1.3 Reporting on effects of activities in the annual report

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The Local Government Act 2002 (the Act) contains a comprehensive reporting regime for all local authorities. The audited annual report of each local authority is the main means of that reporting. Local authorities are required to plan for, and report on, the effect of their activities on the social, economic, environmental, and cultural well-being (the four community well-beings) of their local communities.¹

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The Act requires the Auditor-General to report on whether a local authority has complied with these requirements.²

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In this article, we review how all local authorities approached these requirements. We focus on the reporting requirements of clause 15(d) and (f) of Schedule 10 in particular.

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This is the third time we have reported on these disclosure requirements to Parliament. As new requirements of the Act, disclosures of the required information have ranged from available to difficult to identify (and, in some cases, there have been no relevant disclosures at all). Our practice to date has been to report where disclosures have been inadequate through our management letters to local authorities.

Background

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In the decision-making process, local authorities are required to identify and consider how options affect the four community well-beings, community outcomes, and future generations. Recording this process appropriately and linking it to the performance management framework can substantially enhance a local authority’s ability to identify and report on the effects of the activities it carries out. An integrated planning, decision-making, and reporting framework is crucial to meeting the requirements of the Act.

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We recognise that, to be able to meet this requirement, local authorities will need to develop a comprehensive framework that links their monitoring of community outcomes, decision-making, and performance against levels of service to reporting that includes the identified effects of activities on the four community well-beings. It is clear from our previous reports³ and the annual reports of local authorities that this is a challenge. It is an area in which we expect to see substantial improvement.

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We expect frameworks for monitoring community outcomes to be part of the Long-Term Council Community Plan (LTCCP).⁴ We expect the report on progress, which is required not less than once every three years, to be published at a time when the information it contains will be useful to the community for developing the next LTCCP.

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Figure 1.4 demonstrates the related requirements between the LTCCP and annual report planning and reporting.

Figure 1.4

Related requirements in the LTCCP and annual report for each group of activities

LTCCP (Schedule 10, clauses 1 and 2)	Annual report (Schedule 10, clause 15)
Identify the activities within the group of activities.	Identify the activities within the group of activities.
Identify the rationale for delivery of the group of activities (including the community outcomes to which the group of activities primarily contributes).	Identify the community outcomes to which the group of activities primarily contributes.
State the measures that will be used to assess progress towards achieving community outcomes. State how the local authority will monitor and report on the community’s progress towards achieving community outcomes (not less than once every three years).	In relation to each group of activities, report the results of any measurement carried out during the year of progress towards achieving community outcomes.
Outline any significant negative effects any activity (within the group of activities) may have on any of the four community well-beings.	Describe any identified effects that any activity within the group of activities has had on the four community well-beings.
Identify additional or replacement assets needed to meet levels of service and/or demand.	Describe any significant acquisitions or replacements of assets, the reasons for the acquisitions or replacements, and the reasons for any variance from the LTCCP.

Note: Group of activities, as defined in the Act, means one or more related activities provided by, or on behalf of, a local authority or council-controlled organisation.

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The requirements summarised in Figure 1.4 mean that a local authority needs to understand how it will monitor progress towards community outcomes so that it can produce reports on the result of measuring that progress. Consideration of the best approach for achieving this has involved substantial debate.

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Preparing the LTCCP obliged local authorities to distinguish between the requirement to report on community outcomes at least every three years and the requirement to report on any measurement carried out that reflects a local authority’s contribution to the achievement of outcomes through its activities. In focusing on the performance accountability framework, Figure 1.5 demonstrates how the Act envisaged the reporting framework for outcomes and levels of service.

Figure 1.5
The feedback flow of performance in the Local Government Act 2002

Focus for reviewing 2005/06 annual reports

Identifying effects on the four community well-beings, and disclosure of significant acquisitions

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Last year, we reviewed how local authorities approached the annual report requirements of clause 15 of Schedule 10. For the annual reports for 2004/05, we considered the responses of all local authorities to the requirements of clause 15(d) and (f) of Schedule 10 – in particular, the 77 local authorities that were reporting for the first time.5 The focus in 2005/06 was to find out whether local authorities had made progress in the second year that the requirement applied to all local authorities.

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In addition to the requirements for each group of activities listed in Figure 1.4, the annual report must contain:

• an audited statement comparing the actual and intended levels of service provision, and giving the reasons for any variance between the actual and the expected service provision; and
• an audited statement describing any significant acquisitions or replacements of assets carried out during the year, and giving the reasons for those acquisitions or replacements, and the reasons for any significant variation between planned and actual acquisitions and replacements.⁶

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In 2003/04 and 2004/05, we assessed reporting under clause 15(d) and (f) of Schedule 10 as the least well done of the annual report requirements.

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As with most new planning and accountability provisions, we expected local authorities to show progress towards meeting these requirements. We found a variety of approaches. Several local authorities indicated that they were continuing to do work, particularly in identifying effects on the four community well-beings.

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Some local authorities are still identifying how to monitor progress under clause 1(g) of Schedule 10. If local authorities are having difficulty planning how to monitor progress, effective reporting on achievement is likely to continue to be problematic. We consider this issue further in a separate report on our review of the LTCCP audits.⁷

Description of identified effects on the four community well-beings

What is required

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Although the Act requires reporting against the four community well-beings, it does not specify how this is to be done.

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A local authority therefore needs to establish the framework within which it makes decisions and determines how well its own activities and services contribute to community outcomes. It also needs to be able to report on the effects of these activities.

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It can be challenging for a local authority to identify and report on the full range of effects that an activity may have on each community well-being. For instance, some traditional activities, such as water management and building roads, are often identified by local authorities as having a positive effect on community wellbeing. A general statement of this type does not adequately identify the effects that such infrastructure could have on social cohesion, environmental well-being, or biodiversity.

What local authorities did

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Overall, we observed little change in the information presented in 2005/06 annual reports compared to the previous year. About 80% of local authorities did not develop their disclosures any further during 2005/06. More than 50% of local authorities did not meet the requirements of clause 15(d) in either year that the requirement has been in place. Those local authorities presenting the most comprehensive disclosures were the same as in 2004/05, and even these best performers showed no evidence of continuing to improve their disclosures.

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There was evidence of improvement to the disclosures of about 20% of local authorities. However, although efforts were made to increase disclosure and make improvements, this did not always result in the local authority effectively identifying the effects of activities on the well-being of the community.

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Most local authorities provided information on the nature of their activities, why they did those activities (that is, they identified the activities’ contribution to one or more community outcomes), how the activities were measured, and their progress towards the objective.

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Many local authorities provided a discussion on the effects of their activities. However, many of the effects identified appear to be more a repetition of a local authority’s aim or objective for that activity rather than an identified effect. Local authorities need to distinguish between an identified effect of an activity, as required by the Act, and the effect they intend that activity to have.

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Some local authorities provided general statements about the effects of their activity. In our opinion, a statement to the effect that “this activity contributes to economic and social well-being through protecting the safety of residents” is describing an intended effect rather than an identified effect. Other examples of this confusion were instances where local authorities identified that their water management systems did not support some environmental outcomes, or that some roading activity can have detrimental effects on the social cohesion of a community.

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Consistent with reporting against its LTCCP, which requires a local authority to outline any significant negative effects of its activities, a small number of local authorities have identified only negative effects in their subsequent annual report. Although negative effects were thoroughly discussed in some of the reports, we consider that none of the reports that identified only the negative effects met the requirements of the Act. Under the Act, an annual report is required to report any identified effects, negative or positive.

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A few local authorities identified both negative and positive effects. These were presented as either written commentaries or in a table format.

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A small number of local authorities provided information on the identified effect each activity had on each community well-being.

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Other local authorities provided a report on each community well-being, outlining the authority’s contribution and the effect of its activity on these areas.

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A few local authorities noted that they were still developing the links between the outcomes, rationale, activity, performance measure, targets, and identification of effects. The number of local authorities in this position in 2005/06 has reduced compared to 2004/05. This confirms that there has been some progress in this area as a result of preparing the 2006-16 LTCCPs. Most of those local authorities that have yet to make any disclosures to meet the requirements of clause 15(d) have indicated that they intend to do so in 2006/07. However, some have yet to acknowledge and produce information to meet the new requirement.

Comment on identification of effects

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We noted in our report in 20068 that local authorities needed to ensure that their identification of the effects of activities was more than simply reporting on the activity of the local authority. As there has been little change to disclosures, the same comment continues to apply.

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Enhancements that could be made to meet the requirements to identify the effects of activities include:

• moving from a restatement of local authority aims to identification of effects;
• moving towards specific consideration and analysis of the effects of activities rather than generalised statements; and
• ensuring that the performance management framework is an integrated package that links community outcomes and the rationale for local authority activity to performance measures, targets, and levels of service. With such a linked framework, it is easier for local authorities to report on progress towards community outcomes (as required by clause 1(g) of Schedule 10) and the identified effects of activities (as required by clause 15(d) of Schedule 10).

Conclusion

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Overall, most local authorities provided clearly accessible information about what the authority did, how the community outcome was enhanced, why it carried out the activity, and how it measured performance. While this meets accountability requirements for the clear reporting of local authority activities back to the community, further work is required in clearly reporting the identified effects of those activities.

Statement of acquisition and replacement of assets

What is required

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The Act, through the LTCCP and the annual plan, creates the framework against which the annual report discloses actual results. This includes how assets will be maintained, replaced, and renewed, and how costs will be met.⁹

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Significant asset acquisitions and replacements are noted in planning financial forecasts, and are disclosed in the budget sections of the LTCCP.

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The annual report must include the information listed in Figure 1.4.

What local authorities did

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Consistent with our observations on the requirements of clause 15(d), we noted little change to the information presented in 2005/06 to meet the requirements of clause 15(f) compared to 2004/05. Improvement was evident in fewer than 15% of local authorities. Improvements ranged from including some asset acquisition information to explaining variances against budgeted acquisitions and/or explaining the rationale for acquisition and replacement decisions.

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Some local authorities reported significant variations between the LTCCP and the actual asset programme. Few provided information on the reasons for these variations.

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Those that did provide information about, and reasons for, the variations did so either as notes to the financial statements or, more generally, in the Statement of Service Performance as part of reporting on the group of activities.

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In some cases, major variations were noted between the mayor’s/chairperson’s or chief executive’s report, and the financial statements and the Statement of Service Performance.

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A small number of local authorities provided a list of all assets acquired and disposed of (with reasons) as a separate section in the annual report. Where the information and explanations were clear and thorough, this provided a snapshot of all local authority acquisitions and replacement of assets.

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We are concerned that a small number of local authorities presented asset information to a lesser standard in 2005/06 compared to the previous year.

Comment on statements about significant asset acquisition and replacement

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A significant number of local authorities do not yet address the requirements of clause 15(f) in a clear manner. In addition, up to half are inadequate. This is usually because of a lack of explanation of the reasons for the acquisition, replacement, or variation.

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We remain concerned about this finding. Asset acquisition and replacement are important to sustaining and developing services. Most local authority plans – including the LTCCP – centre on sustainably delivering desired levels of service. Identifying an appropriate asset development programme that incorporates acquisition and replacement is generally central to demonstrating sustainability of services. Without this information, an important aspect of accountability is missing, and information useful to the reader is not available.

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We consider that providing high-level information on significant asset decisions (for example, advising of either delay or bringing forward of major asset acquisitions) in the mayor’s or chairperson’s report is useful for the public. However, the mayor’s or chairperson’s report is not subject to audit, and cannot include all the information required by the Act.

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Where variations were reported in the financial statements section, they were often aggregated. In our view, this does not provide the most accessible information to the community about specific actions carried out by the local authority for significant assets.

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As we noted in previous years, putting financial and asset information in the Statement of Service Performance has the advantage of keeping information on one topic within each group of activities. However, unless the variation and its reason are also clearly stated in that section, it is not easy to determine the difference between the LTCCP or annual plan projections and the actual expenditure or acquisitions carried out during the year.

Conclusion

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Overall, despite the requirement of clause 15(f) being in place for three years, there remains significant scope for improvement. As noted previously, we will continue to work with our auditors to help the sector become more aware of the clause 15 requirements, and to help them improve their reporting of performance.

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However, if we do not observe improvements over time, we will be obliged to consider what effect failure to observe these requirements should have on our audit opinions.

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1: These requirements are in clauses 2 and 15 of Schedule 10.

2: Section 99(1)(b). In clause 15(e) and (f) of Schedule 10, our obligation extends to actual verification of the information reflected in annual reports – in other words, we audit the disclosures.

3: Local Government: Results of the 2003-04 Audits, parliamentary paper B.29[05b], pages 61-87, and Local government: Results of the 2004-05 audits, parliamentary paper B.29[06b], pages 14-16.

4: Schedule 10, clause 1(g).

5: Nine local authorities adopted an LTCCP one year earlier than the other 77 local authorities. As a result, those nine local authorities were required to report against the clause 15 requirements one year earlier.

6: Schedule 10, clause 15(e) and (f).

7: Matters arising from the 2006-16 Long-Term Council Community Plans, parliamentary paper B.29[07c], ISBN 0- 478-18187-6.

8: Local government: Results of the 2004-05 audits, parliamentary paper B.29[06b], page 16.

9: Schedule 10, clause 2(1)(d).

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