Part 2: Our output classes, performance measures, and targets

Provision of audit and other assurance services

This output class relates to the Auditor-General's statutory duty to carry out annual audits of the financial reports of, and in some cases performance information for, public entities.

Performing annual and other statutory audits

During 2006/07, we carried out 4090 annual audits of public entities. These were done on the Auditor-General's behalf by either Audit New Zealand or private sector auditors from chartered accounting firms. The output class is funded mainly by fees paid by the entities being audited. It made up 87% of our total expenditure.

The Auditor-General also carries out other audits required by various statutes. For example, in 2005/06, we audited for the first time Long-Term Council Community Plans (LTCCPs), which local authorities are required to produce and have audited every three years. In between the triennial LTCCP audits, the Auditor-General must also audit amendments to these plans. In 2006/07, we audited 47 amendments to LTCCPs, and it is already apparent that this will be a continuing stream of work beyond 2006/07.

Annual audits

There are two main products from an annual audit:

The audit report is addressed to readers of the financial statements and performance information. It provides the auditor’s independent opinion on whether the financial statements and performance information fairly reflect the public entity’s performance. In cases where the financial statements fairly reflect the public entity’s financial and service performance position, the auditor issues an audit report with an unqualified opinion. However, where the auditor identifies a material¹ error or omission in the financial statements or performance information, the auditor issues an audit report with a qualified opinion (which we refer to as a non-standard audit report).

The management report is addressed to the governing bodies and management of public entities. It sets out any significant issues identified by the auditor during the audit. The report provides recommendations for improving the public entity’s controls, systems, and processes.

Auditor appointments and fee monitoring of annual audits

The Auditor-General appoints auditors to carry out the annual audits of public entities. Auditors are appointed from a pool of audit service providers that includes Audit New Zealand and private sector accounting firms, ranging from the four major chartered accountancy firms to sole practitioners. Most audits are allocated directly to an auditor, but auditors may also be appointed to an audit after winning a competitive tender. This is normally restricted to public entities that have a strong commercial focus and schools where appropriate.

Because we principally use an allocation approach, we monitor audit fees during negotiation between auditor and public entity, and provide a comparative analysis to help resolve any concerns about proposed fees. Our objectives are to ensure that audit fees are fair to the public entities subject to audit, and also provide a fair return to the auditors for the work required by them to meet the Auditor-General’s auditing standards.

During 2006/07, the Auditor-General reappointed the existing auditors to conduct the audits of 160 public entities (other than schools) and their subsidiaries. No tenders were conducted during the year for these entities.

Of the 160 public entities where auditors were reappointed, 13 asked us to provide comparative fee information to help resolve concerns about the fee proposed by the appointed auditor. In all cases, the auditor and the entity resolved the matter based on that extra information.

During the year, we also completed new audit arrangements for the audits of 2460 state schools for the three financial years ending 31 December 2006 to 2008.

All boards of trustees were given the options of reappointment of their current auditor, appointment by the Auditor-General of a new auditor, or selection of a new auditor through a tender process. The auditors of 2260 schools were reappointed after negotiation of audit fees with boards of trustees. Twenty of these schools sought comparative audit fee information to assist them in reaching agreement with their auditors. One hundred and eighty schools asked us to manage the auditor selection (in conjunction with a board member nominated by the board of trustees) and to set a fair fee, having regard to the audit fees set for comparable schools by tender and negotiation and to fair market hourly rates for auditors. The remaining 20 schools elected to manage a tender process using the mandatory procedure we required.

We continued to examine and determine the status of several subsidiaries of public entities. In 2006/07, 38 new public entities were added to our audit portfolio. These included newly formed public entities, new subsidiaries of existing public entities, and other entities controlled by more than one public entity.

In 2006/07, the Auditor-General commissioned an external reviewer (Rutherford Sloan) to report to him on:

• the robustness of our current fee monitoring and resolution processes, and how they might be improved; and
• other mechanisms and data sources that may be used to assure public sector entities and auditors that fees are set at fair and reasonable levels.

Rutherford Sloan concluded that "we are of the view that the fee monitoring mechanisms, while capable of some modest enhancement and refinement, are performing their function in an appropriate manner and delivery against the objective of fair and reasonable audit fees."

Rutherford Sloan also identified some areas for further development. Their recommendations identified the following work streams:

• improving the documentation of the current fee monitoring processes of the Office;
• enhancing the tracking of the main drivers of audit costs (for example, auditor salaries); and
• continuing and expanding many of the processes already in place (for example, comparing audit fees by sector using size proxies to identify fee outliers).

We made good progress in 2006/07 on implementing these recommendations, but expect to continue this work in 2007/08 and beyond.

Each year, an independent reviewer evaluates the integrity of the methods and systems we use to allocate and tender audits and monitor the reasonableness of audit fees. The report of the independent reviewer for 2006/07 follows.

Updates to the Auditor-General’s auditing standards since 1 July 2006

There was only one update to the Auditor-General’s auditing standards since 1 July 2006 and that was to AG-1: Reporting to the OAG, which was carried out in October 2006. That update was mainly to the “intermediate reporting” table (on pages 3-2005 and 3-2006) to make it consistent with the requirements in the Auditor-General’s auditing statements. The update also included material on using the Audit Status Database online.

Auditors’ independence

During the year, we identified three instances where concerns were raised about whether the Auditor-General’s standard on independence had been breached. All instances identified were resolved to the satisfaction of the Auditor-General.

Annual audit outcomes and impacts

To assess the effectiveness of our annual audit work, we considered the trend in the quality of public sector financial reporting and management by public sector entities in the results of:

• our annual audit opinions;
• the response by public entities to management report recommendations; and
• our management aspect gradings reported to Ministers and select committees.²

The information set out relates to audit opinions, entities’ responses, and management aspect gradings issued during the year in review rather than the financial year to which the audit relates.

Overall, this information suggests that the standard of public sector reporting and management is good. Results show high levels of achievement in annual audit opinions and management aspect gradings, and that the response to audit recommendations has been maintained or slightly improved.

Results of our annual audit opinions

A "non-standard audit report" is issued in accordance with the New Zealand Institute of Chartered Accountants Auditing Standard No. 702: The Audit Report on an Attest Audit (AS-702). It contains:

• a qualified audit opinion (that is, a "disclaimer of opinion", an "adverse" opinion, or an "except-for" opinion); and/or
• an explanatory paragraph.

A full definition of a "non-standard audit report" is set out in our report Central Government: Results of the 2005/06 Audits (parliamentary paper B.29[07a], 2007, pages 31-34). Figure 3 provides an analysis of all non-standard audit reports issued in 2006/07. Information for the previous year is provided for comparison.

Figure 3
Non-standard audit reports issued in 2006/07 compared to 2005/06

Type of non-standard audit report	Schools		Other		Total
	2006/07	2005/06	2006/07	2005/06	2006/07	2005/06
Unqualified opinion
With explanatory paragraph or reference to a breach of law	154	214	38	62	192	276
Qualified audit opinion
Disclaimer of opinion	0	0	5	1	5	1
Partial disclaimer of opinion	0	0	5	1	5	1
Adverse opinion	0	0	4	7	4	7
Partial adverse opinion	0	0	2	6	2	6
Except-for opinion	30	38	50	42	80	80
Total	184	252	104	119	288	371
Total of all audit reports	2635	2633	1455	1430	4090	4063

There was an improvement in the proportion of non-standard audit reports issued compared to all audit reports issued during the year - a decrease from 9.6% in 2005/06 to 7.0% in 2006/07.

There were a number of reasons for this decrease:

• There was a decrease in the number of school audit reports containing breaches of law paragraphs outlining that schools had not complied with aspects of the Education Act 1989. The decrease was mainly because more schools were complying with the Education Act by meeting their statutory reporting deadline and other requirements, and more schools were voluntarily disclosing such breaches in their financial statements.
• There was a decrease in the number of audit reports containing explanatory paragraphs outlining that the financial statements been appropriately prepared on a disestablishment basis. The decrease was because a small number of schools and other non-school entities were being closed or wound up in 2006/07.

On the other hand:

• There was an increase in the number of non-school audit reports containing qualified opinions. This increase was because more entities came under the Auditor-General’s mandate and were audited for the first time. The qualifications related to situations where the Office was unable to form an opinion on the comparative figures in the financial statements because they had not previously been audited.

Figure 4
Acceptance of our formal recommendations (Audit New Zealand only - sample of 30 public entities)

	2006/07		2005/06		2004/05
	Number		Number		Number
Recommendations accepted	148	64%	132	53%	163	75%
Recommendations rejected	3	1%	19	8%	18	8%
Recommendations noted or under consideration by management	68	29%	56	22%	23	11%
Client made no response	14	6%	43	17%	14	6%
Total recommendations	233	100%	250	100%	218	100%

Figure 4 shows that the acceptance of our recommendations has increased for 2006/07 compared to 2005/06. We consider the main reason for this to be that in 2005/06 many of our management report recommendations related to preparation for the adoption of NZ IFRS, at which stage many entities had not considered the implications of the transition.

Improvements in aspects of entity financial and service performance management (as measured by our assessments)

In the central government sector, we have, since 1994, analysed trends in the assessments our auditors make every year for five particular aspects of financial and service performance management. These ratings are reported to entities, Ministers, and select committees. They are known as "the five management aspects".

Figures 5 and 6 show changes in assessments of the five management aspects for 2005/06 compared with 2004/05, and for 2004/5 compared with 2003/04. (The data is always one year behind the year of our Annual Report.)

We looked at this data in terms of net changes (that is, the number of higher assessments compared with the number of lower assessments).

Figure 5
Changes in management aspect assessments 2005/06 compared with 2004/05

Entity type	Unit of measure	Higher	Same	Lower	Total
Government departments	Number	7	188	10	205
	%	3.4	91.7	4.9	100.0
District health boards	Number	8	87	10	105
	%	7.6	82.9	9.5	100.0
Crown Research Institutes	Number	0	43	2	45
	%	0	95.6	4.4	100.0
State-owned enterprises	Number	1	72	3	76
	%	1.3	94.7	3.9	100.0
Totals	Number	16	390	25	431
	%	3.7	90.5	5.8	100.0

Figure 6
Changes in management aspect assessments 2004/05 compared with 2003/04

Entity type	Unit of measure	Higher	Same	Lower	Total
Government departments	Number	4	192	4	200
	%	2.0	96.0	2.0	100.0
District health boards	Number	10	89	6	105
	%	9.5	84.8	5.7	100.0
Crown Research Institutes	Number	0	44	1	45
	%	0	97.8	2.2	100.0
State-owned enterprises	Number	4	69	3	76
	%	5.3	90.8	3.9	100
Totals	Number	18	394	14	426
	%	4.2	92.5	3.3	100.0

Overall, there has been some net deterioration in our assessments of the five management aspects (that is, there were 16 higher assessments in 2005/06 compared with 2004/05, and 25 lower). However, a high proportion of ratings (90.5%) remained unchanged from the previous year.

Within each class of entity, we observe:

• Government departments showed a net deterioration from last year, with 10 lower assessments and 7 higher assessments.
• District health boards showed a slight deterioration, with 10 lower assessments and 8 higher assessments.
• Crown Research Institutes remained at almost identical levels to the previous year, with only 2 lower assessments.
• State-owned enterprises also showed a slight deterioration from last year, with three lower assessments and one higher one, but with assessments being mainly the same as last year (94.7%).

This is the last year we will be reporting these assessments under this framework. In future, we will report under a new assessment framework that is designed to be simpler and, in our view, clearer and easier to understand. Our new reporting will address the same subject matter as the previous framework - the areas of the management control environment, information systems, and controls necessary to produce the audited financial statements, including service performance statements.

Performance against measures and targets 2006/07³

		2006/07 Actual	2006/07 Forecast	2005/06 Actual
Output	Annual audits conducted and audit reports issued:
	Total audit completions4	4090	3865	4063
	Total number of audits in arrears as at 30 June 20075	360	310	315
Timeliness	Audits will be completed and audited financial statements available within the statutory deadline or within five months of balance date
	Miscellaneous public bodies and audits for which no fee is charged	55% (misc)	75%	59% (misc)
		36% (no fee)		33% (no fee)
	School boards of trustees	91%	75%	19%
	All other entities	85%	100%	82%
Quality	Quality assurance review carried out to gain enough assurance that the Office’s policies, procedures, and standards for annual audits have been applied appropriately	Achieved	QA carried out	Achieved
	Audit New Zealand client satisfaction survey	On a scale of 1 to 10, 68% of respondents gave overall satisfaction ratings of 7 or greater	75% of respondents satisfied	Not undertaken

		2006/07 Actual	2006/07 Forecast	2005/06 Actual
Output	Output Management reports issued:
Timeliness	within 6 weeks of issuing the audit report	95%	100%	96%

Comments on performance against measures and targets

Annual audits conducted and audit reports issued

The increase in the number of audits in arrears from 315 at 30 June 2006 to 360 at 30 June 2007 has been caused by priority being given to other audit work at the expense of smaller audits such as cemeteries, school subsidiaries, and hall boards. We have introduced a new performance measure for the 2007/08 audits: "ensure that fewer than 10% of the arrears at 30 June are because of inaction on our part."

The reason for the increase in the number of school audits completed on time from 19% in 2005/06 to 91% in 2006/07 is a change in legislation. Previously, school audits were required to be completed within 30 days of receipt of the draft accounts. Legislative changes have increased the time available. School audits now need to be completed by 31 May.

Quality assurance of annual audits

Because the Auditor-General is responsible for auditing all public entities, it is important that we ensure that audits are performed effectively and efficiently. We carry out quality assurance reviews of all appointed auditors to ensure that they have complied with the relevant professional accounting and auditing standards, as well as the Auditor-General's own published auditing standards.

We aim to review the performance of each of our appointed auditors at least once every three years. If we identify any concerns, we carry out more frequent follow-up reviews. In 2006/07, we met our target by carrying out 43 reviews. Consistent with previous years, the majority of the work we reviewed was of a good standard. Of the 43 reviews completed, we have identified the need to perform follow-up reviews of seven of the appointed auditors, which is consistent with the number of follow-up reviews identified in the previous year.

Audit New Zealand client survey

The Auditor-General expects audit service providers to seek feedback from the entities they audit about the audit services provided, and to incorporate this feedback into their business improvement work.

Audit New Zealand engages an independent firm to conduct an annual client survey of public entities for which it is the auditor. Representatives of a sample of these entities are invited to participate in a telephone interview to provide comment on:

• Audit New Zealand’s core audit ability;
• Audit New Zealand’s staff knowledge (technical and sector knowledge) and general skills;
• the way Audit New Zealand staff work with entities, including with governing bodies and audit committees where relevant;
• the value that Audit New Zealand adds and the usefulness of the advice given;
• the contribution that Audit New Zealand made as part of the LTCCP process, where relevant;
• the contribution that Audit New Zealand made as entities prepared for the adoption of NZ IFRS; and
• their overall degree of satisfaction with the service received from Audit New Zealand.

Although the majority of clients remain largely satisfied with Audit New Zealand's performance, there has been a drop in perceptions of the levels of service provided since the last survey in 2004/05. The overall service rating has decreased from 7.6 to 6.8.

The survey firm that conducted the 2006/07 survey noted that "for many of the questions the drop had been slight, and that an overwhelming majority of clients continued to rate the ability, professionalism and quality of staff highly". The survey firm also noted that "an exceptional amount of clients commented positively on Audit New Zealand’s openness and honesty".

In 2006/07, Audit New Zealand staff faced a number of additional pressures after the introduction of LTCCP audits and NZ IFRS. Based on comments provided during the survey, both these pressures appear to have had a large effect on Audit New Zealand’s resources and on the service provided. The majority of clients recognised these pressures, and a number of lower ratings were qualified with this recognition.

Audit New Zealand will continue to focus on client service delivery. It is investigating moving to rolling sector surveys as a means of receiving feedback in a more timely manner after opinions are issued, and also to help gain a deeper understanding of the issues facing individual sectors, so that it can improve the service provided.

Audit fee movements

Figure 7 shows the movement of audit fees from 2004/05 to 2006/07.

Figure 7
Analysis of movements in audit fees from 2004/05 to 2006/07

		2004/05 to 2005/06			2005/06 to 2006/07
Entity type	Sample size	Total fee increase	Due to hours	Due to charge out rate	Total fee increase	Due to hours	Due to charge out rate
Government departments	45	6.90%	2.20%	4.70%	5.40%	5.20%	0.20%
State-owned enterprises	16	12.40%	6.30%	6.10%	9.80%	5.90%	3.90%
Crown entities	51	3.80%	0.60%	3.20%	19.00%	8.50%	10.50%
District health boards	36	23.40%	8.90%	14.50%	4.00%	-0.80%	4.90%
Crown Research Institutes	10	5.20%	3.70%	1.50%	14.80%	7.50%	7.30%
Tertiary education institutions	28	13.20%	6.40%	6.80%	1.70%	0.10%	1.60%
Energy companies	27	15.50%	5.20%	10.30%	4.60%	3.70%	0.90%
Local authorities	58	4.70%	-0.60%	5.20%	10.40%	2.90%	7.60%
Local government subsidiaries	96	6.90%	-1.40%	8.40%	19.60%	26.20%	-6.60%
Port companies	8	3.00%	-1.00%	4.00%	0.70%	-6.00%	6.70%
Licensing and community trusts	15	7.70%	8.10%	-0.40%	8.30%	0.80%	7.40%
Maori trust boards	5	4.50%	8.70%	-4.20%	46.90%	28.70%	18.20%
Schools	2445	20.60%	4.60%	16.00%	6.80%	2.80%	4.00%
Other	37	7.90%	0.70%	7.20%	6.30%	3.00%	3.20%
Total	2877	11.20%	3.20%	8.00%	8.40%	4.50%	3.90%

Note: Fee movements are based on a sample of entities within each sector with balance dates falling within the financial year of the Office (for example, the 31 December 2006 audits of schools are included as fees in the 2006/07 year).

Internationally, there have been significant changes to audit fees in both the public and private sectors since 2003. The two main underlying causes for these changes, which both arise from reactions to well-publicised international accounting and auditing failures, are:

• changes to international accounting and auditing standards that have led to auditors spending more time completing audits; and
• increased competition for accounting and auditing staff that has driven salary rates up well in excess of inflation.

These changes have affected audit fees for public entities in New Zealand when audit contracts have been renewed, normally every three years.

In addition, as contracts are renegotiated, auditors have reviewed the response of public entities to the audit process, and increased their estimate of audit hours for entities with a consistent history of time and cost overruns because of poor performance by the entity. In the face of escalating salary rates and pressure on scarce staff resources, these overruns are no longer being written off so readily by auditors.

Auditors continue to work with public entities to minimise the audit’s time and cost by improving both the auditor's performance and the entity’s preparation for, and response to, the audit.

Financial performance of Output Class: Provision of audit and assurance services

	2006/07 actual $000	2006/07 forecast $000	2005/06 actual $000
Revenue
Crown funding	150	150	190
Audit fees and other revenue	58,339	59,696	42,729
Expenditure	(58,582)	(59,840)	(42,981)
Surplus/(Deficit)	(93)	6	-62

Parliamentary services

This output class includes two main activities:

• providing advice and assistance to select committees and other stakeholders; and
• carrying out the Controller function.

Advice and assistance

Because of our annual audit, performance audit, and inquiry work, the Auditor- General has a broad overview of public entities both individually and throughout sectors. We provide advice and assistance to select committees, Ministers, and individual members of Parliament, as well as to central agencies and other public sector representative groups, to assist them in their work to improve the performance and accountability of public entities.

The main ways in which we provide this advice and assistance is through:

• reports to select committees to assist their financial reviews of government departments and Offices of Parliament, State-owned enterprises, and Crown entities;
• reports to select committees to assist their examination of the Estimates of Appropriations; and
• reports to responsible Ministers on the results of our annual audits.

We also provide advice and assistance through:

• reports to Parliament and other stakeholder representatives on matters arising from our annual audits;
• responding to requests and participating in working parties on matters related to financial management and accountability with other stakeholders, including government departments, central agencies, local authorities, professional bodies, sector organisations, and other public entities; and
• working with other Auditors-General to encourage, promote, and advance cooperation in the field of public audit.

This output class also involves our commissioning a history of the Audit Office. This project is to be delivered over four years.

Controller function

The Controller function provides independent assurance to Parliament that expenses and capital expenditure of government departments and Offices of Parliament have been incurred for purposes that are lawful and within the scope, amount, and period of the appropriation or other authority.

The Office of the Auditor-General and appointed auditors carried out standard procedures to give effect to the Controller function in keeping with the Auditor-General’s auditing standards and the Memorandum of Understanding with the Treasury. The appointed auditor carries out an appropriation audit as part of the annual audit of a government department.

Outcomes and impacts

Advice and assistance

To assess the relevance, value, and timeliness of our advice and assistance to select committees, Ministers, and other stakeholders, we conduct an independent stakeholder survey. In 2006/07, feedback from stakeholders (including select committee chairpersons and deputy chairpersons) was very positive about the Office’s advice. One hundred percent of stakeholders said they were satisfied with the quality of advice to select committees, and 86% were satisfied with the usefulness of this advice. This is the same level of satisfaction with the quality of advice as that for 2005/06. The question about the usefulness of advice was asked for the first time in the 2006/07 survey.

However, stakeholders’ views on how effectively we work with them had fallen from 100% in 2005/06 to 89% in 2006/07. The main comment in this regard was concern about the effect of staff turnover. (We discuss our work in capability management in Part 3 of this report.)

Other results were also positive, with 89% of stakeholders agreeing that:

• our staff have an excellent understanding of their sectors (2005/06: 88%); and
• where we identify concerns with public entities within the public sector, or with the sector as a whole, we draw these issues to their attention (new question asked in 2006/07).
• Feedback suggested that stakeholders would like the Office to:
• provide more analysis of financial trends from year to year, and alert the select committees to future capital risks; and
• focus more keenly on misuse of public money and encourage more consistent reporting to select committees on issues such as fraud.

Figure 8 summarises our stakeholder feedback. We are considering this feedback for ongoing work.

Figure 8
Stakeholder feedback

“Satisfaction with the usefulness of advice” and “We draw concerns to stakeholders’ attention” were new measures surveyed for 2006/07.

Controller function

We have considered the nature of the issues that have arisen through the operation of the Controller function in 2006/07. The nature of the issues we have had to consider reinforces the value of the changes made to the Controller function from 1 July 2005 to modernise and enhance that function.

The monthly reporting process identifies breaches of appropriation earlier, and has improved accountability by reinforcing the need for departments to ensure that there is appropriate authority for all expenses and capital expenditure that they incur, and all departmental net assets that they hold.

We have worked closely with the Treasury in resolving issues as they have arisen. Further issues may arise as the full effects of the new legislation continue to emerge.

Parliamentary Services output class performance against measures and targets⁶

Reports to Parliament and other constituencies on matters arising from annual audits

Measure		2006/07 Actual	2006/07 Forecast	2005/06 Actual
Quantity	Reports on matters arising from annual audits	2	2	3
Timeliness	By 30 June 2007	Achieved	Achieved	Achieved
Quality	Stakeholder survey assessing quality of our reports	Achieved (Results are set out in comments below)	Stakeholder survey undertaken	Achieved

In 2006/07, we provided two reports to Parliament on matters arising from 2005/06 annual audits in central and local government. One hundred percent of our stakeholders were satisfied with our reports to Parliament on the results of annual audits (new question in 2006/07).

Reports and advice to select committees and Ministers

Measure		2006/07 Actual	2006/07 Forecast	2005/0 Actual
Quantity	Reports and advice to select committees and Ministers on:
	financial reviews	91	80-90	81
	Estimates examinations	46	40-50	42
	reports to portfolio Ministers on the results of annual financial report audits	149	120-130	146
	other reports as requested*	6	5-10	5
Timeliness	At least two days before an examination, unless otherwise agreed	100%	100%	100%
	*According to the terms of reference for other reports	100%	100%	100%
Quality	Stakeholder survey assessing quality of our reports	Achieved (Results are set out in the Outcomes and impacts section above)	Stakeholder survey undertaken	Achieved
	Internal quality assurance undertaken to gain assurance that the Office’s policies, procedures, and standards in relation to Financial reviews and Estimates examinations have been applied appropriately	Achieved	-	-

Although select committees consider all the entities and Votes allocated to them, only a selection are subjected to a full financial review or Estimates examination each year. The select committees decide which, and how many, entities and Votes receive such scrutiny, and therefore how many reports we have to prepare. The yearly variation that arises from this approach contributes to the difference between the forecast and actual number of reports provided in 2006/07, and the actual number in 2005/06.

Although 49 Votes were subjected to full examination by select committees in 2006/07, we provided reports on 46 Votes. For three Vote examinations, there was not enough time available before examination to allow reports of requisite quality to be prepared for the examining select committees. The Auditor-General therefore agreed with the Finance and Expenditure Committee that reports on these three Votes could not be provided.

Advice to government bodies and other agencies

Measure		2006/07 Actual	2006/07 Forecast	2005/06 Actual
Quantity	Advice to government bodies and other agencies as requested	*	*	*
Timeliness	According to any terms of reference	Achieved	As agreed	Achieved
Quality	Stakeholder survey assessing quality of our reports	Achieved (Results are set out in the Outcomes and impacts section above)	Stakeholder survey undertaken	Achieved

* This is a demand-driven activity for which there are no wholly satisfactory quantity measures. The nature of work involved varies according to issues and needs of stakeholders arising each year.

During 2006/07, we carried out significant work in this activity both domestically and internationally.

Domestically, we responded to requests on matters related to financial management and accountability from central agencies, departments, local authorities, sector organisations, professional bodies, and other public entities. We provided comments on draft legislation, Cabinet papers, policy proposals, and other matters.

All reasonable requests for information and participation were met. In particular, we:

• provided input into the Treasury capital asset management work programme and its review of accountability documents;
• provided comments on central agency guidance for preparing departmental and Crown entity statements of intent and annual reports;
• continued to be represented on a range of committees of the New Zealand Institute of Chartered Accountants, including the Financial Reporting Standards Board and the Professional Standards Board; and
• began providing substantial comment to the Society of Local Government Managers on “Towards 2009” to improve the local government sector’s response to preparing the 2009-19 LTCCPs.

Internationally, we worked with other Auditors-General to encourage, promote, and advance co-operation in the field of public audit. In particular, we:

• continued our role as Secretariat of the South Pacific Association of Supreme Audit Institutions (SPASAI), including acting as executing agent for the Pacific Regional Audit Initiative;
• continued our membership of various committees of the International Organisation of Supreme Audit Institutions (INTOSAI), including the INTOSAI Working Group on Environmental Auditing and the INTOSAI Professional Standards Steering Committee, as well as acting as co-ordinator of the Australasian Council of Auditors-General/SPASAI Regional Working Group on Environmental Auditing;
• participated in the Global Working Group meeting of Auditors-General of Canada, Denmark, France, India, Ireland, Italy, Mexico, Morocco, the Netherlands, New Zealand, Norway, South Africa, Sweden, the United Kingdom, and the United States;
• attended regular meetings with our counterparts in Australia; and
• hosted a range of visitors from our international counterparts and other public sector bodies.

Audit Office history

Measure		2006/07 Actual	2006/07 Forecast	2005/06 Actual
Quantity	Audit Office history commissioned	On track for publication by 30 December 2007	1 written history7	-
Timeliness	The agreed project milestone will be achieved	On track for publication by 30 December 2007	30 June 20078	100%
Quality	Ministry of Culture and Heritage confirm use of skilled personnel	Achieved	Confirmed	Achieved

During the year, drafts of chapters two (the late nineteenth century), eight (the Tyler era), nine (the 1990s), and the conclusion were written. Considerable research was done for the remaining chapters, and the preparation of chapter three (the early twentieth century) was well advanced. The transcriptions of the oral history interviews were edited, and tapes of the interviews were deposited in the Oral History Centre at the Alexander Turnbull Library. The project is on track to complete a full draft text in December 2007.

Controller function

Measure		2006/07 Actual	2006/07 Forecast	2005/06 Actual
Quantity	Monthly statements provided by the Treasury examined for the period September 2006 to June 2007	Achieved	Achieved	Achieved
Timeliness	Reviewed and response provided to the Treasury within five working days of receipt of statement	100%	100%	100%
	Reviewed and provided to the appointed auditor within five working days of receipt of statement	100%	100%	100%
	Where a breach has occurred or may occur the relevant Minister is informed in accordance with the Memorandum of Understanding with the Treasury	100%	100%	100%
Quality	Where there is a breach or suspected breach of appropriation, actions are taken in accordance with the Auditor-General’s powers and auditing standards, and the Memorandum of Understanding with the Treasury	Actions taken	Actions taken	Actions taken
	Internal quality assurance undertaken to gain assurance that the Office’s policies, procedures, and standards in relation to the Controller function and appropriation audits have been applied appropriately.	Achieved	QA undertaken	-

We examined the monthly reports provided by the Treasury for the period September 2006 to June 2007 and advised the Treasury of any issues arising and the action to be taken. We reported to Parliament on the notable matters we have had to consider in the operation of the Controller function in Central Government: Results of 2005/06 audits.

A review of the Memorandum of Understanding (MOU) with the Treasury has been initiated, and a revised MOU is expected to be in the first quarter of 2007/08 before the first monthly report is due.

Financial performance of Output Class: Parliamentary services

For 2006/07, a new multi-class output appropriation was established that includes the output classes Parliamentary services and Performance audits and enquiries. Appropriations were transferred to these output classes from the former output classes Reports and advice arising from the function of the legislative auditor, and Certification of authority to release funds from the Crown Bank Account. To more clearly show comparative figures, the financial performance of both of these output classes is shown on page 54.

Performance audits and other studies, and inquiries

This output class includes two main activities:

• reports to Parliament and other constituencies on matters arising from performance audits and special studies; and
• carrying out and reporting on inquiries relating to central and local government entities.

We published 18 reports on performance audits (including good practice guidance publications) in 2006/07, one major inquiry report, and a report on the audits of local authorities’ LTCCPs. By comparison, in 2005/06, we published 15 performance audit reports and seven reports on major inquiries.

Appendix 1 on pages 91-97 summarises these reports. A copy of each published report can be found on our website: www.oag.govt.nz.

Performance audits and other studies

A performance audit is a significant and in-depth audit covering issues of effectiveness and efficiency. It provides Parliament with assurance about specific issues or programmes and their management by the relevant public entity or entities. We also carry out other studies that may result in published good practice guidance on topical issues of public sector accountability and performance to assist public entities to better manage these issues.

To select performance audits and studies, each year we scan the environment, identify issues, assess risk, and identify what assurance responses are needed. This helps determine how we can use our discretionary resources to best effect.

In deciding the discretionary work programme, the Auditor-General considers that - regardless of any other work he might do - he has a responsibility to Parliament and the public to regularly provide assurance about the activities of public entities that are large and complex, and/or where it is difficult to assess their performance.

We also identified areas within and throughout entities and sectors that warranted further examination based on our assessment of the severity and significance of the issue, benefit to the public, extent to which the performance of the public entity or sector could be improved, and fit with the Auditor-General’s role and mandate.

We consulted with Parliament and other stakeholders on our draft annual plan (and in particular our proposed discretionary work programme) to ensure that stakeholders agreed we were addressing issues of greatest relevance.

Our annual plans describe the performance audits and other studies we intend to carry out each year. It is not always possible for us to complete the full range of work we propose, because:

• in some cases, entities have begun their own internal or independent reviews,or are undergoing legislative or structural change;
• when we scope the project, it becomes clear that our initial proposal needs to be amended; and/or
• other events happen that change the Auditor-General’s priorities.

We describe our progress on the performance audits and other studies we proposed in our Annual Plan 2006-07 on pages 49-51.

Inquiries

The Auditor-General has a separate statutory role of inquiring into the way in which public entities use their resources. The Auditor-General can carry out inquiries at his own initiative or when correspondence draws attention to potential issues. We also administer the Local Authorities (Members’ Interests) Act 1968, which governs the financial interests of members of local authorities, and manage correspondence about that Act under the same processes as our general inquiries work.

We receive a large number of requests for inquiries each year. We are able to deal with most of these reasonably simply. Occasionally, an issue will lead to a major inquiry attracting significant public attention.

We carefully consider each request to determine whether to carry out a formal inquiry. Factors in the decision include whether the Auditor-General is the appropriate authority to consider the issues, whether we have the resources to do so, and the seriousness of the issues raised. We often carry out a considerable amount of preliminary work, such as reviewing documents and talking with the public entity, before deciding how to proceed.

If we conclude that the issues raised with us do not warrant a separate formal inquiry, we:

• advise the correspondent of our decision not to carry out an inquiry, and the reasons for our decision; and
• in some instances, advise the public entity of the matter.

If we do decide to carry out an inquiry, it is classified into one of three categories - routine, sensitive, or major. A routine inquiry involves straight-forward issues, is often able to be completed through correspondence with the public entity, and does not usually result in any published reports. Sensitive and major inquiries involve more complex issues and arrangements, and will often include formal interviews with people as well as reviewing documents. Major inquiries will usually result in publication of a formal report.

Outcomes and impacts

Performance audits and other studies

To assess the effectiveness of our performance audits and other studies, we consider the feedback from stakeholders collected by an independent stakeholder survey. In 2006/07, feedback from stakeholders (including select committee chairpersons and deputy chairpersons) was very positive about the Office’s performance audits. All stakeholders said they were satisfied with the quality of these audits (2005/06: 100%). The stakeholder survey uses a scale of 1 to -5. Our mean score on this scale improved from 4.25 in 2005/06 to 4.43 in 2006/07 for satisfaction with performance audits.

Eighty-six percent said they were satisfied with the usefulness of performance audits. This was a new question in 2006/07.

Comments for potential improvement in our performance audit work were that we:

• show more clearly what has happened in areas that we monitor and provide better year-to-year comparisons in terms of classifications; and
• provide deeper insight into capital flows within departments.

We also internally reviewed three performance audit reports published in the previous year to assess whether entities accept or respond to recommendations made in reports. Our independent Audit and Risk Management Committee selected these three reports. The results were presented to the Officers of Parliament Committee.

For 2006/07 the results of these reviews showed that two of the three audited entities had incorporated our audit recommendations into an internal work programme. The remaining entity had implemented some of our audit recommendations. We reported to the Officers of Parliament Committee that the Office would be following up the implementation of the audit recommendations.

Inquiries

• In summary, in 2006/07 we received: 250 general requests for inquiries; and
• 47 enquiries under the Local Authorities (Members’ Interests) Act 1968.

We also carried forward 38 general requests from the previous year, and three Members’ Interests Act enquiries.

We log general requests by the sector to which the request relates and the type of person making the request. Thus, requests from members of the public relating to local authorities are termed “ratepayer requests”, and requests from members of the public relating to central government entities are termed “taxpayer requests”. We separately log requests from members of Parliament. Of the 250 general requests we received, 72 were logged as taxpayer requests and 169 as ratepayer requests. Nine came from members of Parliament.

We carried out a formal inquiry in 77 cases. Seventy-six of these were classified as routine. By contrast, in 2005/06, we carried out seven major inquiries. As this part of our work is largely reactive, as issues emerge, this variability is not something that we can predict or control.

The overall number of general requests that we received was slightly up from last year (250 for 2006/07 compared to 228 for 2005/06). Most of this increase was requests from ratepayers about the activities of local authorities. This may reflect the increased interest associated with the local body elections later in 2007. We have observed in the past that there are generally increases in ratepayer requests closer to elections.

The number of requests relating to the Members’ Interests Act was significantly lower than forecast, which may reflect the level of effort this Office and local authorities have put into providing training and guidance material for elected members. Once again, we did not become aware of any significant breaches of the Members’ Interests Act during the year, and did not have to carry out any formal investigations with a view to prosecution.

We are carrying forward into the next year 22 general requests for inquiries and seven Members’ Interests Act enquiries.

Figure 9 summarises the number of requests we dealt with during 2006/07.

Figure 9
Summary of number of requests dealt with during 2006/07

	Carried forward from 2005/06	Received and completed during 2006/07	Carried forward to 2007/08
Ratepayer requests	19	169	15
Taxpayer requests	13	72	3
MP requests	6	9	2
Total general requests for inquiries	38	250	20
Members’ Interests Act enquiries	3	47	7

Output class performance against measures and targets 2006/07⁹

Performance audits and other studies

		2006/07 Actual	2006/07 Forecast	2005/06 Actual
Output	Reports to Parliament and other constituencies on matters arising from performance audits and special studies, and inquiries	20	19-21	22
Timeliness	Within the timelines agreed in each proposal	Largely achieved	Achieved	Partly achieved
Quality	Stakeholder survey assessing quality of our reports	Undertaken (Results are set out in the Outcomes and Impacts section above)	Stakeholder survey undertaken	Undertaken
	Internal quality assurance review undertaken to gain sufficient assurance that the Office’s policies, procedures, performance audits and special studies comments have been applied appropriately below)	Achieved (Results are set out in comments below)	QA undertaken	Not recorded

Comments on performance against measures and targets

Because we assess how entities carry out activities and make recommendations for improvement, it is important that we conduct our performance audits in keeping with sound audit methodology, and that we effectively manage how we carry out and report audit work.

Quality of reports

• Performance audits published by the Office are subject to three regular internal and external review mechanisms. Each review focuses on a different aspect of the performance audit process. In total, the internal and external reviewers looked at 10 different performance audits.
• In 2006/07 the Office’s internal quality assurance team conducted a review of the audit files of the Performance Audit Group (PAG). The overall conclusion of the review was that PAG had appropriate systems and controls in place. However, the review made recommendations to improve the way PAG documents the operation of important controls. These recommendations were incorporated in the current review of compliance with audit standards due to be completed by 31 August 2007.
• In addition to the QA review, the Office commissioned external reviews of two performance audit reports. These reviews were carried out by Alex Matheson (consultant and advisor on public governance management) and the Canadian Auditor-General. The reviewers made favourable comments about the reports, but also identified opportunities for improvement.
• The Office and the Australian National Audit Office (ANAO) have a standing arrangement to provide reciprocal peer review of each Office’s performance audits. In 2006/07 the ANAO reviewed two audits. The review looked at all aspects of the audit process, and endorsed the quality of the two audits. It was also able to highlight some useful lessons for PAG.
• From 2007/08, each of the reviews described above will be included as performance measures in the Auditor-General’s Annual Plan. As a result, PAG is improving its systems for managing the review process and the findings of the reviews.
• With regard to timeliness of reports, we maintained our performance audit methodology and used project management disciplines. Some performance audits took longer to complete than initially planned. This was a result of a number of issues, including staff movements within PAG, it taking longer to receive comments from entities on draft reports in some instances, and on occasion the audit being held up to accommodate internal issues such as restructuring or the availability of crucial staff within entities. We seek feedback on the usefulness of our performance audit reports as part of our stakeholder survey. As outlined above, based on the survey result, stakeholders are satisfied with the usefulness of reports. This suggests that our reports are timely and relevant.

Progress against our Annual Plan 2006-07

On pages 27-28 of our Annual Plan 2006-07, we listed a number of performance audits and other studies that we proposed to start and/or complete in 2006/07.

Much of that work is now complete.

The performance audits and other studies completed during 2006/07 were:

• Allocation of the 2002-05 Health Funding Package
• New Zealand Qualifications Authority: Monitoring the quality of polytechnic education
• Inland Revenue Department: Performance of taxpayer audit - follow-up audit
• Performance of the contact centre for Work and Income
• Residential rates postponement
• Controlling sensitive expenditure: Guidelines for public entities
• Te Puni Kōkiri: Administration of grant programmes
• Assessing arrangements for jointly maintaining state highways and local roads
• Department of Labour: Management of immigration identity fraud
• Ministry of Health and district health boards: Effectiveness of the “Get Checked” diabetes programme
• Department of Internal Affairs: Effectiveness of controls on non-casino gaming machines
• Effectiveness of the New Zealand Debt Management Office
• New Zealand Customs Service: Collecting customs revenue
• Sustainable development: Implementing the Programme of Action
• Waste management planning by territorial authorities
• *Statements of corporate intent: Legislative compliance and performance reporting
• *Managing conflicts of interest: Guidance for public entities
• *Guidance for members of local authorities about the law on conflicts of interest
• *Advertising expenditure incurred by the Parliamentary Service in the three months before the 2005 General Election
• *Matters arising from the 2006-16 Long-Term Council Community Plans

The five reports marked with an asterisk are additions to the work programme set out in the Annual Plan 2006-07.

Variations to the 2006/07 annual work plan

Reports that were removed from the work programme, have been delayed, or have been carried out and the results presented to Parliament in another form are:

• Ministry of Defence - major acquisitions projects (deferred - due for completion in 2007/08);
• Procurement guidelines update (to be presented to Parliament in the second quarter of 2007/08);
• Local government - decision-making and consultation (to be presented to Parliament in the first quarter of 2007/08);
• Resource Management Act 1991 – consultation in relation to major Crown capital developments (work completed - will be included in a compendium report to be presented to Parliament in 2007/08);
• E-government - review against progress and targets (not continued with);
• Land information management systems (deleted from work programme); and
• Local Government - asset management, business planning, and risk
• integration (deleted from work programme).

Inquiries

Responses to requests for inquiries

		2006/07 Actual	2006/07 Forecast	2005/06 Actual
Output	Responses to requests for inquiries from:
	Taxpayers	72	50-60	70
	Ratepayers	169	150-180	144
	Members of Parliament	9	10-20	14
Timeliness	Receipt acknowledged within five working days	89%	100%	81%
	Advise within 15 working days of receipt of our decision whether to initiate an inquiry or recorded undertake preliminary work that may result in an inquiry	96%	80%	Not recorded
Quality	Internal quality assurance review undertaken to gain sufficient assurance that the Office’s policies, procedures, and standards in relation to responses to requests for inquiries have been applied appropriately	Completed	QA undertaken	Undertaken

Completion of inquiries initiated during 2006/07

		2006/07 Actual	2006/07 Forecast	2005/06 Actual
Output	Completion of inquiries under section 18 of the Public Audit Act 2001			5
	“Routine” inquiries initiated and completed during the year	76	*
	“Sensitive” inquiries initiated and completed during the year	1	*
	“Major” inquiries initiated and completed during the year	0	*
Timeliness	“Routine” inquiries started in this year completed within three months	95%	80%
	“Sensitive” inquiries started in this year completed within six months of initiation	0	80%
	“Major” inquiries started in this year completed within 12 months of initiation	0	80%
Quality	Independent review of two major inquiries**	Completed	Undertaken
	Internal quality assurance review undertaken to gain sufficient assurance that the Office’s policies, procedures, and standards in relation to inquiries have been applied appropriately	Completed	QA review undertaken

* As this is the first year of classifying and measuring inquiries in this way, we did not set quantity targets.

** As there were no major inquiries during the year, the reviewer was provided with a list of major and sensitive inquiries from the 2006/07 and previous financial years. The reviewer chose a major inquiry involving a central government organisation and a sensitive inquiry about a local authority.

Administration of the Local Authorities (Members' Interests) Act 1968

		2006/07 Actual	2006/07 Forecast	2005/06 Actual
Output	Administration of the provisions of the Local Authorities (Members’ Interests) Act 1968: enquiries received	47	80	49
Timeliness	Receipt acknowledged within five working days	100%	100%	81%
	Completed within 30 working days	87%	80%	86%
	Advised if enquiry will take longer than 30 working days	86%	100%	57%
Quality	Internal quality assurance review undertaken to gain sufficient assurance that the Office’s policies, procedures, and standards in relation to administration of the Local Authorities (Members’ Interests) Act 1968 have been applied appropriately.	Completed	QA review undertaken

Comments on performance against measures and targets

In last year's annual report, we noted that we had developed an inquiries strategy to set a common process for dealing with all requests. We now have in place an inquiries manual, which sets out the general process for dealing with requests and for carrying out inquiries. The manual has been in use since early 2006. We also now have a dedicated resource to support the overall administration of the inquiries process.

We also changed the performance measures we use for this work and the way in which we record and track requests, to match the new process and to give a clearer picture of the range of activity and our performance. Thus the measures we have used for requests received during 2006/07 are different from those that we used for the previous year. This means that direct comparisons cannot be made.

However, our broad sense is that we have succeeded in improving the timeliness of our work on inquiries. In particular:

• we advised 96% of correspondents of our decision on whether to initiate an inquiry within 15 working days (compared with a target of 80%); and
• we completed 95% of our responses to routine inquiries within three months (compared with a target of 80%).

As part of this ongoing development and improvement of our work on inquiries, we have recently completed an internal quality assurance review of the new processes, as well as an independent review of two recent larger inquiries. Both reviews confirmed that the new processes are operating well and offered some minor suggestions on areas of possible future improvement. As a result of these reviews and our own ongoing assessment of how well the new processes are operating, we are likely to make some further refinements during the coming year to the basic process, and also to our systems for recording data and measuring our performance.

Financial performance of Output Class: Parliamentary services, and Output Class: Performance audits and inquiries

For 2006/07, a new multi-class output appropriation was established that includes the output classes Parliamentary services, and Performance audits and inquiries. Appropriations were transferred to these output classes from the former output classes Reports and advice arising from the function of the legislative auditor, and Certification of authority to release funds from the Crown Bank Account. To more clearly show comparatives, the financial performance of both of these output classes is shown below.

Measure	2006/07 actual $000	2006/07 forecast $000	2005/06 actual $000
Financial performance of Output Class: Parliamentary services
Crown funding	2,890	2,890
Expenditure	(2,772)	(2,889)
Surplus	118	1
Financial performance of Output Class: Performance audits and inquiries
Crown funding	6,295	6,295
Expenditure	(5,992)	(6,295)
Surplus	303	-
Financial performance of Output Class D1 Reports and advice arising from the function of the legislative auditor
Crown funding			8,822
Other revenue			8
Expenditure			(8,666)
Surplus			164
Financial performance of Output Class D2 Certification of authority to release funds from the Crown Bank
Account
Crown funding			91
Expenditure			(53)
Surplus			38
Total
Crown funding	9,185	9,185	8,913
Other revenue	0	0	8
Expenditure	(8,764)	(9,184)	(8,719)
Surplus	421	1	202

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1: "Material" is defined in AS-702: The Audit Report on an Attest Audit as "A statement, fact, or item that is of such a nature or amount that its disclosure, or the method of treating it, given full consideration of the circumstances applying at the time the written assertion or set of assertions is completed, has the potential to influence users of the audit subject matter in making decisions or assessments."

2: We are making changes to this reporting system that mean this is the last year we will report ratings for public entities under the five management aspects. We have reported under the current framework for 13 years.

3: This is the Statement of Service Performance on which our auditor reports under section 45D(1)(a) and (2).

4: We will continue to report our performance in this output class at a group level as well as at an overall level. The groups of entities we report on are government departments and Offices of Parliament; major statutory bodies (comprising State-owned enterprises, tertiary education institutions, producer boards, district health boards, Crown Research Institutes, and major Crown entities); regional, city, and district councils; other local authorities (comprising licensing trusts, airports, council-controlled organisations, energy companies, port companies, and sinking fund commissioners); school boards of trustees; miscellaneous public bodies (mainly comprising Māori trust boards, smaller Crown entities, and subsidiaries of major Crown entities); and those entities for which fees are not directly charged (That is, those entities where there is no statutory right to charge an audit fee or no realistic possibility of obtaining a fee. These entities include cemetery trustees, hall and reserve boards, racecourse trustees, and patriotic funds).

5: The number of audits to be completed during the year will fluctuate according to the readiness of each entity to present its financial statements for audit. The number of audits actually finished during the year will relate mainly to those financial statements due in a year, plus some presented for audit that relate to earlier years. Where entities have not presented their financial statements for audit in previous years, we use the term "audit arrears" to describe the outstanding audits. Most arrears are from small bodies such as school boards of trustees, cemetery trustees, or minor subsidiaries of a parent body. Because an entity might have arrears for a number of years, the number of audit entities with arrears is lower than the total arrears numbers shown.

6: This is the Statement of Service Performance on which our auditor reports under section 45D(1)(a) and (2).

7: Delivered over four years.

8: The Audit Office history is a four-year project. The timeframe for completion of the history was adjusted to 30 December 2007 by the Officers of Parliament Committee.

9: This is the Statement of service performance on which our auditor reports under section 45D(1)(a) and (2).

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