Auditor-General’s overview

Annual report 2006-07.

photo of Kevin Brady. During 2006/07, the work of my Office has continued to focus on achieving our 2004-09 strategic plan. This plan is based around three main strategies, within which are a number of specific organisational development intentions:

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

I am proud of the progress the Office has made since 2004, including:

  • shaping our services in response to changing financial reporting and professional standards;
  • increasing the number of performance audits we carry out;
  • expanding our suite of good practice guides;
  • setting up a research and development team;
  • implementing the revised Controller function under the 2004 amendments to the Public Finance Act 1989;
  • implementing a project management approach, which has improved the timeliness of performance audits and inquiries;
  • developing new products (for example, the methodology for auditing Long-Term Council Community Plans (LTCCPs));
  • achieving efficiencies through merging the corporate services teams of Audit New Zealand and the Office of the Auditor-General;
  • improving workflow management in Audit New Zealand by bringing forward audit work traditionally completed during the July to October peak period; and
  • improving recruitment and retention strategies, including a comprehensive professional development programme and an internship programme at Audit New Zealand.

The external environment

Significant changes in the accounting and auditing profession and in the legislative and operating environments of public entities continued to have a major effect on our work in 2006/07, as they have done in the last couple of years. The effect of these changes is increasing complexity for those preparing and those auditing financial reports. This puts pressure on both the quality of the audit work carried out and the cost of performing the audit work. These changes also mean financial expertise and audit assurance expertise are in high demand.

In particular, in December 2002, the Accounting Standards Review Board decided that New Zealand entities producing general purpose financial statements would be required to apply new standards based on International Financial Reporting Standards (IFRS) for reporting periods beginning on or after 1 January 2007. Entities were given the option to apply the new standards from reporting periods beginning on or after 1 January 2005. This requirement applies to nearly all public entities audited by the Auditor-General and to the Auditor-General’s own financial statements.

Value of New Zealand equivalents to International Financial Reporting Standards for the public sector

Since the decision was announced, a significant amount of time and energy has been expended on preparing for the transition to the new standards. Within the Office, we set up a specific project with the primary objective of readying our auditors to audit according to the new standards. This project is ongoing.

I believe that the decision to base New Zealand standards on IFRS (which are written to be applied by large profit-oriented entities) acknowledged that the needs of the public sector are different and would therefore require different treatment. In my view, the new standards will be credible only if they are seen to:

  • specifically consider public sector issues;
  • incorporate appropriate changes to IFRS so that the public sector is able to apply them sensibly; and
  • incorporate appropriate guidance to assist the public sector to apply the standards.

As this is not happening in all cases, I am becoming increasingly concerned about the credibility of the new standards. In my view, if this continues, the public sector will become disenfranchised from the standard-setting process, which is likely to lead to financial information that fails to meet users’ needs. There are already signs that this is happening.

Effect of the external environment for my Office - risk management and governance

We continue to face challenges in recruiting and retaining suitably qualified and experienced senior staff because of industry and labour market shortages. This in turn adds pressure on salaries, audit charge-out rates, and ultimately audit fees paid by public entities.

We have identified our main 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.

During 2006/07, we maintained risk management systems around these core risks, including:

  • the Auditor-General’s independence standards - I set a high standard for independence for my employees and the auditors I appoint from chartered accounting firms. My standards are based on the independence standards issued by the New Zealand Institute of Chartered Accountants;
  • monitoring the independence of statutory officers, employees, and all appointed auditors - the system includes regular declarations of interest and, where necessary, measures to manage conflicts of interest;
  • adhering to professional auditing standards;
  • external peer review and substantiation procedures - these include annual independent evaluation of our audit allocation and tendering processes, independent external review of two performance audits and of two inquiries each year, and our annual stakeholder feedback survey; and
  • my independent Audit and Risk Management Committee, comprising three external members and the Deputy Controller and Auditor-General. The report from the Chairman of the Audit and Risk Management Committee is presented on pages 56-57.

In 2006/07 I commissioned an independent review of the governance arrangements and practice in my Office, at the request of the Audit and Risk Management Committee. David Smyth, a former public service chief executive, carried out the review.

The purpose of the review was to provide assurance that the governance of my Office is of high quality. Exercise of governance by the Auditor-General does not have all the checks and balances that are usual for public entities, because:

  • the Auditor-General is a single statutory officer, so that governance and executive functions are vested in one person; and
  • the Auditor-General is independent in exercising the powers and performing the functions and duties of the role.

The reviewer found the standard of governance in the Office to be high. His assessment was that the processes and practices in the Office work effectively to counterbalance the risks inherent in the independence of the Auditor-General and the concentration of the governance role vested in that position. The reviewer recommended a number of specific improvements that could be made to strengthen some aspects of governance, all of which have been implemented or are being addressed.

Shaping our services - highlights for 2006/07

Preparing for the adoption of standards based on International Financial Reporting Standards

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 accordance with NZ IFRS for the year ended 30 June 2007. Most other entities within the public sector will follow a year later (that is, for the year ending 30 June 2008).

During 2006/07, we continued to focus on preparing our auditors to audit in an NZ IFRS environment. Our main priorities were further training and developing tools to assist auditors. In addition, we continued to assist the public sector to prepare for the transition to NZ IFRS with a range of initiatives, including developing what we expect to be a series of model annual reports under NZ IFRS. The first model annual reports we released were for local authorities and council-controlled organisations. This was because the local authority sector adopted NZ IFRS one year earlier than the majority of the public sector.

Implementing new International Standards on Auditing and new quality control standard

Another significant change in the accounting and auditing profession is the adoption of New Zealand equivalents to International Standards on Auditing. In time, this change will probably mean we will need to review and update the Auditor-General’s auditing standards.

During 2006/07, we began implementing the NZ Institute of Chartered Accountants’ revised quality control standard. The new quality control standard requires quality control processes to be in place throughout the operations of the Office (that is, the Office of the Auditor-General, Audit New Zealand, and other audit service providers).

While there has been good progress to date, various parts of the Office still have work to complete during 2007/08 to implement and monitor this very important standard.

This quality control standard is being applied not just to my annual audit work but to all the areas of the Office’s outputs. This is so that I can be confident that the Office gives appropriate emphasis to quality for all my auditing and assurance work.

Auditing Long-Term Council Community Plans

We completed our extensive work auditing the 2006-16 LTCCPs during 2006/07. Work toward these audits began in 2003, after the Local Government Act 2002 was passed.

One of the particular successes of this work has been the extensive liaison and collaborative work between the local government sector and my local government audit service providers.

We reported to Parliament on the results of the LTCCP audits (including the results of the audits of the LTCCP Statement of Proposal and of the final LTCCP adopted by each local authority). We also included the results of an external review by four experts in the areas of sustainable development, performance information, asset management information, and financial management and strategies.

Between the triennial LTCCP audits, I must also audit any amendments to these plans. It is already apparent that, although we have completed our first LTCCP audits, this will be a continuing stream of work beyond 2006/07. During 2006/07, we began an internal review of our audit methodology in preparation for the 2009-19 LTCCP audits.

Performance audits (including good practice guidelines)

One of the main elements of our 2004-09 strategic plan is to increase the number of performance audits we carry out. Previously, this had been low relative to our international counterparts. The Office received additional funding from Parliament to increase our capacity to carry out performance audits and other studies.

I am pleased to report that in 2006/07 we completed the highest number of performance audits in the history of the Office. Overall, stakeholder satisfaction with performance audits has also increased. These performance audit reports included a small number of good practice publications, such as our guidelines on sensitive expenditure and reports on managing conflicts of interest.

As an Office we are aware that good practice expectations come from a range of other entities, such as the State Services Commission and the Treasury, which have a leading role in providing such guidance to the State sector. Therefore we carefully consider the circumstances under which we issue good practice advice, including whether:

  • there is any other agency whose responsibility it is to provide the guidance - however, there is rarely another agency that covers the whole public sector; and
  • the advice relates to issues and concerns our auditors are commonly raising with entities.

In such circumstances, and where guidance does not currently exist, the communication of my expectations both to entities and to my auditors for use in conducting annual audit work helps to develop a common understanding of important issues facing the public sector.

Auditing performance information - implications of new public sector management legislation

One of the significant areas of strategic focus we began work on in 2006/07 was around performance information prepared by public entities - particularly where the auditor is required to attest to entities’ Statements of Service Performance. The work in this area is intended to enhance the effectiveness of annual audit work on service performance information - an area of particular interest to me.

These enhancements are needed to address issues arising as a result of statutory change (for example, the Crown Entities Act 2004 and the changes to the Public Finance Act 1989 and the Local Government Act 2002), as well as general improvements that I consider to be long overdue.

The work we carry out in this area will better place us to contribute to improving the quality of service performance information reported by public entities. It will also take account of our focus on sustainable development. There are two immediate areas of focus:

  • reviewing 2007/08 Statements of Intent for government departments and most Crown entities, and incorporating lessons learned into our audit methodology; and
  • developing a methodology to support auditors in reporting on annual reports under the LTCCP framework in the local authority sector.

As a result of this work, during 2006/07 my Office gave a great deal of consideration to my own Statement of Intent and Annual Report and the framework underlying these. We explored a range of ideas that appeared to have potential as better ways of assessing our own impact, effectiveness, and efficiency. These ideas included:

  • We considered, in response to a request from the Officers of Parliament Committee, measures of efficiency around average time and average cost for each audit. We prepared a range of information for the Committee, including fee data, and commissioned a process review (conducted by Rutherford Sloan, management consultants). However, given the range of size and nature of public entities, these factors bear little relationship to the complexity of issues in any audit. Therefore we did not find much insight from taking an averaged approach to understanding audit costs and hours. Our approach to monitoring audit fees is discussed in Part 2.
  • We looked at whether there are international or industry benchmarks to assess the efficiency of our strategic audit planning, the services we deliver to Parliament, and our performance audits. We liaised with our Australian counterparts, who had set up a working party to identify benchmarks. We intend to maintain our contact with the working party of Australian Auditors-General in anticipation of the development of relevant benchmarks in the future.

As a result of the considerable work to review the presentation of our own performance information, I changed the presentation of the Annual Plan 2007/08 to better reflect what I consider to be good practice. The main change has been to put outcome information and measures in the Statement of service performance. This should make the flow of information more logical and understandable.

Review of "five management aspects"

In the course of carrying out annual audits of government departments, most Crown entities, and State-owned enterprises (SOEs), our auditors make assessments of how these entities are performing in five aspects of financial and service performance management. These assessments are reported to the entity’s Board and management, Ministers, and select committees.

During 2005/06, we decided to revise this assessment approach. During 2006/07, we undertook our review and developed the audit assessment approach and detailed guidance for auditors. We will begin reporting under the new approach from the 2006/07 annual audits.

The most substantive change from the previous approach is that the new assessment approach is deficiency based, in that the assessments and any corresponding recommendations for improvement will be based on deficiencies observed by auditors.

I expect the changes to improve the transparency, understandability, and usefulness of our reporting.

Fostering relationships - highlights for 2006/07

None of our achievements over the last year would have been possible without the assistance of, and collaborative work with, others - whether internally across audit service providers and teams within the Office, with our international counterparts, or with others working to improve the public sector.

There is a range of ways in which fostering good relationships has contributed to our achievements in 2006/07.

Internal office relationships

I have already remarked upon the exceptional collaborative working that occurred during our audits of the 2006-16 LTCCPs. The approach taken to the LTCCP audits has provided a "living" example of how my audit service providers - while coming from different accounting firms - can work together to create greater value for the public sector from their individual work. This has included developing shared audit methodology resources and guidance through shared databases of issues.

One element of our strategy is to improve our work planning so that we focus our performance audits and other studies on giving relevant and timely assurance to Parliament over important issues. In 2006/07, we introduced a revised approach to our work planning that features:

  • regularly providing assurance in core areas of interest about the activities of public entities that are large and complex, and/or where it is difficult to assess their performance. These core areas of interest include:
    • major public investment or liability management;
    • major public revenue management or generation;
    • major asset management or infrastructure spending or management;
    • major expenditure (including service delivery expenditure); and
    • local government.
  • strategic areas of focus - an integrated programme of assurance work for the next three to five years on significant and “hard” issues and risks affecting the public sector. These are studies that consider multiple agencies and/or central and local government collaboration. They include areas where I want to “lift the bar” of public sector performance and emerging areas where I feel I should take a lead. The areas of focus are probity, fraud, sustainable development, stewardship and management of infrastructure assets, and performance information.
  • entity- or sector-specific areas of focus - identification of areas within or across entities or sectors that warrant further examination by the Office.

Introducing this approach has allowed for stronger collaboration across the Office.

New Zealand public sector relationships

We continue to strengthen our work on the new approach to the Controller function brought in by the 2004 changes to the Public Finance Act 1989. We have been greatly assisted by the Treasury’s support.

We have also sought to ensure that, as relevant, where the Office is proposing to issue good practice guidance, relevant agencies such as the State Services Commission and the Treasury are involved with and endorse our guidance. I have been pleased for my staff to participate in initiatives of central agencies, including current work on the Review of Accountability Documents and Capital Asset Management. This work is discussed in Part 2.

We also continued to refine our work to assist select committees to examine the Estimates of Appropriations and with their financial reviews of government departments and Offices of Parliament, State-owned enterprises, and Crown entities. In 2006/07 feedback from stakeholders was very positive about the Office’s advice.

Relationships with the main standard-setting bodies

My staff continue to participate on the major accounting and auditing standard-setting bodies in New Zealand. Although this is extremely time intensive, I am supportive of such involvement as long as the public sector voice is heard and standard-setters respond appropriately to the public sector issues identified. If I feel that this no longer happens, I will review the nature and extent of our involvement.

International relationships

In view of the difficult labour market and the increasing "internationalisation" of accounting and auditing standards, the Office has been putting more effort into its relationships with our international counterparts. We have benefited from an increasing number of secondment arrangements and have been exploring the range of countries from which we may be able to second staff. Such secondments also contribute to the professional development of our staff.

We have continued participating in several of the international standard-setting bodies for the accounting and auditing professions, as these international standards will apply to New Zealand’s public sector entities. I have concerns from time to time about the implications of these standards for the public sector, and I consider it important that my Office continues to work co-operatively with such bodies to ensure that public sector issues have international consideration.

Building our capability - highlights for 2006/07

Despite the broader environment of a tight labour market, overall we have made good progress during 2006/07 on:

  • ongoing leadership and capability development of our people;
  • embedding our shared services model for corporate services;
  • improving our systems and processes;
  • improving recruitment and retention strategies to attract and retain good people;
  • improving staff numbers in a difficult labour market;
  • maintaining acceptable levels of organisational health; and
  • implementing Audit New Zealand’s national practice and its professional practices group.

Further commentary and discussion on our organisational health and capability is set out in Part 3.

The year ahead

I was grateful for the feedback I received from Parliament on my 2007/08 draft work programme. I appreciate the opportunity to operate transparently in setting out my annual work programme, including seeking feedback from members of Parliament as part of our annual plan preparation. As a result of this feedback, I am confident that the work we intend to conduct in 2007/08 is relevant and likely to be useful to Parliament, public entities, and the public. Neither the Speaker nor any committee of the House requested any change to our work programme priorities. Their 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 important studies. I will ensure that this feedback is incorporated into our scoping of the respective studies.

In 2007/08, the Office will begin work on a new strategic plan.

I have also initiated a peer review of the Office by a team of our international counterparts. The Office’s last peer review was in 2001. The results of this review will let us know whether we are operating effectively and efficiently, and in accordance with good practice. The reviewers have been asked to cover:

  • The governance of the Office, including the respective roles of and relationship between the Office of the Auditor-General and Audit New Zealand;
  • The conduct of financial audit engagements, including the audit of Long-term Council Community Plans and the Controller function;
  • The conduct of performance audits, inquiries, and other work performed by the Office of the Auditor-General, including the support of select committees;
  • General management of the Office, including the organisation of resources, the allocation of audits, and setting and monitoring of audit fees;
  • The operation of the Office’s quality control systems;
  • The Offices relationships with its primary stakeholders, in particular Parliament; and
  • Such other matters as the review team considers relevant.

Concluding remarks

I am pleased to present my annual report on the work of my Office for 2006/07. I would like to extend my thanks to the Deputy Controller and Auditor-General and my Audit and Risk Management Committee for their guidance and support, and to my staff and appointed auditors for their efforts and their achievements.

In 2007/08, we have a challenging year as an Office to continue to contribute to trust in the effectiveness and efficiency of the public sector. I am proud of our achievements in 2006/07, and am confident that we have a strong basis on which to continue to make our contribution.

Kevin Brady's signature

K B Brady
Controller and Auditor-General

18 September 2007

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