Part 2: Government departments – results of the 2004-05 audits

• Introduction
• Audit opinions issued
• Financial and service performance management

Introduction

2.1
This Part reports on the results of the 2004-05 audits of 39 government departments and 2 Offices of Parliament.¹ Its purpose is to inform Parliament of the assurance given by the audits on:

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

Audit opinions issued

2.2
The Public Finance Act 1989 (the Act) specifies departments’ responsibilities for general purpose financial reporting. Section 35 of the Act² requires departments to prepare financial statements in accordance with generally accepted accounting practice.³

2.3
Section 38(1)⁴ of the Act and section 15 of the Public Audit Act 2001 set out the responsibility of the Auditor-General to issue an audit opinion on the financial statements of each department.

2.4
To form an opinion on the financial statements of departments, our audits are conducted in accordance with the Auditor-General’s auditing standards, which incorporate the auditing standards issued by the New Zealand Institute of Chartered Accountants. The audits are planned and performed to obtain all the information and explanations considered necessary to obtain reasonable assurance that the financial statements do not have material mis-statements caused by fraud or error.

2.5
The audit also involves procedures to test the information presented in the financial statements. In forming our opinion, we assess the results of those procedures and evaluate the overall adequacy of the presentation of information in the financial statements.

2.6
None of the 41 departments audited received an audit report containing a qualified audit opinion (see Figure 2.1).

Figure 2.1
Analysis of audit opinions 2001-05

Financial and service performance management

2.7
Our auditors examine aspects of financial management and service performance management. These are sometimes referred to as the “five management aspects” (see paragraphs 2.8 and 2.9). Where applicable, we identify specific areas of weakness and make recommendations to eliminate those weaknesses.

Financial management

2.8
We assess and report on the following aspects of financial management:

• Financial control systems – the individual systems that process financial data; for example, processing payments (expenditure and creditors). This covers controls surrounding the processing of these transactions to ensure the completeness and accuracy of data.
• Financial management information systems – the systems for recording, reporting, and protecting financial information. This includes the information systems and information technology (IS/IT) control environment, and, for example, IS/IT strategic planning, data integrity, access controls, and the physical security of hardware and software.
• Financial management control environment – this covers management’s attitude, policies, and practices for overseeing and controlling financial performance. It includes financial management policies and procedures, self-review procedures (including internal audit), and budgeting processes.

Service performance management

2.9
We assess and report on the following aspects of service performance management:

• Service performance information and information systems – the systems to record service performance (non-financial) data, and the internal controls (manual and computer) to ensure the completeness and accuracy of data.
• Service performance management control environment – this covers the planning processes, the existence of quality assurance procedures, the adequacy of operational policies and procedures, and the extent to which self-review of non-financial performance is taking place.

The rating system

2.10
The rating system we use is:

Reporting of results

2.11
We report our assessment of certain aspects of management to the chief executive, and to stakeholders in each department (such as the responsible Minister, and the select committee that conducts the financial review of the department).

2.12
Departments vary greatly in size and organisational structure, and sometimes undergo restructuring. For these reasons, we advise all readers to exercise caution when comparing departments.

The results

2.13
We assessed financial and service performance management in each of the 41 departments. A summary of the assessments (205 in total – 5 for each department) is given in Figure 2.2.

2.14
There were 72 assessments of “Excellent” (35%), and a combined total of 181 assessments (88%) that were either “Excellent” or “Good”, which shows a similar pattern to the previous year.

2.15
No assessments of “Just adequate” or “Not adequate” were issued in the last 3 years.

Figure 2.2
Summary of assessments of aspects of financial management and service performance management in departments for 2004-05

* The percentage figures add to 101% due to rounding.
Key:
FCS Financial control systems
FMIS Financial management information systems
FMCE Financial management control environment
SPIS Service performance information systems
SPMCE Service performance management control environment

2.16
We compared our assessments for 2003-04 and 2004-05. The results are summarised in Figure 2.3.

Figure 2.3
Assessment ratings for 2005 compared to 2004

Note: This table compares the ratings of 40 entities. The 2004 ratings for the former Ministry of Housing and the 2005 ratings for the Department of Building and Housing are excluded from the analysis because the former Ministry is only one of the constituent parts of the department.
* See Figure 2.2 for key to abbreviations.

2.17
Figure 2.3 shows:

• a very high proportion (96%) of the assessment ratings were maintained at the 2004 level;
• 4 of the assessment ratings (2%) were higher in 2005 than in 2004; and
• 4 of the assessment ratings (2%) were lower in 2005 than in 2004.

2.18
The 4 assessment ratings that were higher in the 2004-05 year confirm that some departments continue to make improvements.

2.19
The theoretical possibility of all departments attaining a rating assessment of “Excellent” is, for a variety of reasons, unlikely. Those reasons include:

• periodic restructuring;
• the complexity of departmental operations; and
• the size of some departments’ operations.

2.20
Our auditors will, nevertheless, continue to assist and encourage departments to make improvements.

1: The 39 departments are those listed on page 98 of the Financial Statements of the Government of New Zealand for the Year Ended 30 June 2005, excluding the Government Communications Security Bureau and the New Zealand Security Intelligence Service. The 2 Offices of Parliament included in the results are the Office of the Ombudsmen and the Parliamentary Commissioner for the Environment. For the purposes of this Part, our use of the term ”departments” includes reference to these 2 Offices of Parliament.

2: This section has been repealed by the Public Finance Amendment Act 2004 and replaced by new sections 45 and 45B. However, the former section remains in effect for a transitional period – see section 33 of the Public Finance Amendment Act 2004.

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

4: This section has since been repealed by the Public Finance Amendment Act 2004 and replaced by new section 45D(2), but the former section remains in effect for a transitional period – see section 33 of the Public Finance Amendment Act 2004.