Part 4: Meeting the requirements of the Crown Entities Act and the Public Finance Act

Central government: Results of the 2004-05 audits.

Introduction

4.1
In this Part, we set out the results of our review of how well public entities are meeting the requirements of parts of the new public sector legislation – namely, the Crown Entities Act 2004 (CEA) and the Public Finance Amendment Act 2004 (PFAA) – which are of particular interest to us. Both Acts were enacted on 16 December 2004.

4.2
The new legislation has moved nearly all financial management and accountability provisions in respect of Crown entities into the CEA, which contains:

  • new provisions regarding bank accounts, which came into effect on 25 January 2005, with a 6-month period of grace ending on 25 July 2005;
  • new financial powers1provisions, which came into effect on 1 April 2005;
  • conflict of interest disclosure provisions requiring entities to keep an interests register, which came into effect on 25 January 2005; and
  • planning and reporting provisions, in particular as regards the statement of intent (SOI), which will take effect for the 2006-07 financial year.

4.3
The PFAA:

  • introduced changes to the financial powers provisions for departments and Offices of Parliament;
  • inserted a new Schedule 4 naming organisations that (with one exception)2 were formerly Crown entities and to which specified financial and reporting provisions of the CEA are applied as if the organisation were a Crown entity; and
  • also introduced changes to ex ante accountability requirements; relating, in particular, to SOIs and the Estimates of Appropriations.

4.4
The new legislative provisions take effect at various times, some within the last financial year, and others in 2005-06, or 2006-07. The planning and reporting provisions for Crown entities, for example, do not take effect until 2006-07.

4.5
We were concerned to assess whether entities had complied with some of the new legislative requirements where these were already in effect, and their preparedness for those requirements that had yet to come into effect. We therefore asked our appointed auditors to report on compliance and preparedness in the course of the 2004-05 annual audit.

4.6
The public entities we examined were:

  • all Crown entities as defined under the CEA, except Crown entity subsidiaries, school boards of trustees, and tertiary education institutions; and
  • all departments and Offices of Parliament, except the Auditor-General, the New Zealand Security Intelligence Service, and the Government Communications Security Bureau.

4.7
We did not examine the organisations named in Schedule 4 of the Public Finance Act 1989 (the “as if” Crown entities).

Crown entities’ meeting of requirements of the Crown Entities Act

4.8
The CEA contains 3 main groups of provisions that are of particular interest to us (see paragraph 4.2 above):

  • new provisions regarding bank accounts and financial powers;
  • conflict of interest provisions requiring entities to keep an interests register; and
  • planning and reporting provisions.

Compliance with the banking and financial powers requirements

What the legislation requires

4.9
The CEA provides a regime for bank accounts held by Crown entities. Accounts that fall outside the provisions of the CEA require the permission of the Minister of Finance. The requirements came into effect on 25 January 2005, with a 6-month period of grace ending on 25 July 2005.

4.10
The CEA also contains a framework for acquisition of securities, borrowing, giving of guarantees and indemnities, and use of derivatives by Crown entities, which came into effect on 1 April 2005.3

What we asked our auditors to do

4.11
Our appointed auditors were asked to:

  • review the entity’s banking arrangements to assess compliance with the new requirements that took effect on 25 July 2005 (just after balance date); and
  • assess whether or not the entity had complied with the new requirements regarding securities, borrowing, guarantees and indemnities, and derivatives, for the period 1 April (when the provisions took effect) to 30 June 2005 (balance date).

Findings

4.12
All Crown entities complied with the legislation regarding permitted types of bank accounts (section 158).

4.13
All Crown entities complied with the legislation regarding acquisition of securities (section 161); new borrowing (section 162); new guarantees and indemnities (section 163); new derivatives (section 164); and existing securities, borrowing, guarantees, indemnities, and derivatives that have been amended or options taken up on or after 1 April 2005 (section 197).

Disclosure of interests

What the legislation requires

4.14
The CEA (sections 62-72) requires that entities keep an interests register, and that members of boards4 disclose interests in the interests register and to the chairperson or, if the chairperson is unavailable or has an interest in the matters, the deputy or temporary chairperson, or, failing that, to the responsible Minister. The requirement came into effect on 25 January 2005. The Act also contains provisions that require prospective members to disclose interests to the responsible Minister.

4.15
In respect of the disclosure requirement, we expect that an entity would proactively ask new members if they are aware of any potential interests and to record the details in the register. In addition, we would expect there to be a regular process – we suggest at least 6-monthly – where members are asked to review and update the interests register. We note that a number of entities have a “conflict of interest” question as a standing item on the agenda for every meeting. That practice is encouraged.

What we asked our auditors to do

4.16
We asked our appointed auditors to report whether or not the entities kept an interests register as required in sections 64-65 of the CEA.

4.17
The CEA requirements in respect of interests do not apply to District Health Boards, but there is a similar requirement in those entities’ own Act. Auditors of District Health Boards were asked to report whether or not the entity had complied with the relevant requirement in its own Act.

Findings

4.18
Most of the entities that were required to have an interests register did have one. Nine did not. Three of the 9 entities were in the process of setting up registers. We advised the other 6 entities that they were required to implement a register.

4.19
Failure to disclose an interest is a serious matter of probity where public management is concerned, and the statutory entity’s board must advise the Minister when there is a failure to disclose. In the 2005-06 audit, we will ensure that all these entities have implemented a register as required, or initiate appropriate reporting action.

Preparedness for impact of the CEA, in particular the new planning requirements, on the entity

What the legislation requires

4.20
Under previous legislation, only some individual Crown entities and Crown entity groups had to prepare an SOI. The CEA extends this requirement to all Crown entities except schools, tertiary education institutions, and Crown Research Institutes,5 and changes the focus of the SOI in line with the new emphasis in public management on managing for outcomes and results.6 Section 139 of the CEA requires that, before the start of the financial year, Crown entities prepare an SOI covering at least the next 3 financial years. The SOI is required to include the scope of the entity’s functions and intended operations, the specific impacts, outcomes, or objectives that the entity seeks to achieve or contribute to, and financial and non-financial measures and standards by which the future performance of the Crown entity may be judged.

4.21
Sections 150 and 151 of the CEA require entities to present an annual report, which includes reporting against the financial and non-financial service performance measures set out in the SOI.

4.22
These provisions of the Act do not come into force until the 2006-07 financial year.7 Guidance on applying the provisions is available on the SSC website at www.crownentities.ssc.govt.nz.8

What we asked our auditors to do

4.23
We asked our appointed auditors to assess whether the entity had analysed the effect on it of the changes to legislation.

4.24
Auditors were asked to exercise their judgement, taking into account the size and complexity of the entity and the risk of non-compliance. Examples of actions which could demonstrate that the entity had sufficiently analysed the effect of the legislation on it include:

  • discussing the legislation in governance or management meetings;
  • going through the Act and assessing the effect on the entity;
  • seeking legal advice, external or in-house, where appropriate;
  • engaging with the entity’s monitoring department or the Treasury or the State Services Commission regarding the legislation;
  • providing training or education for staff on the effect of the legislation; and
  • changing its procedures and processes in line with the new legislation.

4.25
We also asked our appointed auditors to report on whether entities had a plan for meeting the statutory requirements identified in the assessment process. While auditors were asked to consider whether the entity had a formalised plan, and whether it had allocated resources to implementing the plan, this level of planning was not considered necessary in all entities. Auditors were asked to exercise their judgement as to what constituted a suitable plan for a given entity.

Findings

4.26
Almost all the audited Crown entities had analysed the impact of the legislation changes. However, in our auditors’ opinion, 4 entities had either not done any analysis or had not done sufficient analysis.

4.27
Most entities had instituted some form of appropriate planning for meeting their statutory obligations. In our auditors’ view, 7 entities did not have a sufficient level of planning.

4.28
Of these 7 entities, one did not have a plan because it considered that it already complied with all its statutory obligations. We have advised this entity that we intend to follow up its compliance during the 2005-06 audit. We advised the other 6 entities of the need to plan to meet their statutory obligations.

4.29
A further 2 entities did not have a plan, but in our opinion a detailed plan was not necessary, as the new legislation will have only minimal impact on these entities.

4.30
We noted that, for some Crown entities, the requirement to have an SOI was new. But even where the entity had an SOI before the requirement was introduced, several felt the need to refocus their SOI to meet the requirements of the new legislation. Others were reshaping their SOI to respond to new reporting focuses (such as triple bottom line reporting), even though it was not required in the legislation.

4.31
We also noted that non-financial measurement of outcomes is an area that several entities need to develop further in future SOIs.

Compliance of departments9 with the Public Finance Act

4.32
We focused on 2 main areas of changes introduced to the Public Finance Act 1989 (PFA) by the PFAA:

  • changes to the financial powers requirements for departments and Offices of Parliament; and
  • changes to the ex ante accountability requirements, relating, in particular, to SOIs and the Estimates of Appropriations.

Compliance with financial powers requirements

What the legislation requires

4.33
The financial powers provisions of the PFA concerning banking, investing, borrowing, guarantees, and indemnities remain broadly the same as they were, but changes have been made regulating use of derivatives. The changes to the provisions took effect from 1 April 2005.

What we asked our auditors to do

4.34
We asked our appointed auditors to assess whether or not the department had complied with the financial powers provisions in the period 1 April 2005 (when the provisions took effect) to 30 June 2005 (balance date).

Findings

4.35
Most departments had complied with the financial powers aspects of the new legislation.

4.36
There were 3 instances of minor technical breaches of the borrowing provisions, which we have brought to the attention of the departments concerned. The technical breaches were in the nature of accounts overdrawn as a result of dishonoured payments.

4.37
Section 65S of the PFA requires departments to have the authorisation of the Minister or the Treasury to operate bank accounts. We found one instance of a department operating an unapproved bank account. We brought this to the attention of the department concerned.

4.38
One department had received approval from the Minister of Finance to continue 4 existing finance leases that, without permission, would have constituted borrowing on behalf of the Crown, which departments cannot lawfully do.

Planning for, and compliance with, the new ex ante accountability requirements

What the legislation requires

4.39
The amendment to the legislation introduced changes to the ex ante accountability requirements for departments, which apply to the 2005-06 financial year (that is, they needed to be in place before 1 July 2005). These included:

  • a change to the GST basis of appropriations;
  • changes to the information regarding future operating intentions (SOIs); and
  • changes in the way the authority given by an appropriation is described – in particular, from specifying the purpose of the expenditure to specifying the scope within which expenditure may be incurred.

4.40
Under the PFA, all appropriations are GST-exclusive for the 2005-06 Estimates, with the exception of existing multi-year appropriations (all new multi-year appropriations are presented on a GST-exclusive basis).

4.41
Information regarding future operating intentions (SOI) replaces the Departmental Forecast Report (DFR), but the information previously published in the DFR continues to be published as part of the SOI. The required information is detailed in sections 38-42 of the PFA. Departments’ SOIs must cover at least the next 3 years, and include the scope of the department’s functions and intended operations, and the specific impacts, outcomes, or objectives that the department seeks to achieve or contribute to. These provisions give effect to the focus in public sector management on managing for outcomes.10

4.42
In addition, section 40(d) of the PFA requires the department to set out and explain the main measures and standards that it intends to use to assess and report on matters relating to its future performance, including the following matters:

  • the impacts, outcomes, or objectives achieved or contributed to by the department (including possible unintended impacts or negative outcomes);
  • the cost-effectiveness of the interventions that the department delivers or administers; and
  • the department's organisational health and capability to perform its functions and conduct its operations effectively.

4.43
The amended PFA clarifies the requirements as regards description of the appropriation. It provides that the authority to incur expenses or capital expenditure provided by an appropriation is limited by the “scope” of the appropriation. The scope describes what activities are allowed using the funding available, rather than the purpose for which the expenditure could be incurred.

4.44
There was relatively little movement by departments in the 2005-06 appropriations descriptions in response to the “scope” provision. The Treasury gave general direction to departments regarding the “scope” provision in its Circular 2005/2 on 7 February 2005, and has since issued more specific guidance (Scoping the Scope of Appropriations, August 2005, available on the Treasury website). We expect to see improvement in the description of appropriations in the 2006-07 Main Estimates.

What we asked our auditors to do

4.45
We asked our appointed auditors to assess:

  • whether departments had planned adequately for the impact of the changes in ex ante accountability reporting;
  • whether departments had complied with the ex ante accountability requirements for 2005-06 – our auditors were instructed to bear in mind that the legislation had been very recently introduced, and that the SOIs were likely to be “works in progress”, in terms of fully complying with all the new requirements of the amended PFA; and
  • whether departments were aware of their statutory obligations in respect of specifying the scope of the appropriations and that further changes would be required in the 2006-07 year. We also asked our auditors to assess whether departments had a plan in place to meet these statutory obligations.

Findings

4.46
In our view, all departments had planned adequately for the impact of the changes required in ex ante accountability reporting.

4.47
Most departments had a plan for meeting their statutory obligations. Those that did not have a formal plan intended to read and follow relevant Treasury circulars and obtain further advice as needed.

4.48
Most departments had made some moves towards compliance with the new ex ante accountability requirements. However, 7 departments were considered not to have complied with the requirements for 2005-06.

4.49
We noted in particular that:

  • Almost all departments need to refine future SOIs in order to fully comply with section 40(d) of the PFA.
  • In our view, departments need to work on mechanisms to establish the cost-effectiveness of interventions. Mechanisms to establish cost-effectiveness need to be clear, and able to show that the interventions chosen by the department were more cost-effective than other possible interventions.
  • Departments need to improve their outcome indicators. While most departments had some indicators, these were not always clear enough to assess the impact of departments’ interventions on the outcomes they wish to achieve.

4.50
With one exception, departments were aware of their statutory obligation to include a description of scope of each appropriation in the Estimates. The one department that was not aware of the forthcoming changes was awaiting Treasury guidance, which has now been issued.11

Conclusions

Crown entities’ compliance with the CEA

4.51
Crown entities have generally done a good job of complying with the financial powers and conflict of interest disclosure aspects of the new public sector legislation.

4.52
We note that the full planning and reporting requirements of the CEA have not yet come into effect. Thus, while entities have been preparing for the impact of the new legislation, full compliance is still work-in-progress.

4.53
In particular, entities need to ensure that they develop non-financial outcome performance measures, in accordance with Treasury and SSC guidance,12 that are:

  • valid and meaningful;
  • sensitive and specific to the underlying phenomenon;
  • grounded in research;
  • intelligible and easily interpreted;
  • able to be disaggregated, and
  • timely.

4.54
Entities should pay particular attention to the performance information (for example, quality, quantity, timeliness, and cost). The auditor will review the forecast measures and standards for appropriateness. This will involve using the standard audit criteria of relevance, completeness, and understandability. These measures and standards provide the basis for end-of-year reporting in the statement of service performance contained in the annual report and the basis on which that statement is audited.

Departments’ compliance with the PFA

4.55
While the ex ante reporting requirements of the PFA had already come into force at the time of our audit, we considered that almost all departments’ SOIs were also works-in-progress in relation to the new requirements of the PFA.

4.56
In particular, departments need to ensure – as required in section 40(d) of the PFA – that the SOI includes the main measures and standards that the department intends to use to assess and report on its future performance, including:

  • the impacts, outcomes, or objectives achieved or contributed to by the department (including possible unintended impacts or negative outcomes);
  • the cost-effectiveness of the interventions that the department delivers or administers; and
  • the organisational health and capability of the department to perform its functions and conduct its operations effectively.

4.57
In the 2005-06 Main Estimates, departments tended to produce scope descriptions that were essentially the same as the statements of purpose that were appropriate to the former legislative requirement. Specific Treasury guidance to departments to describe the scope of their appropriations was available in August 2005, after the presentation of the 2005-06 Estimates. The guidance is now available on the Treasury website, at www.treasury.govt.nz/appropriations/scoping/.

4.58
The description of the appropriation is important for the audit scrutiny of whether or not the entity is using public funding in the way that Parliament intended. In his Controller role, the Auditor-General needs to be satisfied that the entity is using the resource within the limits described in the scope.

4.59
In the next annual audit, we will ask our appointed auditors to assess whether each department has complied with the Treasury guidance on preparation of the scope descriptions of the appropriations, and to report on the quality of those descriptions.

1: The financial powers relate to the acquisition of securities, borrowing, giving of guarantees and indemnities, and use of derivatives, and are supplemented by the Crown Entities Financial Powers Regulations 2005. Financial powers provisions for one class of Crown entity – tertiary education institutions – remain under the Education Act 1989.

2: Pacific Co-operation Foundation.

3: A guide to the financial powers provisions of the CEA (covering bank accounts, acquiring securities, giving guarantees and indemnities, and using derivatives) is available on the Treasury website at www.treasury.govt.nz/crownentities/.

4: As defined in section 10 of the CEA.

5: Schools, tertiary education institutions, and Crown Research Institutes have to meet planning requirements in their own governing legislation.

6: See Part 7.

7: Some reporting requirements, specifically in respect of remuneration disclosures, took effect for the 2004-05 annual report.

8: In particular the 2 papers Planning and Managing for Results: Guidance for Crown Entities, and Preparing the 2006/07 Statement of Intent: Guidance and Requirements for Crown Entities.

9: Offices of Parliament (except the Auditor-General) are included with this group, as the same requirements apply to them.

10: Guidance is given to the departments by the Treasury and SSC at www.treasury.govt.nz/publicsector/sois/.

11: See www.treasury.govt.nz/appropriations/scoping.

12: Guidance on performance measures can be found at www.treasury.govt.nz/publicsector/sois/sois-guidancedepts and www.ssc.govt.nz/display/document.asp?navid=215&docid=4859&pageno=7#P130_14612.

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