Part 6: Operation of the Controller function

Central government: Results of the 2005/06 audits.

The Public Finance Amendment Act 2004 (the Amendment Act) made significant changes to the Controller function of the Controller and Auditor-General. These changes took effect from 1 July 2005, so this is the second year of the operation of the function since the Amendment Act.

Last year we reported on the work that has been done to bring the function into operation and discussed the issues that arose between 1 July 2005 and 31 December 2005. We also advised of our intention to report annually to Parliament on the significant issues arising from the operation of the Controller function.

In this Part, we outline the public finance principles and main features of the Controller function, summarise the unappropriated expenditure in 2005/06, and report on some notable matters we have had to consider during the past year.

Public finance principles

Public expenditure occurs within a framework dominated by two important principles:

  • the principle of appropriation; and
  • the principle of lawfulness of purpose.

The system of appropriations is the primary means by which Parliament authorises the Executive to use public resources. Expenses and capital expenditure can be incurred only in accordance with an appropriation or other statutory authority.

There are three elements to an appropriation. It specifies:

  • the maximum amount of expenses or capital expenditure that can be incurred;
  • the scope (that is, what the amount can be used for); and
  • the date on which the appropriation lapses.

Unappropriated expenditure occurs when expenses or capital expenditure are incurred:

  • without an appropriation;
  • in excess of the amount of an appropriation;
  • for a purpose outside the scope of an appropriation; or
  • after an appropriation has lapsed.

The principle of lawfulness of purpose includes, but is wider than, the principle of appropriation. To be lawful, expenses or capital expenditure must be incurred in accordance with an appropriation, but also in keeping with the lawful authority provided to the department1 to engage in the activity concerned, if such lawful authority exists.

The Controller function and the appropriation audit

The legislative provisions for the Controller function are set out in sections 65Y to 65ZB of the Public Finance Act 1989.2

The main features of the Controller function are:

  • The Treasury is required to supply monthly reports to the Controller, to enable the Controller to examine whether expenses and capital expenditure have been incurred in accordance with an appropriation or other authority (section 65Y).
  • The Controller can direct a Minister to report to the House of Representatives if the Controller has reason to believe that any expenditure has been incurred that is unlawful or not within the scope, amount, or period of any appropriation or other authority (section 65Z).
  • The Controller can stop payments from a Crown or departmental bank account, to prevent money being paid out that may be applied for a purpose that is not lawful or not within the scope, amount, or period of any appropriation or other authority (section 65ZA).

The Auditor-General’s appointed auditors must carry out an appropriation audit as part of the annual audit of a department.3

Departments provide information to the Treasury on the expenses and capital expenditure incurred against the statutory authority available. The Treasury collates this information and provides a monthly report to the Office of the Auditor-General (OAG).4 Each month the OAG and appointed auditors operate the Controller function under certain standard procedures. These procedures are carried out in accordance with the Auditor-General’s Auditing Standard 2: The Appropriation Audit and the Controller Function (AG-2) and the Memorandum of Understanding between the Office of the Auditor-General and the Treasury.5 As part of the annual audit, appointed auditors carry out the appropriation audit work in accordance with the requirements in AG-2.

All appropriations are audited to:

  • determine whether expenses or capital expenditure have been incurred within the amount, scope, and period of an appropriation or other statutory authority;
  • ensure that expenses incurred have been for lawful purposes; and
  • ensure that any unappropriated expenditure is reported in the financial statements of each department.

Unappropriated expenditure in 2005/06

There were 84 instances (within 21 departments) where unappropriated expenditure was reported during the 2005/06 year.6

A summary of the amount of expenses or capital expenditure in excess of appropriation, outside of scope, or incurred without an appropriation, and breaches of net asset limits, is presented on pages 89 to 98 of the Financial Statements of the Government (Government financial statements) for the year ended 30 June 2006. Unappropriated expenditure is also reported in the financial statements of the relevant department in the Statement of Unappropriated Expenses and Capital Expenditure, together with an explanation of the reasons for such expenditure.

Seven instances of unappropriated expenditure occurred because of “in-principle expense transfers”. We reported on in-principle expense transfers last year.7 The Treasury subsequently revised procedures so that, before the end of the financial year, an explicit (rather than an in-principle) authority is given under imprest supply to incur the transferred expenses in the next financial year up to a particular amount. We were pleased to see that there were no further breaches of appropriation as a result of in-principle expense transfers at the start of the 2006/07 year.

In October 2006, for the first time, the Auditor-General exercised the power under section 65Z of the Public Finance Act to direct a Minister to report to the House of Representatives. A direction was issued to the Speaker, as Minister responsible for Vote Parliamentary Service, to report breaches of the scope of appropriations identified after an inquiry into advertising expenditure incurred by the Parliamentary Service in the three months before the 2005 General Election. Our expectation is that this power is likely to be used rarely.

During the year, the Treasury issued two Treasury circulars relating to unappropriated expenditure:

  • 2006/4: Unappropriated Expenditure – Avoiding Unintended Breaches. This circular emphasised that departments must have an existing appropriation or other authority (or authority for use of imprest supply) in advance of incurring expenses or capital expenditure. Departments should seek authority in advance for any expenditure they anticipate may be in excess or outside the scope of an appropriation, or any breach of the net asset balances.
  • 2006/6: Unappropriated Expenditure 2005/06. This circular provided information and templates for the 2005/06 unappropriated expenditure process.

The 79 instances of unappropriated expenditure in 2005/06 within 21 departments compare with 45 instances in 2004/05 within 16 departments, and a similar number in 2003/04 within 12 departments. This indicates that the new monthly process has been effective, and has identified breaches of appropriation earlier. We encourage all departments to pay particular attention to ensuring that all expenses and capital expenditure stay within appropriation throughout the year. We found instances where departments could have avoided unappropriated expenditure through better forecasting of expenditure for each output class, and more timely requests for imprest supply to deal with potential unappropriated expenditure.

Scope of appropriations

The Public Finance Act provides that the authority to incur expenses or capital expenditure provided by an appropriation is limited to the scope of the appropriation and may not be used for any other purpose.

In September 2005, the Treasury issued a paper entitled “Scoping the Scope of Appropriations”,8 to provide guidance for departments in developing the scope description of appropriations in the Estimates of Appropriation.

The paper notes that:

The objective of the scope description in the Estimates should be to provide an appropriately balanced description of the scope of expenses or capital expenditure being incurred so that:

  • the wording acts as an effective constraint against non authorised activity;
  • the wording does not inappropriately constrain activity intended to be authorised.

We have seen examples where the scope of an appropriation is so broad that it is not possible to get a clear understanding from the scope description what activities are actually being funded within an appropriation. This affects the effectiveness of Parliamentary scrutiny, and approval of expenditure within Votes. We recommend that departments review the scope of the appropriation definitions before they are included within the Estimates of Appropriation.

Net asset holdings

Four departments breached their net asset limits in 2005/06.

We considered some issues relating to the provisions in the Public Finance Act about net asset holdings and remeasurements when carrying out our Controller function work.

Section 22(3) of the Public Finance Act states: “The amount of net asset holding in a department must not exceed the most recent projected balance of net assets for that department at the end of the financial year, as set out in an Appropriation Act in accordance with section 23(1)(c).” This is subject to section 22(2), which provides authority for the reported net asset holdings of a department to increase as a result of a remeasurement of an asset or liability.

An issue that arose, for the purposes of determining whether a department’s net asset balance is within the limit set out in section 22(3), is whether planned capital withdrawals that have not yet occurred should be taken into account when determining whether net asset balances have been exceeded.

For example, a department’s net assets at 30 September 2006 were in excess of the projected 30 June 2007 balance because a capital withdrawal proposed to occur during the financial year ended 30 June 2007 had not yet taken place. The withdrawal subsequently occurred during October 2006. We considered whether this timing difference would cause the department to be in breach of section 22(3) at 30 September 2006.

We accepted the Treasury’s view that, for the purposes of interpreting section 22(3), departments can recognise a liability for a capital withdrawal that will be paid in the current financial year (either a provision for payment of surplus or a debt to the Crown) whenever their net assets would otherwise exceed the projected year-end balance. We therefore formed the view that the department was not in breach of section 22(3) at 30 September 2006.

Recognition of a liability to the Crown for capital withdrawals that will be paid in the current financial year in the Statement of Financial Position is appropriate on the basis that the first Appropriation Act for the year creates a legal requirement to make a repayment of equity during the year. Therefore, departments may show capital withdrawals that will be paid in the current financial year in the Statement of Financial Position as a liability to the Crown with a corresponding reduction in equity, until such time as the capital withdrawal has occurred.

It is important to note that:

  • A provision is required only in those situations where a department’s net assets are in excess of the projected year-end balance because of a timing difference arising from a capital withdrawal.
  • The earliest point at which such a provision would be recognised would be when the first Appropriation Act for the year is passed (for example, 3 August 2006 for the year ending 30 June 2007).
  • The requirement to make a provision for the capital withdrawal will be incorporated into Treasury Instructions with effect from 1 July 2007. This will include a requirement for departments to agree with the Treasury the date for the capital withdrawal; this will need to be agreed before the passing of the first Appropriation Act for the year.


The Amendment Act introduced the concept of remeasurements, defined in section 2 of the Public Finance Act as meaning: “revisions of prices or estimates that result from revised expectations of future economic benefits or obligations that change the carrying amount of assets or liabilities”. Section 2 also sets out what remeasurements do not include. In particular, it does not include revisions that result from transactions or events directly attributable to actions or decisions taken by the Crown.

Remeasurements are not included in the meaning of expenses in section 4, and therefore do not require an appropriation.

As mentioned in paragraph 6.105, a fundamental principle to be applied to expenses or capital expenditure is that it must be incurred in accordance with appropriation or statutory authority. However, the remeasurement provision in the Public Finance Act provides an exception to this principle. Where remeasurements cause a reduction in the value of assets or increase the liabilities, the Public Finance Act does not require an appropriation for the expenses related to such transactions or events. This recognises that Parliament does not require prior approval for a reduction in net assets resulting from changing expectations of future economic benefits or obligations and transactions or events not under the control of the Crown.

As part of our Controller function work, we have considered whether certain transactions or events arising result in a remeasurement as defined. We found that determining what is a remeasurement is often a matter of judgement. The key factors have usually been assessing whether the revision to prices or estimates is caused by changing expectations about future economic benefits or obligations, and whether the revision results from a transaction or event directly attributable to actions and decisions taken by the Crown. In our view, assessing an expense as a remeasurement needs careful consideration because it does not need an appropriation.

In July 2006, the Treasury issued a paper entitled “Measuring Remeasurements” to provide guidance for making judgements as to whether an item is a remeasurement or an expense requiring an appropriation. Examples of remeasurements are provided in the paper.9

Given the careful judgement needed for an expense to be assessed as a remeasurement, as well as the risk of an appropriation being exceeded if the transaction or event is not assessed as a remeasurement, we encourage departments to discuss any possible remeasurements with their appointed auditor.


In our view, the nature of the issues that have arisen through the operation of the Controller function in the first and second year of its operation reinforces the value of the changes made to modernise and enhance that function.

The new 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.

Breaches of appropriation have also come to our attention through annual audits and inquiries.

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.

Departments are encouraged to pay particular attention to ensuring that all expenses and capital expenditure stay within appropriation throughout the year. Departments should review the scope of appropriations carefully before they are included in the Estimates of Appropriation for approval by Parliament. We encourage early communication between departments and appointed auditors on any potential issues, such as remeasurements.

1: The references to “departments” in this article mean government departments and Offices of Parliament.

2: As amended by the Public Finance Amendment Act 2004.

3: Section 15 of the Public Audit Act 2001, as amended by the Public Finance Amendment Act 2004.

4: Monthly reporting is not required for July and August.

5: The joint understanding and expectations of the OAG and the Treasury of the role and procedures associated with the Controller function are set out in the Memorandum of Understanding between the Treasury and the Office of the Auditor-General: Controller Function (MOU), which is available on the Treasury website ( The MOU is currently being updated to take into account current practice and matters requiring emphasis or further clarification.

6: This number includes each breach of appropriation for each year. Where breaches of appropriation were identified for previous years but the amount of the breach could not be separately identified for each year, these have been counted as one breach. There were seven breaches of the Party and Member Support appropriations in Vote Parliamentary Service in 2005/06 and five in 2004/05. The Government financial statements do not separately list each breach, but show these as one line because the inquiry of the Auditor-General was not complete at the time the Government financial statements were issued.

7: Central Government: Results of the 2004-05 audits, parliamentary paper B.29[06a], “The operation of the Controller function”, pages 51-60.

8: See

9: See

page top