background
The Specialist Services Unit within the Ministry of Social Development (MSD) carries out debt-collection relating to people who no longer receive a social security benefit or student allowance. A total of $19 million was appropriated in 2003-04 for this work. As at 30 June 2004, the value of non-current beneficiary debt was $448 million. About $78 million was collected in 2003-04 and $94 million was written off. The MSD’s primary focus is debt prevention. However, when debts arise, the MSD uses strategies to increase collection, while ensuring that repayments do not cause undue hardship or jeopardise an individual’s ability to stay in employment.

What is the potential impact of this performance audit?
Our proposed performance audit would assess MSD’s debt-management systems, policies, processes, and procedures. The audit would be the second in a series of 3 performance audits focusing on public sector debt collection (Ministry of Justice: Fines Collection will be completed in 2004-05, and Inland Revenue: Taxpayer Debt is proposed for 2007-08). The audit would aim to provide assurance to Parliament about whether the MSD is collecting beneficiary debt in an effective and efficient manner. It would also aim to recommend ways to improve the MSD’s debtcollection systems, policies, and procedures. The Social Services Committee would be offered a briefing on the outcomes of our performance audit.

Revitalisation of Te Reo Māori

Background
The Government is committed to supporting revitalisation of the Māori language, and released a revised Māori Language Strategy in 2003. Several government departments have been involved in development of the strategy, and are responsible for delivering specific support functions. Te Puni Kōkiri monitors implementation of the strategy. The Government invests several million dollars a year through a range of Votes to meet its Treaty obligations to assist with the revitalisation of Te Reo Māori. There is a risk that efforts are not being well co-ordinated or targeted, and that funds are not being used efficiently.

What is the potential impact of this performance audit?
Our proposed performance audit would examine the extent of co-ordination between contributing departments in response to the Crown’s obligations to revitalise the Māori language. The audit would provide assurance to Parliament about the prudent and effective use of taxpayer funds in relation to the revitalisation of Te Reo Māori, and would seek to improve co-ordination of the implementation of the Māori Language Strategy. The M¯aori Affairs Committee would be offered a briefing on the outcomes of our performance audit.

Transit New Zealand – State highway maintenance

Background
Transit NZ spends more than $300 million a year on maintaining State highways and motorways. The State highway network is one of the largest assets owned by the Crown, with a depreciated replacement cost of more than $13 billion. Transit NZ’s reporting indicates that the condition of the network is stable (that is, maintenance balances out deterioration). However, it is not clear how efficiently Transit NZ maintains State highways.

What is the potential impact of this performance audit?
Our proposed performance audit would look at how efficiently Transit NZ maintains State highways, and to what extent it follows best practice in asset management and contract management. The audit would provide assurance to Parliament about whether Transit NZ is maintaining State highways in an effective and efficient manner. The Transport and Industrial Relations Committee would be offered a briefing. We are also proposing a performance audit in 2006-07 on the effectiveness of collaboration between local authorities and Transit NZ in the management of roads.

Sustainable development – implementation of the Programme of Action

Background
In 2002, an international working group of Auditors-General promoted audits of government responses to the Johannesburg World Summit on Sustainable Development. New Zealand’s Programme of Action for the world summit involves a whole-of-government approach in 4 work areas – water, energy, sustainable cities, and child and youth development. New Zealand’s performance in relation to the Programme of Action is unclear.

What is the potential impact of this performance audit?
Our proposed performance audit would assess the effectiveness of the response to the Programme of Action by looking at selected aspects of the Programme. There may be opportunities to collaborate with government agencies on the audit. The relevant Committees would be briefed, and we would also look for ways to promote the audit’s findings to government agencies and internationally.

“What we expect” studies and best-practice guidance in 2005-06

Procurement guidelines update

Background
Our procurement guidance requires updating to deal with general procurement issues and to clarify its application to Local Government procurement decisions. We are aware that there are other sources of procurement guidance, and that some issues that we have considered in inquiries (such as sole-source procurement) have not yet been included in our guidance.

What is the potential impact of this study?
Our proposed study would update the Auditor-General’s procurement guidance. Through this study, we would maintain the relevance of our published guidelines to current practice, and ensure that the guidelines are applicable to circumstances faced in both Central and Local Government. This would assist in improving the management of procurement activities in public entities. The relevant Select Committee(s) would be offered a briefing.

Rates postponement – reverse mortgages

Background
A small number of local authorities are providing rates postponements as reverse mortgages. This is a new initiative made possible by the postponement powers under the Local Government (Rating) Act 2002. Legislative, accounting, debt management, and financial prudence issues need to be considered for such initiatives.

What is the potential impact of this study?
Our proposed study would identify the extent to which this option of rates payment is being taken up by ratepayers in the early stages of such schemes, and assess compliance with appropriate statutory responsibilities. It would also address arrangements for prudent management of the potential impacts on local authorities. The study would seek to improve the management of reverse mortgages. The Local Government and Environment Committee would be offered a briefing.

Sensitive expenditure guidelines

Background
In 1996, the Institute of Internal Auditors of New Zealand published A Management Guide to Discretionary Expenditure. The document set out some principles on how organisations should deal with items of sensitive expenditure. Since that time, we have been asked to inquire into and report on a number of specific examples of sensitive expenditure. We consider that more guidance on sensitive expenditure is timely. We intend to publish clear guidance about key sensitive expenditure items. The guidance would establish our expectations for use by all public entities, as well as auditors of all public entities.

What is the potential impact of this study?
The guidelines will contribute to the wise use of public money by setting definite expectations for public entities to apply to items of sensitive expenditure. We would seek to distribute the guidelines widely among public sector organisations.

Contracting of public services to NGOs

Background
We have been involved in issues relating to NGO contracting since 2000. In our 2003 report on funding of organisations associated with Donna Awatere Huata MP, we outlined some of our expectations of how public entities that contract with, or provide funding to, NGOs should ensure proper accountability, transparency, and best use of public money. The report has been used as a best-practice guide, although it was not written for this purpose.

What is the potential impact of this study?
Our proposed study would develop best-practice guidance (audit expectations) on contract and other funding arrangements between Government and nongovernment organisations (NGOs). The study would clarify our expectations in relation to the monitoring and evaluation of public entities’ contracts with NGOs for service delivery. This would allow us to audit against these expectations in future annual audit and performance audits. We plan an integrated audit approach, including additional assurance responses, such as research and development in 2005-06 on specific work for annual audits, and a series of performance audits, starting in 2006-07, to examine different agencies’ management of NGO contracting arrangements.

Proposed research and development programme for 2005-06

In our Strategic Plan, we undertook to include our proposed research and development programme as part of our Annual Plan. For 2005-06, we will continue our existing research and development programme activities in relation to NZ IFRS, LTCCPs, the PFAA and CEA, and ISA. In addition, we propose the following areas for research and development:

Legal compliance issues.
NGO contracting – clarification of ongoing annual audit requirements.
Probity – development of ongoing annual audit requirements.
Five management aspects.

Legal compliance issues

Background
In relation to Local Government, our standard on assessing compliance with laws and regulations (Auditing Standard AG-208) does not adequately provide auditors with guidance on how to assess the reasonableness of a local authority’s actions and extent of compliance under the principle-based approach of the Local Government Act 2002.

Proposed research and development
We propose to update Auditing Standard AG-208 based on work done as part of our research and development programme for 2005-06.

Contracting of public services to NGOs

Background
We have specific concerns in relation to contracting of public services to NGOs (see page 45).

Proposed research and development
We propose to establish, through research and development, the specific annual audit work that we need to carry out on contracting of public services to NGOs, and to roll out the outcomes of that work in subsequent years.

Probity

Background
We have specific concerns in relation to probity (see page 46).

Proposed research and development
We propose to establish, through research and development, the specific annual audit work that we need to carry out on performance, waste, and probity. This will include updating of Auditing Standard AG-3. In 2006-07, we propose to roll out the outcomes of that work in our annual audits.

Five management aspects

Background
In the course of carrying out annual audits, our auditors make assessments of how entities are performing in respect of 5 aspects of financial and service performance management. Select Committees perceive our assessments of the 5 management aspects as having high value. We need to refresh the 5 management aspects, and consider the possibility of applying them in other sectors in the future. A revised rating system also presents an opportunity to reinforce and complement other research and development, and product development initiatives.

Proposed research and development
We propose to carry out a fundamental review of the 5 management aspects, and to develop the audit approach and guidance for auditors for our revised 5 management aspects.

Feedback from Parliamentary consultation

Under section 36(1) of the Public Audit Act 2001, our proposed work programme is subject to Parliamentary consultation. This is an important way in which the Auditor-General can continue to ensure that his work remains relevant and responsive.

We sought feedback on two occasions – once on a preliminary early draft and again on the statutory Draft Annual Plan. This feedback:

largely supported the priority and ranking of proposed studies; and
provided us with guidance as to the scope and relative emphases we should place on many of our proposed studies.

We thank Parliament for this feedback, and will ensure that it is incorporated into our scoping of the respective studies.

Having regard to the requirements of section 36(3) of the Public Audit Act, we acknowledge that the Finance and Expenditure Committee provided a written response to the statutory Draft Annual Plan, and note that neither the Speaker nor any committee of the House requested any change to our work programme priorities.

Proposed management actions for 2005-06

Implementing our Strategic Plan

The OPC approved the Auditor-General’s 5-year Strategic Plan in 2004. In this Annual Plan, we have outlined our strategy to better respond to our stakeholders’ needs and the changes in our environment.

In our Annual Plan 2004-05, we undertook to include, as part of our proposed annual work programme, a section on Strategic Plan activities to be implemented during the planning period. This is intended to provide the OPC and Parliament with greater detail on how we will use the additional baseline funding that we received to achieve our outcomes. Below, we outline the specific actions we will take in 2005-06 to implement our Strategic Plan.

Background

The Office received the first stage of additional Parliamentary baseline funding on 1 July 2004. This has been used to implement the first phase of our Strategic Plan.

During 2004-05, this phase has involved “building the infrastructure” to support the achievement of our Strategic Plan. This has included:

establishing clear governance and accountability for our Strategic Plan;
putting in place the mechanisms, processes, and systems to support implementation of our Strategic Plan;
increasing our resources and capacity in areas where funding has been received;
looking for ways to maximise efforts across the Office;
enhancing our capabilities;
continuing to work together in ways that encourage innovation and collaborative working; and
delivering what we have committed to.

On 1 July 2005, the Office will receive the second stage of additional parliamentary baseline funding. The emphasis for this second phase of implementation of our Strategic Plan in 2005-06 is to be on “development – of our people, and our products and services”.

Summary of management actions for 2005-06

Throughout this Annual Plan, we have identified specific management actions that we propose to take during 2005-06. These have also been integrated into our risk management framework as the “mitigating actions or enhancements to existing strategies” that we intend to implement during the coming year. During 2005-06, we propose to:

Develop our people

implement Leadership Development initiatives for senior staff within the Office (for example, individual development plans and specific leadership development learning interventions);
design and implement a technical/professional development programme for performance auditors; and
devise a strategy for difficult-to-recruit positions, including the consideration of options to extend or rotate existing staff and encourage secondments from overseas.

Develop our products and services

review our professional methodologies for performance audits and Audit NZ’s annual audits;
implement the outcomes from our review of quality assurance over all our products; and
implement revisions arising from a review of our enhanced SAP process.

Other

review the linkages between our Strategic Plan, performance management, and remuneration;
review the application of our agreed risk management processes, and clarify management accountabilities for risk management;
complete the implementation of our agreed impact evaluation process for performance audits;
develop an evaluation framework to assess the impact of the implementation of our Strategic Plan;
• complete the implementation of our stakeholder feedback study;
develop measures to assess the quality, adequacy, effectiveness, and appropriateness of our governance framework;
develop a legislative compliance framework for the Office; and
continue to implement our 5-year Information Systems Technology Plan.

Other contributions to better public sector administration

Other contributions we will make during 2005-06

The Office plays an important role in enhancing accountability, and in the development of professional and technical standards for accounting and auditing.

It does this through:

commenting and making submissions on draft legislation, within our particular expertise and knowledge;
making senior staff available for membership on committees of ICANZ – including the Professional Practices Board and the Financial Reporting Standards Board;
considering and making submissions on proposed New Zealand and, where appropriate, international financial reporting, auditing, and ethical standards;
participating in committees and working groups of public sector auditing bodies – such as INTOSAI and the Australasian Council of Auditors-General (ACAG);
liaising with the Auditor-General’s appointed auditors (including those in private practice) on accounting, auditing, and policy developments; and
liaising with, and assisting, government agencies and others (including the Treasury, the State Services Commission and the Society of Local Government Managers) on public sector accountability and reporting issues.

We intend to continue our contribution in all these areas during 2005-06.

2: Parliamentary paper B.28AP(04), pages 53-59.

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