3.2 Preparing for the audit of Long-Term Council Community Plans

Local government: Results of the 2003-04 audits.

3.201
From 2006, the Auditor-General has a new statutory duty to issue an opinion on a local authority’s draft and final LTCCP under sections 84(4) and 94 of the 2002 Act.

Our guiding principles

3.202
Both the LTCCP, and the requirement for it to be audited, are unique to New Zealand. While other local government jurisdictions have auditor involvement in prospective information, the inclusion of an audit within the Act is a unique response to the specific legislative arrangements for New Zealand local government in a context of general empowerment.

3.203
Our collective understanding – that of auditors, councils, and communities – of the 2002 Act’s challenge to promote sustainable long-term well-being, and our respective roles in this process, will develop over time. The Auditor-General, as the public sector’s auditor, has a unique opportunity to add value for:

  • communities – in enhancing councils’ LTCCP preparation so that communities are consulted on robust and realistic plans that provide a basis for subsequent accountability of councils;
  • elected members and councils – in giving additional confidence that community needs are understood and planned for through robust and integrated planning systems, and that decisions are based on relevant considerations and quality information; and
  • Parliament and other stakeholders of local government – in providing confidence that the local government system is supporting the delivery of activities essential to communities’ well-being over the long term and in a sustainable way.

3.204
With 2006 being the first time the Office takes up this audit function, we are committed to maximising the value we can provide. The audit of the LTCCP was not in the Local Government Bill as introduced, but was recommended for inclusion by the majority of members of the Local Government and Environment Committee. In developing our approach, we have been conscious of the intention of Parliament as expressed by the 2002 Act, and the view of the Select Committee in the majority report on the Local Government Bill. When recommending the inclusion of an audit of LTCCPs, the Select Committee said:

We suggest a further requirement of audit in relation to the long-term council community plan. … This contributes to the information necessary for communities to assess the quality of the long-term plan in the draft stage and after adoption.

3.205
The Select Committee had received several submissions proposing some form of statutory authority with power to review, and even overturn, local authority decisions. In commenting on those submissions, the Committee concluded that existing review mechanisms (such as public audit and the Ombudsmen) were adequate. However, it reported that:

We consider that there is a need for checks on the processes, financial management and general fairness of local authorities. … We also consider that the introduction of a requirement for an audit report on the quality and adequacy of information and assumptions on which forecasts and performance measures are based will help reduce the need for review mechanisms. As discussed above, the audit report will be prepared at the draft stage of the long-term council community plan. This should reduce the chance of poor planning being put into practice.

We recognise that this provision may add to the costs and time involved in preparing draft plans. However, it is essential that communities be enabled to participate in long-term planning for their locality.

Our approach

3.206
In developing our approach to the LTCCP audit, we have striven to maximise our adherence to relevant professional standards, and our application of good auditing practice. However, we recognise that preparing an LTCCP relies on making informed and reasonable judgments about the future, rather than always being supported by facts or evidence. We are therefore taking a flexible approach, that attempts to recognise the reality of the context and constraints in which councils operate, while allowing for good practice within the general empowerment framework of the 2002 Act to emerge over time. To this extent, our methodology relies on the application, as appropriate, of:

  • requirements and principles of the 2002 Act (including the sustainable development principles);
  • requirements of generally accepted accounting practice (GAAP);
  • existing sector good practice (for example, National Asset Management Steering Committee asset management guidelines); and
  • identified good practice in the sector emerging out of audit enquiries.

3.207
Our audit work focuses first on systems, because we consider that councils’ planning systems are vital to the preparation of a robust LTCCP. We also doubt that there will be sufficient time to complete our audit work after a proposed LTCCP statement of proposal (SOP) has been prepared. We hope that, by focusing on systems, rather than on specific decisions or forecast amounts only, good practice will be encouraged and that, over time, this will give communities greater confidence in the robustness and quality of the LTCCP.

3.208
We are aware that the sector is concerned about the compliance cost of our audit work, both in time and effort and in financial cost. In respect of cost, we have tried to balance 3 things:

  • a desire to minimise the cost of the audit to the sector and ratepayers;
  • a commitment to ensuring that the overall benefits of the audit justify the cost; and
  • remunerating our audit service providers fairly, so that we can continue to offer quality auditing services to the public sector.

3.209
We have also taken the following measures to try to maximise consistency in approach across our local government auditors – Audit New Zealand, Deloitte and Ernst & Young – and to minimise the impact of our audit work on councils’ time and resources:

  • A move away from contracting audits to an allocation model. This was done to give councils certainty and consistency in audit arrangements, and to allow expertise in LTCCP and local government audits to grow among auditors.
  • Preparation of a range of standard audit documentation to provide consistency and minimise duplication of audit work. This applies to our LTCCP audit methodology, as well as standard engagement arrangements and reporting documents, and is providing standard support and training that is shared among all our auditors.
  • Providing several “checkpoints” at which audit work will be centrally reviewed to confirm the consistency and fairness of our approach to each council.

3.210
We recognise that the LTCCP is a plan, and that plans, of necessity, are not based on information that is certain. We will not be seeking to second-guess councils’ financial and performance estimates. Rather, we will be seeking confidence that estimates are reasonably based. In order to provide a good basis for consultation and decision-making in the preparation of the LTCCP, and for subsequent decisions and accountability to the community, we expect that both draft and final LTCCPs will be based on a council’s best available information, and best estimates, at the time of issue.

3.211
Our major focus will be on the SOP for the LTCCP, as this is the key document for public consultation. Our interest in the final adopted LTCCP is therefore primarily to ensure that changes made, through consultation and final decisions, have been appropriately reflected in the adopted LTCCP.

3.212
In developing a methodology to address our reporting responsibility under the 2002 Act and the concerns of the Select Committee, we have looked internationally for audit techniques that would help us to effectively address the principles provided to guide councils’ judgements in key areas (such as decision-making and consultation) within the general empowerment that the Act provides.

3.213
A particular element of that methodology is self-assessment. While this is an experimental approach, we were aware that mayors and chief executives in the United Kingdom had evaluated self-assessment as the most useful tool used by the United Kingdom Audit Commission in undertaking Comprehensive Performance Assessments of local authorities in a statutory context similar to our Act. In deciding to use this approach, we consulted, developed, and tested the assessment with sector representatives.

3.214
While there are challenges in organising and resourcing the Office to perform audits that occur only once every 3 years, overall we believe that the Office is in a good position to respond to the challenge of the LTCCP audit, and we expect to deliver a range of benefits in doing so.

3.215
The following diagram sets out our intended audit approach, based on ISAE 30001 and adapted as appropriate to reflect the intentions and specific requirements of the 2002 Act. A full diagram of this methodology and an outline of our approach is available on our website www.oag.govt.nz.

Summary of our LTCCP audit approach

PRELIMINARY PLANNING AND RISK IDENTIFICATION
Understand the council’s business environment and the LTCCP development process, including the
council’s self-assessment of consultation, outcomes, decision-making, governance and performance
management.
Commence assessment of the council’s approach to:
• significant assumptions;
• accounting policies; and
• prudent financial management and balanced budget.
Understand, document and assess control risks in the internal control environment for the financial
and performance planning systems and processes to be applied in the preparation of the LTCCP.
Perform preliminary analytical review procedures of available information to help identify unexpected
balances and relationships.
Determine planning materiality.

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DEVELOP THE AUDIT PLAN
Perform risk assessment and assess the reliance that can be placed on the council’s controls, focusing on;
• significant account balances;
• groups of activities; and
• disclosures.

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Where controls cannot be relied on, plan level of substantive tests to address risks. Where controls can be relied on, identify the controls that mitigate risk and plan substantive tests to address residual risk.

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Summarise and communicate the audit plan.

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PERFORM THE AUDIT PLAN
Perform tests of controls and substantive tests, and evaluate results.
Complete review of:
• the council’s self-assessment;
• significant assumptions;
• accounting policies; and
• prudent financial management and balanced budget.		 Review:
• groups of activities;
• CCOs;
• funding impact statement;
• LTCCP SOP content and integration; and
• summary report.

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CONCLUDE AND REPORT ON THE LTCCP SOP

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REVIEW THE FINAL LTCCP

The challenge for councils

3.216
In our view, the key areas of challenge for councils in preparing and subsequently reporting on LTCCPs lie in the following areas:

  • Outward focus – that councils have an active approach to understanding community views, consult with interested people, collaborate with other stakeholders where appropriate, and have a clear logic flow that links community well-being and desired outcomes to the activities of the council. An information base that aids an understanding of the impact of external sustainability issues for ratepayers, and on council activities, should support this outward focus.
  • Use of “best estimates” – that this concept is applied across the range of areas in which a council is required to make estimations, including assumptions and financial and performance target estimates. A best estimate has two key elements – use of best information and application of best judgement. This is not to suggest that an LTCCP can provide a perfect picture of what will occur. Rather, by using best estimates, the council and its stakeholders are in the best position to understand and assess the impact of options and choices, both in adopting the LTCCP and in subsequent decision-making. We believe that both the 2002 Act and GAAP include a requirement to consider the impact of future price changes when preparing financial estimates – although we recognise the potential for issues in the development, application, and presentation of such information. We are working with the Society of Local Government Managers (SOLGM) Financial Management Working Party to consider how these matters can be addressed in ways that allow best estimates to be prepared for minimum cost in time and resources, and with greatest clarity in public information.
  • Integration – that information within the LTCCP presents a coherent and consistent representation of the council’s future plans that reflects the underlying information, assumptions and policies, plans and strategies of the council.

3.217
We are aware that many councils are working intently to address these key challenges for their upcoming 2006 LTCCPs, building off the lessons learnt from preparing Long-Term Financial Strategies2 and 2003 and 2004 LTCCPs. We think this is wise, and encourage councils to take an active project management approach to this work, the pressure of which has been intensified by the move to International Financial Reporting Standards3.

3.218
The Act provides a framework for continual development of best practice in local government. We expect that, with experience and time, the process of preparing a quality LTCCP that addresses the key challenges of outward focus, best estimates and integration should become easier in subsequent years. Through our LTCCP audit work, we expect to be in a good position to provide feedback and information to the sector to assist this good practice to emerge.

Observations on 2004 LTCCPs

3.219 We asked our local government auditors to consider the integration of the information presented in LTCCPs prepared during 2003-04 and adopted for June 2004, and to assess whether the LTCCPs were complete in the sense of containing all material required by the 2002 Act. The 9 councils that adopted an LTCCP in 2003 were not included in this exercise. In reviewing the presentation of the LTCCP, we did not attempt to assess the quality of the underlying information on which it was based, as this will be part of the first audit of LTCCPs in 2006.

3.220
2004 LTCCPs reflect their transitional basis in that:

  • Councils were not required to have completed a community outcomes process under sections 91 and 92 of the 2002 Act. Many councils, particularly the smaller councils, elected to use existing information or to take part in regional processes for the development of community outcomes. Both of these approaches were acceptable as interim measures, but the processes for the development of community outcomes require more careful development and public consultation in order to support the rationale for council activities and service levels.
  • Territorial authorities were not required to have prepared Water and Sanitary Services Assessments and Waste Management Plans under sections 126 and 127 of the 2002 Act; they were due to be completed by June 2005. Councils’ 2006 LTCCPs will include the results of these assessments and plans, as well as any role councils intend to take in providing these services, and any development work they will undertake to address identified community needs. Therefore, for some councils, information relating to these services will be considerably more developed in the 2006 LTCCP than in the 2004 LTCCP, reflecting the result of the Water and Sanitary Services Assessments.

Group of activity service-level information

3.221
Our auditors reported that about half of the councils had not covered service-level information well, including performance measures and targets in 2004 LTCCPs. Service levels were generally not specified and, as a result, the relevance and appropriateness of the performance management framework was difficult to assess. Where a service could be implied from information (for example, through reference to qualities such as “safe”, “efficient” or “continuous”), these qualities frequently did not feature in measures and targets to be used to assess performance.

3.222
Performance measures tended to have a short-term focus, or were either very broad at a community level, or very detailed at the service level. There was a reliance on user or resident satisfaction feedback – which, in many instances, may have been appropriate – but other service dimensions of the activity that might have been addressed through other measures were neglected.

3.223
The 2002 Act also requires councils to consider any significant negative effects that any of their activities may have on the social, environmental, economic and cultural well-being of the local community. While many councils had given such potential effects consideration, performance information did not appear to have been developed, reflecting key risks or potential negative effects that may require monitoring and mitigation. In our view, the monitoring and reporting of potential negative effects is likely to be most usefully considered as part of the performance monitoring framework.

3.224
It is likely that users of LTCCPs would have difficulty in many instances in understanding how the performance measures and targets demonstrate whether a service was achieving its intent – and therefore whether the actual performance can be meaningfully assessed.

Group of activity asset information

3.225
Overall, the asset information requirements of Part 1 of Schedule 10 of the 2002 Act were met by many councils, but with about a quarter not covering asset information well in their 2004 LTCCPs. Clause 2(1)(d)(i) of Schedule 10 requires the reasons for additional asset requirements to be identified by demand or consumption, and by service provision levels or standards. A common issue was the lack of information on the first leg of that requirement – how the need for additional requirements had arisen in terms of demand or consumption.

Group of activity financial information and financial policies

3.226
Our auditors’ reviews suggested that about a third of councils had areas in which financial information and policies could be improved.

3.227
For the financial information in groups of activities, LTCCPs:

  • did not describe the rationale for the selection of revenue mechanisms in terms of section 101(3), although in many instances this information was included in Revenue and Financing Policies. In our view, describing the selection of funding methods and the reasons for these is most likely to be useful to users of the LTCCP if dealt with (along with information about the activity, its asset requirements and funding and costs) in the group of activity information.
  • did not appear to provide the financial information required about groups of activities for a 10-year period – rather providing generally either one year’s or 3 years’ information, or estimates that flattened out after the first 3 years. This suggests that, in some instances, information was rolled out for years 4 to 10, rather than being built through a modelling system that incorporated expected asset and other demands to continue the maintenance of service levels.
  • had confused presentation of key financial information such as revenue, operating expenditure and capital expenditure. Clear presentation of group of activity financial information that aggregates to the council estimates is important to a user’s overall ability to assess the likely financial position of the council and to their confidence in the plan.

3.228
For the financial policies under sections 100 to 111 that councils were required to prepare and present in the LTCCP, some policies were still in development at June 2004, and some gaps in the coverage of the statutory contents were noted by auditors. These omissions were raised with the individual councils concerned.

Integration between community outcomes, asset information, service levels and long-term financial forecasts

3.229
Perhaps the greatest challenge in preparing an LTCCP, and one that will need further development in 2006, is integrating the range of information to present a coherent and complete future plan for the 3 key sets of group of activity information – service levels, assets, and financial information. Generally, where integration was not well done, the linkages between levels of service and financial planning were unclear or incomplete, and much of the information retained an annual or, at best, 3-year focus. Many councils said that 2004 information was an interim position because they were still developing both asset management plans and community outcomes.

Other issues on which the Office was asked for advice

3.230
Since the passing of the 2002 Act in December 2002, the Office has been asked for its views on a number of matters associated with the preparation and adoption of LTCCPs, some of which we outline below.

Managing changes between the draft and final LTCCP

3.231 In relation to adopting annual plans, and more recently in relation to adopting LTCCPs, councils have asked us what they should do where a significant change is proposed or occurs during a special consultative procedure and the change has not been signalled in the SOP for the consultation.

3.232 While we are not aware of any consideration by the courts of the appropriate response in these circumstances, we have given some thought to the consultation and decision-making provisions of the 2002 Act. We provide the following general suggestions when councils contact us for advice:

  • Any change requiring a decision by the council is subject to the decision-making provisions in sections 76-80 of the 2002 Act. In contemplating the inclusion of any decision in the LTCCP/annual plan that has not been signalled in the SOP, a council particularly needs to consider sections 77, 78 and 79. These relate to:
    • identification and assessment of all reasonably practicable options and in relation to land or bodies of water, taking account of the interests of Māori (section 77);
    • consideration through the stages of decision-making of community views (section 78); and
    • making judgements about how to comply with sections 77 and 78, having regard to the significance of the matters affected by the decision, including the principles relating to local authorities, the council’s resources, and the scope and opportunity to consider views and preferences (in particular, such judgements are to be made about the extent to which options are identified and their benefits and costs quantified, and the extent and detail of information considered and written records kept).
  • Where a council, as a result of considering its decision-making responsibilities, considers that it does not a have wide enough spread of community views given the significance of the proposed change, it should consider how such views could be obtained. This could result in a council deciding to:
    • extend the consultation period on the LTCCP to allow more views to be provided;
    • conduct additional consultation alongside the special consultative procedure being used for the LTCCP; or
    • take the decision out of the context of the special consultative procedure for the LTCCP into a separate consultation and decision-making process (while ensuring that the adopted LTCCP appropriately reflects this course).
  • • Councils should note that, where a decision is one to which section 97 relates, the proposal must be included in an LTCCP SOP prepared under section 84.

Variations and amendments to LTCCPs

3.233
A concern we have been aware of through our work with the 9 councils that adopted an LTCCP in 2003 relates to how amendments and changes are identified and the processes associated with these.

3.234
The relevant provisions of the 2002 Act relating to the status of decisions in the LTCCP and variations and amendments to this document appear to be:

  • section 93(3), which states that each LTCCP has a 3-year life span;
  • section 96, which provides that a resolution to adopt an LTCCP or annual plan does not constitute a decision to act on any specific matter within the plan;
  • section 97, which provides that a local authority must not make certain decisions unless the decision is explicitly provided for in the LTCCP and was included in an SOP for an LTCCP or LTCCP amendment; and
  • other sections that constrain a council from making a decision without including it in an SOP prepared under section 84 for a draft LTCCP. These are:
    • section 102, which requires that any changes to the financial management policies set out are amendments to the LTCCP; and
    • section 141, which relates to a proposed sale or exchange of endowment land.
  • Sections 85 and 95, which require a council to prepare an SOP in adopting an annual plan. The SOP for the annual plan must include:
    • information included in the LTCCP for the year to which the plan relates about each group of activities, and the reasons for any departures from the information set out in the LTCCP;4 and
    • the annual budget and funding impact statement, and any variations of these from the LTCCP financial statements and funding impact statement.
  • Section 80, which requires a council, when making decisions, to identify any inconsistencies with any policy adopted by the council or any plan required by the 2002 Act or any other Act.

3.235
The 2002 Act therefore provides a framework in which change is both expected and accommodated. This framework emphasises understanding the impact of changes, and disclosing to and consulting with communities where these impacts are likely to be significant.

3.236
Our advice to councils considering changes to their LTCCPs has been that:

  • Each LTCCP lasts for 3 years, and the 2002 Act does not contain a mechanism for a council to make minor changes to the LTCCP and reissue it during that 3-year period. The only way to amend the LTCCP is to use the amendment process set out in the 2002 Act.
  • A council is not bound to implement any specific decision in its LTCCP, but is required to prepare an SOP and use the special consultative procedure for certain types of decisions, either as part of adopting the LTCCP or for making an amendment to it. Other variations and departures occur through general decision-making and the annual planning information in respect of each year, and should be explained within the annual plan.
  • In working with these provisions, a council will need to make judgements about how far to go in explaining variations. For example, in our view, where a variation is an ongoing adjustment, it would be sensible to signal this to the community and discuss the effect of it on the LTCCP.
  • In making specific decisions, a council should note any inconsistencies with the LTCCP, or any policy or plan, and provide information about the impact of these inconsistencies in any material prepared to support or implement the decision.
  • For practical management purposes, a council is likely to find it useful to flow such changes into their LTCCP model as they occur, so that the model remains live and the collective effect of changes can be seen and understood throughout its 3-year period. Maintaining the LTCCP as a “live system” is also likely to make the preparation of a new LTCCP every 3 years a more manageable exercise.

3.237
We acknowledge that a number of amendments are likely to occur between 2004 and 2006 as councils refine the processes by which financial and service estimates are incorporated into their existing LTCCP. Ideally, those amendments should be infrequent, because communities should be able to rely on the adopted LTCCP as a reasonable indication of the council’s intentions. Communities are also reasonably entitled to expect that, where changes are proposed, they will be dealt with in a manner that:

  • makes the change, and the reasons for and impact of the change, clear;
  • enables community consultation and feedback on a similar basis to that by which the LTCCP was adopted; and
  • provides confidence that the integrity and robustness of the LTCCP remains, so that its proposals can be relied on.

3.238
Some councils have suggested to us that they expect to make amendments annually, because that is the way they operate. However, one of the purposes of the LTCCP is to promote a long-term focus to council planning. Our hope therefore is that, as councils become more familiar with the longer-term planning focus, the need for significant annual change will be minimised. Nevertheless, the view of these councils suggests a need for ongoing monitoring of the extent to which it is practical to take such a long-term focus, given the uncertainties associated with many activities of councils.

Observations on amendments to LTCCPs adopted in 2003

3.239
There were 20 individual amendments among 6 of the 9 councils that adopted LTCCPs in 2003 that we were involved with because of an issue with the 2002 Act. Although LTCCPs adopted in 2003 or 2004 did not need to be audited, transitional provisions in the 2002 Act did not exempt amendments to these LTCCPs from audit. The 2002 Act was amended in 2004 to remedy this anomaly.5 However, we consider it useful to describe the circumstances that generated the need for these amendments:

  • Fifteen amendments resulted from decisions to change or adopt the section 102 funding and financial policies that had not previously been included in the 2003 LTCCPs. We expect amendments of this nature to decline as councils become more familiar with the new policy requirements.
  • Three changes arose as a result of section 97 (decisions to significantly alter service levels, transfer ownership or control of a strategic asset, construct, replace or abandon a strategic asset, that will significantly impact on the costs to or capacity of a council). The volume of these amendments may reduce as councils become more confident with the requirements for information about assets and service levels. However, ongoing amendments of this nature seem likely and appropriate.
  • Two changes resulted from information about intended sale of endowment land not being included in the 2003-2013 LTCCP, which therefore required an amendment under section 141. The extent to which councils can predict whether they will want to sell or exchange endowment land will vary according to how active the council is as a property investor. Those with few properties will probably have clear intentions about the future use of endowment land that could be included in LTCCPs. However, those that are actively managing their endowment land as a source of revenue may wish to be more opportunistic. Overall, it is fair to say that we expect amendments of this nature to continue beyond 2006 – particularly from those councils managing a portfolio of endowment properties.6

1: International Standard on Assurance Engagements, issued by the International Federation of Accountants (IFAC).

2: Arising out of the Local Government Amendment Act (No. 3) 1996.

3: See paragraphs 1.401-1.432 of this report.

4: See section 85, and clause 2(2) of Schedule 10.

5: Local Government Act 2002 Amendment Act 2004.

6: For a further discussion of the approaches to section 141, see paragraphs 2.301-2.320 of this report.

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