Auditor-General's overview

Annual plan 2007/08.

I am pleased to present my annual plan for 2007/08.

I have changed the presentation of this annual plan to better reflect what I consider is good practice in the presentation of performance information. The main change has been to put outcome information and measures with the statement of service performance information. This should make the flow of information more logical and understandable.

This annual plan is based on three key strategies:

  • shaping our services to anticipate and respond to Parliament’s and other stakeholders’ needs and our changing environment;
  • building our capability to create and deliver our services; and
  • fostering relationships and ways of working that support our strategic plan.

Within these three key strategies are a number of specific organisational development intentions. Since 2004, we have made good progress in most of these, including:

  • increasing the number of performance audits we carry out;
  • establishing a research and development team;
  • implementing a project management approach to improve the timeliness of performance audits and inquiries;
  • achieving efficiencies through merging the corporate services teams of Audit New Zealand and the Office of the Auditor-General; and
  • improving recruitment and retention strategies, including starting a comprehensive professional development programme and an internship programme at Audit New Zealand.

Key issues and risks in our operating environment

Significant changes occurring in the accounting and auditing profession and in the legislative and operating environments of public entities continue to have a major effect on our work.

Changes in the public sector

Changes in the public sector include:

  • increasingly high public expectations and scrutiny, particularly relating to ethical conduct and transparent and accountable decisions and transactions;
  • an expectation that public entities will work collaboratively so that services to the public are better integrated, and that public entities will consider the longer term effects of their activities (especially in managing finite or fragile environmental resources); and
  • changes in 2004 to the Public Finance Act 1989 and the Local Government Act 2002, and enactment of the Crown Entities Act 2004. These Acts require changes to be made to the planning, budgeting, and reporting responsibilities of many public sector entities.

Changes in the accounting and auditing profession

A significant change in the accounting and auditing profession is the adoption of New Zealand equivalents to International Financial Reporting Standards (NZ IFRS) in the public sector for periods starting on or after 1 January 2007. Earlier adoption is permitted. The local government sector decided to comply earlier, and will prepare financial statements in keeping with NZ IFRS for the year ending 30 June 2007. Most other entities within the public sector will follow a year later (that is, for the year ending 30 June 2008).

Another significant change in the accounting and auditing profession is the adoption of New Zealand equivalents to International Standards on Auditing. This change is likely to necessitate a complete review and update of the Auditor- General’s auditing standards.

The effect of these changes on our work

The effect of these changes is increasing complexity for those preparing financial reports and those auditing them. This puts pressure on both the quality of the audit work carried out and the cost of performing the audit work. These changes have also generated an environment in which financial expertise and audit assurance expertise are in high demand. We continue to face challenges in recruiting and retaining suitably qualified and experienced senior staff because of industry and labour market shortages.

For several years, we have identified our key strategic risks to be the loss of our independence, and audit failure. The changes in the public sector and the accounting and auditing professions, together with the continuing difficulty in finding and retaining suitably qualified and experienced staff, mean that these risks remain.

Responding to issues and risks in our operating environment

Responding to changes in the public sector

During the next two to three years, our audit work needs to provide assurance to the public and Parliament in the areas where there are concerns about, or greater expectations of, public entities. We also need to provide assurance that the recent legislative changes affecting the public sector have been implemented and are having the eff ect desired by Parliament.

To provide the necessary assurance, I have identified several areas for us to focus on. I have selected these areas because they are strongly related to my statutory role and because these concerns tend to be challenging for the public sector. They cover both central and local government, and are areas where, in my view, public sector performance should be improved. The areas of focus are:

  • probity;
  • fraud;
  • sustainable development;
  • stewardship and management of infrastructure assets; and
  • performance information.1

I expect our work in these areas to involve the full range of our audit assurance services (annual audits, performance audits, inquiries, and advice and assistance). We will ensure that our annual audits place greater emphasis on non-financial reporting, waste, probity, and accountability.

Responding to changes in the accounting and auditing profession

To ensure that our annual audits comply with changing financial reporting and auditing standards, we will continue with the research and development work of the last two to three years.

Public sector audit fees have been increasing to keep pace with the wider international demand for assurance services – and that fee pressure is likely to continue for the next two to three years. In 2003 I decided to shift to an allocation method for contracting audits, rather than a tendering model. In my view, the allocation method is a cost-effective way of encouraging auditors to share methodologies and work together to improve audit work. I have systems in place to ensure that audit services are provided at a reasonable cost to public entities.

For example, I regularly seek independent assurance that our fee-monitoring mechanisms ensure that fee levels are fair and reasonable for audited entities and auditors. However, I must also ensure that audits are performed well. To do this, my audit service providers must be fairly remunerated.

The 2006 review confirmed that our fee-monitoring mechanisms, while capable of some modest enhancement and refinement, are performing well and ensuring that audit fees are fair and reasonable. I am also seeking a review of the audit allocation method, to ensure that the wider pressure on audit fees is managed as well as it can be.

Feedback from Parliamentary consultation

Under section 36(1) of the Public Audit Act 2001, our proposed work programme is subject to Parliamentary consultation. We sought feedback on two occasions — once on a preliminary early draft and again on the statutory Draft annual plan 2007/08.

This feedback:

  • mainly supported the approach we have taken to determining our work programme, and
  • gave us guidance on the scope and relative emphasis we should place on one or two key studies.

I thank Parliament for this feedback, and will ensure that it is incorporated into our scoping of the respective studies.

Having regard to the requirements of section 36(3) of the Public Audit Act, I acknowledge that the Finance and Expenditure Committee provided a written response to the statutory Draft annual plan 2007/08, and note that neither the Speaker nor any committee of the House requested any change to our work programme priorities.

Since we sought feedback on our draft annual plan, two additional pieces of work are likely to be included in our 2007/08 work programme. They are:

  • a performance audit into systems and processes for managing conflicts of interest in the Auckland regional District Health Boards; and
  • ongoing monitoring of the implementation by New Zealand Police of the recommendations made by the Commission of Inquiry into Police Conduct.

I am confident that the performance audits we intend to conduct in 2007/08 are relevant and likely to be useful to Parliament, public entities, and the public.

Working to achieve the objectives described in our strategic plan

Recruiting and retaining good staff and continuing to invest in developing our staff is a core component of our strategic plan. In the coming year I will be focusing on:

  • strengthening the management and leadership skills of our people, including further embedding the national professional development programme and introducing High Potential and Talent Management programmes to recognise, reward, and develop high performers;
  • supporting staff members with Individual Development Programmes and ongoing investment in targeted areas of training; and
  • completing a significant “future business model” project that will provide us with an effective planning tool to better forecast our staffing requirements.

While the 2007/08 financial year has several challenges in store for us, I am confident that we have the systems and processes in place to achieve our strategic plan. Most importantly, in fulfilling the statutory purpose of the Auditor-General, I am fortunate to be working with exceptionally skilled and talented people within Audit New Zealand and the Office of the Auditor-General. Each day my staff show their commitment to integrity, honesty, and independence. I look forward to achieving the objectives of this annual plan with them during 2007/08.

Signature.

Kevin Brady
Controller and Auditor-General

3 April 2007

1: See Appendix 2 for more detailed discussion.

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