Part 1: Our year's work in review

Annual report 2005-06.

Introduction

In this Part, we describe:

our annual and other statutory audit work;
the performance audits and inquiries we reported on;
the work we undertook as part of our research and development programme;
our Controller function work; and
our advice and liaison.

Full information about our performance against our targets is in Part 3: Statement of Objectives and Service Performance, pages 65-74.

Our annual planning, particularly our Strategic Audit Planning, identifies our work programme for the coming year. Our Annual Plan sets out our proposed work programme of performance audits and special studies, and our proposed research and development programme. We consult with Parliament to finalise our work programme.

The work of our auditors

Performing annual and other statutory audits

The Auditor-General has a statutory duty to conduct an annual audit of the financial reports of about 4000 public entities.¹ This work accounts for about 80% of our total budgeted expenditure and is non-discretionary. During 2005-06, we carried out 4063 annual audits of public entities.

The Auditor-General also carries out other audits required by various statutes. In 2005-06, we conducted for the first time the audit of local authorities’ LTCCPs, which local authorities are required to produce and have audited every three years. In 2005-06, we audited 84 LTCCPs, before they were released for community consultation, and 79 final plans. A small number remained to be completed at 30 June 2006 because of delays on the part of the local authorities concerned.

The Auditor-General must also audit amendments to these plans. It is already apparent that this will be a continuing stream of work during 2006-07 and beyond.

Because the Auditor-General is responsible for auditing all public entities, it is important that the Office ensures that audits are performed effectively and efficiently:

in accordance with relevant professional accounting and auditing standards, as well as the Auditor-General’s own published auditing standards; and
at a fair price – that is, that the cost of audit fees for public entities is in balance with the need for our audit service providers to be remunerated adequately so that we can continue to offer quality auditing services to the public sector.

Ensuring that quality audits are performed – setting standards

The Auditor-General’s Auditing Standards² establish the minimum standards to be applied to audits, inquiries, and other auditing services conducted on behalf of the Auditor-General. Under section 23 of the Public Audit Act 2001, the Auditor-General must publish the Auditing Standards, by way of a report to the House of Representatives, “at least once every 3 years”. Each annual report must include a description of any significant changes made to the standards during a financial year. The Auditing Standards consist of the ethical and professional standards of the New Zealand Institute of Chartered Accountants (NZICA), supplemented by the Auditor-General’s Statements, and (where there is no NZICA standard) the Auditor-General’s Specific Standards.

During the year, we made several minor technical enhancements to two Statements within the Auditing Standards – namely, AG-520: Going Concern, and AG-702: The Audit Report on an Attest Audit. The purpose of the enhancements was to improve the clarity of reporting by appointed auditors.

Ensuring that quality audits are performed – quality assurance

In addition to setting out the standards for the conduct of audits, the Office also undertakes an annual quality assurance programme to review the audit work performed. We aim to review the performance of each of our appointed auditors at least once every three years. We may do follow-up reviews if we identify a need for improvement.

In 2005-06, we met our target by undertaking 45 reviews. Consistent with previous years, the work we reviewed was, with only a few exceptions, of good quality. We followed up on the exceptions.

Ensuring that our auditors provide reasonably priced audits – allocation, tendering, and fee monitoring

The Auditor-General uses an “audit resourcing model” for selecting auditors to carry out annual audits of public entities, other than of school boards of trustees.

The Auditor-General established this approach in 2002-03, after a review of procedures to appoint auditors. The changes resulted in most audit contracts continuing to be reviewed every three years, and audit arrangements continuing to be made by direct allocation, with limited recourse to tendering.

In allocating annual audits to auditors, the Auditor-General chooses from a pool of audit service providers – which includes Audit New Zealand, the four major chartered accountancy firms, and a range of medium-sized and smaller audit firms. The Auditor-General uses competitive tendering for the audits of some entities that have a strong commercial focus.

During 2005-06, the Auditor-General reappointed existing auditors to conduct the audits of 162 public entities (other than schools) and their subsidiaries. A competitive tender was used to select the auditor of one public entity with a strong commercial focus (an energy company).

Of the 162 public entities where auditors were reappointed, 17 asked us to provide comparative fee information to help resolve concerns about the fee proposed by the appointed auditor. In all cases, the auditor and the entity resolved the matter based on that extra information.

During the year, we completed new audit arrangements for the audits of 2464 state schools for the 2005 financial year only. Normally, procedures would have been initiated in 2005-06 to appoint auditors for all state schools for a further three years. However, as a result of uncertainty about the timing and effect of changing accounting and auditing standards, the Auditor-General decided to make appointments for each school for a further year.

The auditors of 2272 schools were reappointed, after negotiation of audit fees with boards of trustees. Where any auditor could not be reappointed, the Auditor-General appointed another auditor, and set an audit fee in line with established market rates for the audits of comparable schools. There were 192 schools in that category, and in each case the OAG worked with a representative of the board of trustees to appoint a new auditor appropriate to the school’s situation, and to establish a fair audit fee.

Arrangements are currently under way to appoint auditors for all state schools for the three financial years 2006-2008. All boards of trustees are being given the options of reappointment of their current auditor, appointment by the OAG of a new auditor, or selection of a new auditor through a tender process.

Since the establishment of the audit resourcing model in 2002-03, we have developed a range of techniques to monitor audit fees at the point of negotiation, and to provide a comparative analysis to help resolve concerns about proposed audit fees. Our overall objective is to ensure that audit fees are fair to the public entities subject to audit, and provide a level of return to the auditors commensurate with the auditing standards that public entities, the Auditor-General, and Parliament expect.

Now that those techniques have been refined to a significant degree, the Auditor-General has commissioned an external reviewer to report to him on:

the robustness of our current fee monitoring and resolution processes, and how they might be improved; and
other mechanisms and data sources that may be used to assure public sector entities and auditors that fees are set at fair and reasonable levels.

This report will be used to further improve the Office’s fee monitoring and resolution processes in 2006-07.

We continued to examine and determine the status of several subsidiaries of public entities. In 2005-06, 142 new public entities were added to our audit portfolio. These included newly formed public entities, subsidiaries of existing public entities, and other entities controlled by more than one public entity.

An independent reviewer evaluates the integrity of the methods and systems we use to allocate and tender audits and monitor the reasonableness of audit fees. The report of the independent reviewer for 2005-06 is reproduced on pages 13-15.

Audit New Zealand client survey

The Auditor-General expects audit service providers to seek feedback from the entities they audit about the audit services provided, and to incorporate this feedback into their own business improvement work. Audit New Zealand engages an independent firm to conduct an annual client survey of public entities for which it is the auditor. Chief Executives and Chief Financial Officers of a sample of these entities are invited, in face-to-face interviews, to provide comment on:

the quality of the work of Audit New Zealand;
the quality of their relationships with Audit New Zealand;
the expertise of Audit New Zealand staff;
their understanding of Audit New Zealand’s services;
their intention to buy additional assurance services; and
their overall degree of satisfaction.

A client survey was not carried out in 2005-06. Instead, as a result of feedback received in 2004-05, Audit New Zealand undertook work to redevelop the survey in order to gain a better understanding of clients’ needs and perceptions at a sector level. This redeveloped survey will be carried out in 2006-07.

As part of our strategy, we monitor the ratio of the time spent by senior audit staff to that of junior staff, with a view to increasing the proportion of senior time to address clients’ desire for more constructive relationships with their auditors. In doing so, we are conscious that senior time has a greater impact on the cost of audits to entities. In 2005-06, 24% of the hours involved in annual audits undertaken by Audit New Zealand were performed by senior staff members, and 76% by junior staff. This is consistent with the previous year’s ratio.

Performance audits and other studies

A performance audit is a significant and in-depth audit covering issues of effectiveness and efficiency. It provides Parliament with assurance about specific issues or programmes and their management by the relevant public entity or entities. We also undertake other studies that may result in published good practice guidance on topical issues of public sector accountability and performance to assist public entities to better manage these issues.

Through our strategic planning process (which is outlined in our Annual Plans) we annually undertake an environmental scanning, issue identification and risk assessment, and assurance response identification process to help determine how we can use our discretionary resources for performance audits to best effect. This process includes consultation with Parliament on our draft Annual Plan each year.

Our Annual Plans describe the performance audits and other studies we intend to undertake each year. It is not always possible for us to complete the full range of work we propose because:

in some cases, entities have initiated their own internal or independent reviews, or are undergoing legislative or structural change;
when we undertake project scoping, it becomes clear that our initial proposal needs to be amended; and/or
other events happen that change the Auditor-General’s priorities.

A full list of our progress against the performance audits and other studies we proposed in our Annual Plan 2005-06 is included in Figure 2 on pages 21-23.

In his Five-year Strategic Plan, the Auditor-General indicated that members of Parliament had asked him to increase the number of performance audits and other studies undertaken. This year, we published reports on 15 performance audits and other studies, compared with 13 in 2004-05. (Together with the seven reports on major inquiries, described in Figure 3 on pages 25-27, this makes up the 22 reports referred to in the Statement of Objectives and Service Performance at page 65.)

The 15 reports on performance audits and other studies we published in 2005-06 are summarised in Figure 1 on pages 18-20. Full copies of each report can be found on our website: www.oag.govt.nz.

Figure 1
Summary of reports on performance audits and other studies published in 2005-06

Ministry of Justice: Performance of the Collections Unit in collecting and enforcing fines, July 2005
We examined the role of the Collections Unit of the Ministry of Justice in collecting and enforcing Court-imposed and infringement fines, the policies and procedures that govern the business of the Collections Unit, and its effectiveness and efficiency in collecting fines. Overall, we found that the Collections Unit has effective arrangements in place to collect and enforce fines. However, despite the achievements of the Collections Unit, supported by additional resources and legislative changes, the amount owed in unpaid fines is likely to continue to grow.
Maritime Safety Authority: Progress in implementing recommendations of the Review of Safe Ship Management Systems, December 2005
In 2002, the Maritime Safety Authority of New Zealand (MSA) commissioned an independent review of the Safe Ship Management System – a system aimed at making ship owners and operators responsible for the daily safe maintenance and operation of their vessels throughout the year. Our audit looked at the progress the MSA has made in implementing the recommendations from the review. We found that, overall, good progress has been made in implementing the recommendations from the review, particularly through the introduction of the New Zealand Code of Practice for Safe Ship Management.
New Zealand Police: Dealing with dwelling burglary – follow-up audit, February 2006
We conducted an audit that followed up our 2001 report, which looked at how the Police deal with dwelling burglary. The Police have considerably improved the way they deal with dwelling burglary, including more effective use of forensic and intelligence analysis, greater accountability for results, and increased sharing of good practice on how to investigate and prevent dwelling burglary.
Achieving public sector outcomes with private sector partners, February 2006
Our report provides guidance to leaders and decision-makers about the main issues they need to consider across the public sector and for individual partnering projects. The experience of other countries suggests that there is a need for clear government policy and direction if partnering is to be used to any great extent. Public entities choosing to use partnering will need a high level of expertise and a sound business case that shows how this approach will result in better value for money than other procurement options. They will also need to have robust internal arrangements for managing a partnering approach, including strong leadership to drive the process and ensure proper accountability and control, and adequate arrangements for public scrutiny under the contract.
The Treasury: Capability to recognise and respond to issues for Māori, March 2006
We audited the Treasury’s effectiveness for Māori capability and response. We found that planning processes are appropriate for identifying significant issues for Māori, the Māori Responsiveness Policy Statement and Māori Responsiveness Plan (2000) have been implemented and are updated regularly, and initiatives to improve staff capability to recognise and respond to issues for Māori continue to mature. The Treasury relies on public service departments to identify emerging issues for Māori, and responds to these in its second-opinion fiscal and economic advice. We made recommendations about the need to ensure that employees are aware of the resources available to them to improve their capability to recognise and respond to issues for Māori, and to evaluate their competence to respond to Treaty of Waitangi and Māori issues.
Progress with priorities for health information management and information technology, March 2006
Our audit considered the progress made by the Ministry of Health, District Health Boards, and the health sector in implementing a report to the Ministry of Health by the Working to Add Value through E-information (WAVE) Advisory Board. We found that there has been less progress on the key initiatives than expected. We also found that action was not guided by a detailed plan with measurable objectives. However, using the Health Information Strategy for New Zealand as a basis, the sector is now in a better position to address heath information priorities more quickly.
Management of heritage collections in local museums and art galleries, April 2006
We examined how well local museums and art galleries were managing heritage collections and fulfilling their stewardship obligations using public funds. We were generally satisfied that museums and galleries had in place the necessary components for sound collection management, but have suggested ways for museums and art galleries to work more effectively, both as individual institutions and collectively. Our report also contains important messages for local authorities about collection management, stewardship, and funding.
Management of the West Coast Economic Development Funding Package, May 2006
This audit examined how well the West Coast Development Trust and the four West Coast local authorities managed the use of the funding package to help the West Coast region’s economy adjust to the Government’s policies to end the logging of indigenous forest. We found that the West Coast Development Trust has good systems to manage the investment of its funds. However, we recommended several improvements to the decision-making process used to distribute the funds.
Foundation for Research, Science and Technology: Administration of grant programmes, May 2006
This audit is the second in a three-year series we are undertaking to examine how public entities administer grant programmes. Overall, we found that the Foundation is effectively administering its grant programmes.
Ministry of Agriculture and Forestry: Managing biosecurity risks associated with high-risk sea containers, May 2006
We assessed the Ministry of Agriculture and Forestry’s identification, inspection, and clearance of those sea containers that pose the highest biosecurity risks. We found a number of areas for improvement, including compliance and enforcement with the sea container import health standard, information gathering for risk-profiling purposes, training and guidance for inspectors, checks of the effectiveness of decontamination, and guidance for the establishment of equivalent systems.
Department of Conservation: Planning for and managing publicly owned land, May 2006
We assessed the Department of Conservation’s strategic planning for land, and the adequacy of its land management and land information systems for implementing that planning. In our view, while the Department has policies and objectives for land within statutory planning documents, and comprehensive land management and information systems, it needs a national strategic plan to co-ordinate its management and information systems to achieve long-term objectives. The Department also needs to prepare and review statutory planning documents within the period set by legalisation, and to provide stronger central oversight of its land management and information systems.
Ministry of Education: Management of the school property portfolio, June 2006
Following concerns raised in previous audits of school property management, we assessed the effectiveness of the Ministry of Education’s organisational arrangements, systems, and processes for providing and maintaining school property, and for managing the school property portfolio in general. We found that, while the Ministry now has better controls than in 2001, it has only partly addressed our recommendations to improve its overview of the condition of school property and the maintenance undertaken by school boards. We were concerned that there is no strategic portfolio management plan and no documented processes for staff .
Housing New Zealand Corporation: Effectiveness of programmes to buy and lease properties for state housing, June 2006
Our audit examined the planning, acquisition, and monitoring and reporting processes for buying and leasing properties for state housing. Housing New Zealand Corporation met our performance expectations and we recommended that it provide more regional reporting in its public accountability documents.
Local authority codes of conduct, June 2006
Our audit looked at how local authorities have implemented the requirement to have a code of conduct, and how codes of conduct are being used. We hope it will enhance general understanding of codes, and assist councils in addressing conduct issues in the future.
Principles to underpin management by public entities of funding to non-government organisations, June 2006
This is a good practice guide to enhance public entities’ existing practices in managing their funding arrangements with non-government organisations. It complements existing guidance by taking a principles and risk-based approach to guide public entities’ decisions when they enter into such arrangements.

Progress against our Annual Plan 2005-06 commitments

On pages 49-51 of our Annual Plan 2005-06, we listed a number of performance audits and other studies which we proposed to start and/or complete in 2005-06. We outlined on page 17 of this report the reasons why projects may not be completed or may not always proceed as intended. Eleven of the 15 reports published in 2005-06 were proposed in our Annual Plan for that year, and three had been proposed in earlier years’ plans.

In addition, during 2005-06, the Auditor-General reviewed the way he identifies and prioritises his work programme. This resulted in changes to some work that had been previously proposed, and the publication of Local authority codes of conduct, which had not been proposed in any previous Annual Plan.

Figure 2 sets out our progress against each of the performance audits and studies we proposed to start or complete in 2005-06.

Figure 2
Progress against proposed performance audits and studies

(A) Proposed performance audits to be completed in 2005-06

Proposed performance audit	Progress
E-government – review progress against objectives and targets	To be presented to Parliament in the second quarter of the 2006-07 financial year
Management of heritage collections	Completed
Housing New Zealand Corporation – property portfolio management	Completed
Sea container surveillance	Completed
The Treasury – effectiveness for Māori	Completed
Health sector IT – progress against the WAVE report	Completed
Review of the New Zealand Qualifications Authority’s quality assurance processes	Deferred – due for completion in 2006-07; the audit will focus on the quality assurance of education provided by polytechnics
Department of Conservation’s land holding and purchasing policies	Completed
Overseas development assistance	Deferred – to be started in 2006-07
Review of Health Funding Package	To be presented to Parliament in the second quarter of the 2006-07 financial year
Dwelling burglary – follow-up performance audit	Completed
Economic development funding (West Coast)	Completed
Ministry of Defence – major acquisitions projects	Deferred – to be started in 2006-07
New Zealand Debt Management Office - Treasury management policies and practices	Started – due for completion in 2006-07
Resource Management Act 1991 consultation relating to major Crown capital developments	Started – due for completion in 2006-07
School property maintenance – follow-up performance audit	Completed – scope revised to management of school property portfolio
Annual performance audit of a grant programme	Completed (Foundation for Research, Science and Technology)

(B) Proposed performance audits to be started in 2005-06

Proposed performance audit	Progress
Prisoner mental health treatment	On hold, pending further consideration under the Auditor-General’s revised planning framework
Youth at risk	Cancelled – to be further considered as part of the Auditor-General’s revised planning framework
Primary health care	Started – scoping audit
Annual performance audit of a selected grant programme	Started – audit of Te Puni Kōkiri grant programmes
Call centres	Started – examines the operation of the Work and Income Contact Centre
Combating immigration fraud	Started – scoping audit
Disasters – the maintenance and capacity of flood protection assets	Cancelled – due to other government initiatives in this area
Local authority decision-making	Started – scoping audit
Management of diabetes	Started
Management of employee fraud	On hold – pending further consideration under the Auditor-General’s revised planning framework
Ministry of Social Development – debt collection	On hold – pending further consideration as above
Revitalisation of Te Reo Māori	Deferred – to be started in 2006-07
Transit New Zealand – state highway maintenance	Started – revised audit being scoped (now an audit of collaboration in roading)
Sustainable development – implementation of the Programme of Action	Started – scoping audit

(C) Proposed “what we expect” studies and good practice guidance to be started in 2005-06

Proposed other study	Progress
Procurement guidelines update	Started
Rates postponement	Started
Sensitive expenditure guidelines	Started
Contracting of public services to non-government organisations (NGOs)	Completed

(D) Performance audits started in 2005-06 but not previously included in an Annual Plan

Performance audit	Progress
Effectiveness of the Department of Internal Affairs’ administration of non-casino gaming machines (Class 4 gambling)	Started
Inland Revenue Department – performance of taxpayer audit (follow-up audit)	Started

Inquiries

The Auditor-General responds to enquiries from taxpayers, ratepayers, and members of Parliament – between 150 and 300 each year. Many such enquiries lead to inquiries under section 18 of the Public Audit Act 2001, and a few lead to major inquiries.

In 2005-06, we developed an Inquiries Strategy, to establish a common process for dealing with requests for inquiries, and for undertaking inquiries.

Each request is carefully considered to determine the most appropriate manner in which to proceed. Making this decision involves consideration of many factors, including whether the Auditor-General is the appropriate authority to consider the issues, whether we have the resources to do so, and the seriousness of the issues raised. We often undertake a considerable amount of preliminary work, such as reviewing documents and talking with the public entity, in deciding how to proceed with a request.

In some instances, although an enquiry does not raise issues that warrant a major inquiry, the Office will advise the public entity concerned of the matter.

In 2005-06, the OAG responded to 277 enquiries from taxpayers, ratepayers, and members of Parliament. In seven of those cases, the Auditor-General was sufficiently concerned by the issues raised that he initiated a major inquiry. Reports on five of the inquiries we carried out during 2005-06 were published and presented to Parliament. A brief summary of the seven major inquiries (including the five presented to Parliament) is provided in Figure 3.

The OAG also administers the provisions of the Local Authorities (Members’ Interests) Act 1968. There were 49 applications and enquiries under the Act in 2005-06.

Figure 3
Summary of reports on major inquiries published in 2005-06

Inquiry	Description
Electricity Commission: Contracting with service providers, July 2005	We received a complaint that contract appointments of service providers made by the Electricity Commission and the Ministry of Economic Development that should have been contestable were not. We examined how the decision to use sole source procurement was reached. We found no evidence to suggest that the Ministry and the Commission had failed to comply with their statutory obligations in contracting with service providers, or that they showed any lack of probity or financial prudence. However, the documentation and procedures were not of the standard we would expect of public entities engaged in sole source procurement. We recommended that the Commission establish a procurement policy that could be used to guide its decisions when its service provider contracts come up for renewal.
Cambridge High School’s management of conflicts of interest in relation to Cambridge International College (NZ) Limited, October 2005	Following a request from the Minister of Education, the Auditor-General decided to conduct an inquiry into how the Board of Trustees of Cambridge High School managed any conflicts of interest in relation to its arrangements with a private company, Cambridge International College (NZ) Limited. We concluded that there were conflicts of interest. In addition, in our view, the Board did not identify or manage these conflicts of interest properly. However, we considered that there were some mitigating factors. We also concluded that the School possibly suffered financial loss, but that recovery would be inappropriate. Our main recommendation arising from the inquiry was for the Ministry of Education to provide guidance to schools on managing conflicts of interest.
Inquiry into the sale of Paraparaumu Aerodrome by the Ministry of Transport, September 2005	The Government sold Paraparaumu Aerodrome in 1995. In May 2004, Parliament’s Transport and Industrial Relations Committee reported on a petition asking “that Parliament legislate to safeguard the long-term viability of Paraparaumu Airport as a full operational facility”. The Committee recommended an inquiry into the sale process, which the Minister of Transport invited the Auditor- General to undertake. Our inquiry covered consultation with Māori and former owners of aerodrome land, and the sale of the aerodrome by a restricted tender process. We concluded that the approaches taken to the consultation process were consistent with both legislation and practice at the time, and reflected a genuine attempt at consultation. However, the Ministry could have done more to consider whether the concerns raised by Māori during the consultation process could have been accommodated. In relation to the sale process, we found that the Ministry used a process that was standard for managing asset sales at the time. However, the process used to evaluate and make decisions on the tenders did not meet our expectations. The project governance arrangements were unclear. In addition, the standard of documentation for some parts of the sale process was poor.
Inquiry into certain aspects of Te Wānanga o Aotearoa, December 2005	We began an audit and inquiry into Te Wānanga o Aotearoa (TWOA) after receiving a request for assurance from the then Associate Minister of Education (Tertiary Education) in September 2004. There were concerns about possible conflicts of interest in transactions worth large sums of money. Other issues emerged as we began our inquiry. In February 2005, the then MP the Hon Ken Shirley and the media made certain allegations. The then Minister of Education asked us to look into more matters. We reconsidered the scope of our work, released wider terms of reference in March 2005, and continued with our inquiry. We found practices that are unacceptable for a public entity, including: poor decision-making practices for significant expenditure; inadequate identification and management of conflicts of interest; and unacceptable practices in senior management expenses. In response to our inquiry, TWOA has developed an action plan against each of the recommendations made in our report. Progress made against this action plan is reported by TWOA management to the TWOA Council. As part of our ongoing role as the auditor of TWOA’s annual financial statements, we will consider the progress TWOA has made against the issues raised in our inquiry report.
Inquiry into the Ministry of Health’s contracting with Allen and Clarke Policy and Regulatory Specialists Limited, December 2005	The Auditor-General decided in April 2005 to inquire into issues raised by the Hon Murray McCully MP about the contracting policies and procedures of the Ministry of Health. In particular, the inquiry examined the Ministry’s contracting with two former employees and the company of which they were the principals (Allen & Clarke). However, during the course of our inquiry, we found deficiencies in the Ministry’s procurement and contract management practices that extended beyond the contracts with Allen & Clarke, and in a number of the Ministry’s directorates. We found no evidence in the Ministry’s award of contracts to Allen & Clarke of any inappropriate relationships between the principals of the company and staff of the Ministry. However, we found that the Ministry’s management of contracts was not consistent with good practice in significant respects.
Inquiry into funding arrangements for Green Party liaison roles, April 2006	The Auditor-General initiated an inquiry into the funding arrangements for the Green Party ministerial liaison and relationship roles after concerns were raised about the lawfulness of funding the liaison roles under the Vote: Ministerial Services appropriations. We had no concerns about advisers funded under Vote: Ministerial Services providing support to Ministers in giving effect to co-operation agreements from the Government’s perspective. However, in our view, management of the supporting party’s side of the agreement is a matter of parliamentary business, and resources for the staff employed to assist in managing this relationship are those available under the Vote: Parliamentary Service appropriations. We concluded that the job profiles for the liaison roles included elements that were outside the scope of the Vote: Ministerial Services appropriations and that, even if the extent of the liaison roles were narrowed, controls would need to be put in place to ensure that the performance of these jobs did not fall outside the scope of the appropriations for Vote: Ministerial Services.
Inquiry into certain allegations made about Housing New Zealand Corporation, June 2006	The Auditor-General initiated an inquiry into certain allegations made about Housing New Zealand Corporation by one of its former contractors, after a request from the Chair of the Corporation’s Board. These allegations concerned various issues, including accounting and reporting practices, a procurement process, and bullying. We looked into these allegations, as well as the Corporation’s handling of events leading up to a settlement agreement that was reached with the contractor (which included a payment, and prohibited the contractor from discussing his concerns with anyone). We found that the Corporation made an immediate and genuine effort to investigate the contractor’s concerns, but was hampered by his reluctance to provide any detailed information. We found that the decision to enter into a settlement agreement and make a payment to the contractor was a pragmatic solution in the circumstances, although the rationale for doing so could have been better documented. We had difficulty investigating the contractor’s allegations because many of them lacked specific detail. Overall, our inquiry did not give rise to any significant concerns about the Corporation’s financial accounting practices. However, we did have some concerns about the management reporting practices within the Corporation’s National Property Improvement Team. We found a lack of suitable accounting resource at the operational level, a lack of ownership over programme accounting, a need for improved documentation, and a need for better alignment between management reporting and financial accounting records.

Our research and development programme

The Office undertakes research and development that is primarily driven by the desire to enhance our existing products and to establish new or improved products. The focus of our research and development programme is on testing thoughts and ideas about possible enhancements to existing or possible new products and developing ideas to implementation into our ongoing audit work.

Our research and development work is undertaken to help us deliver on our three important business strategies to attain the wider vision set out in our strategy:

shaping our services to anticipate and respond to the needs of Parliament and other stakeholders and our changing environment;
building our capability to create and deliver our services; and
fostering relationships and ways of working that support our strategy.

Over the last two years, our research and development work has been dominated by the need to ensure that our annual and other audits respond to changes in accounting standards and legislation governing the planning, financial management, and accountability of public entities.

We set up a core team to help identify, establish, and complete research and development work. This team has been able to properly scope and refine our research and development programme. This means that some of the work we proposed in our Annual Plan 2005-06 has not proceeded – specifically, legal compliance issues and work to consider our audit response to contracting with non-government organisations. This response awaited the release of our report Principles to underpin management by public entities of funding to non-government organisations (which occurred in June 2006).

During 2005-06, we continued our existing research and development programme activities into:

the audits of LTCCPs;
the audit implications of the new public sector management legislation; and
auditor readiness for the adoption of standards based on International Financial Reporting Standards.

Each of these legislative and professional changes came into effect in some form during 2005-06. The focus of our research and development therefore shifted to implementation management, and providing guidance, support, and quality assurance as this implementation occurred. This shift signals a significant milestone in our research and development work, as these large and demanding projects can now begin to move into the "business as usual" work of our annual and other audits. Our continued progress in each of these three areas is outlined below.

Audits of long-term council community plans

A new audit reporting responsibility, created by the Local Government Act 2002 (the 2002 Act), came into effect from 2006. This required the Auditor-General to issue opinions on the statements of proposal (SOPs) and LTCCPs to be adopted by regional and territorial local authorities after community consultation.

This new responsibility has been demanding for the Office and its local authority audit service providers in 2005-06, because of both the newness of the requirement and the nature and scope of the audit, which covers 10-year prospective information.

Performing the LTCCP audits has required the Office to:

develop a methodology for conducting the audit work (which was substantively completed in 2004-05), including extensive consultation with the local government sector and auditors of local authorities; and
provide significant review and support to auditors to ensure consistency in our approach and reporting in giving such opinions for the first time.

Our work in 2005-06 focused on providing support to auditors as they began work to audit LTCCPs. The requirements relating to the preparation and information contained in LTCCPs are generally not prescriptive; therefore we needed to develop a basis on which we could provide consistency, while accommodating the large range in the size, scale, and environment of local authorities in New Zealand, in our expectations, approach, and audit reporting. To do this, we undertook two significant initiatives:

We asked local authorities to provide us with information about how they addressed non-prescriptive areas of the 2002 Act, such as decision-making, outcomes development, and consultation. We assessed and used this information to develop a size and scale approach based on groups of relevant peer local authorities. These peer groups of local authorities were then used to help us moderate our decisions in reaching opinions.
We operated an issues-based hotline and a ”hot review team” to support our auditors. The hot review team’s focus was to review the draft LTCCP SOP and the adopted LTCCP and our auditors’ observations on these documents. The team provided a 48-hour turnaround of feedback for auditors on each LTCCP SOP from the time a full set of draft LTCCP SOP papers was received. The team also assisted auditors, where serious concerns were identified, with analysis and their discussions with local authorities to allow opinion issues to be resolved. We could not be rigidly or absolutely consistent because we could not assess all LTCCPs together as each local authority had different dates at which they needed feedback so they could start public consultation on and adoption of their LTCCP. However, because the hot review team reviewed all SOPs and adopted LTCCPs, this team was an important component of our strategy for achieving consistency in the audit reporting phase of our work.

We intend to review the process we undertook for the audit of the 2006 LTCCPs when our audit work is complete in 2006-07. We will provide information on this in a report to Parliament on the results of our LTCCP audits, and expect that this will cover issues such as lessons learned, feedback from the local government sector, and our progress towards audit of the next LTCCPs.

Audit implications of new public sector management legislation

In December 2004, Parliament passed four new pieces of public sector management legislation:

the Public Finance Amendment Act 2004;
the State Sector Amendment Act (No. 2) 2004;
the Crown Entities Act 2004; and
the State-Owned Enterprises Amendment Act 2004.

Many of the changes arising from this new legislation came into effect after 30 June 2005.

In our March 2006 report Central government: Results of the 2004-05 audits, we surveyed compliance with the new legislative requirements by departments and Crown entities in 2004-05.³ We found that:

Crown entities needed to ensure that they develop non-financial outcome performance measures, in accordance with guidance issued by the Treasury and the State Services Commission; and
departments needed to ensure that they have met the requirements for description of the appropriations and for including performance measures and standards in the statement of intent.

We are carrying out a further survey of compliance by departments and Crown entities in 2006-07 during the current annual audits. We have:

established regular communication with the central agencies on issues arising from the new legislative requirements; and
issued guidance to auditors on the requirements of the legislation, generally, and on specific requirements, such as those for appropriations descriptions and reporting.

Auditor readiness for the adoption of standards based on International Financial Reporting Standards

The public sector is moving to report in accordance with the New Zealand equivalents of International Financial Reporting Standards (NZ IFRS). Local authorities are adopting NZ IFRS from 1 July 2006, whereas most of the central government sector is adopting NZ IFRS from 1 July 2007.

The process for transition to NZ IFRS requires the first NZ IFRS annual report to contain comparative figures compliant with NZ IFRS. This requires entities to produce an “NZ IFRS opening balance sheet” at the start of the comparative period (1 July 2005 for local government entities and 1 July 2006 for central government entities).

During 2005-06, we:

continued to prepare our auditors, and support sector readiness, for adopting NZ IFRS;
started auditing NZ IFRS opening balance sheets in the local government sector as part of auditing LTCCPs;
carried out further detailed training in NZ IFRS for our auditors;
prepared resources to support Audit New Zealand in the audit of NZ IFRS opening balance sheets;
prepared a policy on the audit of preliminary NZ IFRS accounting policies, opening balance sheets, and comparative figures;
worked with the Treasury on planning for the transition to NZ IFRS for the Government’s financial statements and the Crown sector;
worked with the Society of Local Government Managers on planning for the transition to NZ IFRS in the local government sector;
engaged with other sector groups on their planning for the transition to NZ IFRS (for example, District Health Boards and tertiary education institutions);
provided guidance to our auditors on some key technical issues relevant to the adoption of NZ IFRS, particularly where they apply across the public sector; and
reported to Parliament on the progress on the transition to NZ IFRS in the central government and local government sectors in our reports on the results of the 2004-05 audits.

Progress with other Annual Plan intentions

As the three projects undertaken to respond to statutory and accounting standard changes have moved toward being incorporated within our regular audit work, we have started on other research and development work signalled in our Annual Plan. Progress with these other areas of our intended research and development work is outlined below.

The five management aspects

In the course of carrying out the annual audits of public entities that are subject to financial review by select committees, our auditors make assessments of how those entities are performing in respect of five particular aspects of financial and service performance management. Select committees tell us that our assessments of these five management aspects are of high value to them.

For some time, we have signalled our intention to review our assessment of the five management aspects, and also to consider the possibility of applying them to other entities.

During 2005-06, we evaluated the way in which our assessments are determined. As a result of our evaluation, we are concerned that the scope and basis of the audit work on which our assessments are based, and therefore the uses and limitations of the assessments, are not as well understood as we would like.

We have begun consultation with our audit service providers about our proposals to review the five management aspects. During 2006-07, we will communicate with the entities assessed, select committees, and other agencies. We will then prepare for the transition to implementing any changes agreed as a result of our review.

Enhanced annual audits

Our strategy signals that we will extend our work in annual audits in the areas of waste, probity, governance, and accountability.

During 2005-06, we began work to review the way we access, share, and respond to information about risks for public sector entities that we become aware of through our audit work. Because we interact with all public entities every year, we want to use our audit work to increase the likelihood that we can better identify risks and determine action that may be required to prevent entities from realising these risks. We intend to do this by:

considering and addressing entity risks in our own audit work so we can make relevant corrective or mitigating recommendations to the entity; and
ensuring that, where appropriate, concerns we have are reported to other agencies responsible for monitoring and overseeing entities, either directly or through their administration of relevant legislation, to allow these agencies to decide what supportive action might be required.

This work has so far involved considering indicators of risk. In 2006-07, we will be considering how these indicators can help our auditors to better identify a broad range of risks, how risk information can be collected more efficiently, and how to determine the risk exposure and the nature of our response.

Controller function

The “Controller” function of the Controller and Auditor-General exists to provide independent assurance to Parliament that expenses and capital expenditure of departments and Offices of Parliament have been incurred for purposes that are lawful, and within the scope, amount, and period of the appropriation or other authority.

The Public Finance Amendment Act 2004 made a number of significant changes to the Controller function to modernise and strengthen the function. These changes took effect from 1 July 2005 and are explained in our report Central Government: Results of the 2003-04 audits.⁴

The Controller function and the Auditor-General’s auditing functions have been intertwined for many years. Each year appointed auditors must carry out an appropriation audit as part of the annual financial audit of departments and Offices of Parliament.

During 2005-06:

The Auditor-General signed a memorandum of understanding with the Secretary to the Treasury that sets out the joint understanding and expectations of the OAG and the Treasury of the roles and procedures associated with the Controller function.
We prepared standard operating procedures that the OAG and appointed auditors are required to carry out to give effect to the Controller function.
We carried out work in accordance with these standard operating procedures, including reviewing the monthly reports provided by the Treasury and advising Treasury of the issues arising and the action to be taken.
We reported on the main issues that arose in the operation of the Controller function from 1 July to 31 December 2005 in our report Central government: Results of the 2004-05 audits.⁵

The nature of the issues that have come to our attention through the operation of the reformed Controller function already show the value of the changes made. We intend to continue to report annually to Parliament on the significant issues arising from the operation of the function.

Advice and liaison

Advice to Parliament

We report on the results of audits to members of Parliament – in select committees, or as Ministers or individual MPs. Most of this work is done through the briefings we provide to Select Committees on financial reviews and Estimates examinations.

We continued to note an increased demand for our services in 2005-06. The OAG provided 81 reports for financial reviews of entities, 42 for Estimates examinations, and 146 reports on the results of annual financial report audits.

We also:

commented on draft legislation, and assisted with the review of regulations and policy proposals; and
assisted the Registrar of Pecuniary Interests of Members of Parliament with the implementation of the Register of Pecuniary Interests of Members of Parliament, and conducted the first annual review of members’ returns.

International liaison and involvement

We maintain a strong involvement with our international counterparts and actively participate in a number of working groups that have been established internationally.