Part 4: Subsequent reporting in annual reports

4.1
In this Part, we present our findings against our expectations for how the content of a statement of corporate intent is reported against in an annual report.

4.2
We expected public entities to provide information in their annual reports:

• to enable a comparison between the planned performance set out in their statements of corporate intent, and their actual performance;
• about all the performance targets or other measures set out in the corresponding statement of corporate intent; and
• to explain why any targets were not met, or why the actual performance varied significantly from the targets (if applicable).

4.3
Our expectations were partly guided by the legal requirements for the entity types we examined. All of them are required to include in annual reports information necessary to enable an informed assessment of their operations. This includes a comparison with their statement of corporate intent. In addition, our expectation that variance between planned and actual performance be explained is a specific legal requirement for council-controlled organisations and council-controlled trading organisations under the 2002 Act.

4.4
We compared the reporting in the 2005/06 annual reports against the content of our sample of 2005/06 statements of corporate intent, especially in relation to performance targets and other measures.

Our findings about performance reporting in annual reports

Information contained in annual reports to assess entity performance

4.5
Overall, most of the entities (44 out of 54, or 81%) included enough information in their annual reports to enable an assessment of the entities' performance against most or all targets set in their statements of corporate intent (see Figure 8).

4.6
However, we also found that six entities (11% of our sample) provided information in their annual reports that allowed only a partial assessment against their statements, while another four entities' annual reports (8%) lacked the necessary information to enable any assessment of actual performance against the targets set in their statements. In these cases, there was no acknowledgement in the annual report of the performance targets published in the statement of corporate intent.

Figure 8
Information contained in annual reports to enable assessment against the corresponding statement of corporate intent

* Some comparison was possible, but not against all key performance targets given in the corresponding statement of corporate intent.

The reporting in annual reports of all performance targets given in statements of intent

4.7
Incomplete reporting of performance targets was a weakness we observed in the annual reports. While 69% of the entities we examined later reported in their annual reports against all their performance targets set in their statements of intent, the remaining 31% reported against only some of the targets. Typically, the entity did not explain why it excluded some of the targets it had set in its statement of corporate intent. We found this selective reporting among all entity types we examined.

Explanation of variances between planned and actual performance

4.8
The quality of reporting against performance targets in an annual report is enhanced if the entity explains why targets may not have been achieved, or why the actual and intended results vary.

4.9
We found that entities only rarely provided explanations for material variance between their actual performance and their intended targets.¹ Figure 9 shows that only 10 of the entities we examined provided explanations for variances. An additional seven entities explained only some of the variances between actual and planned performance.

Figure 9
Explanations provided in annual reports for non-achievement or material variance of actual performance against targets

* Some explanation was provided in some, but not all, instances of significant variance between actual performance and planned targets reported.

** Not applicable, all performance targets and other measures were achieved.

4.10
Good examples of explanations included specific commentary for each performance target and its actual results. In other instances, a chairperson's or chief executive's review section in the annual report contained information that explained material non-achievement of the entity's performance targets.

4.11
We especially expected council-controlled organisations and council-controlled trading organisations to provide explanations in their annual reports for "material variances" between actual and intended performance, because this is a specific legislative requirement of the 2002 Act.² Although what constitutes a material variance is partly subjective, we found several instances where the entity's actual performance was substantially below its targets and should have been explained.³

1: For assessing material variance, we were guided by the New Zealand Institute of Chartered Accountants' accounting standard for materiality in financial statements. Based on this standard, a variance was considered to be material if it was of such a nature that its disclosure would be likely to influence decision making by users of an annual report.

2: Section 68.

3: For example, for one council-controlled trading organisation, the actual dividend was nearly 40% less than a minimum target set in the statement of intent. In another example, a council-controlled organisation did not explain why the actual number of visitors to its facilities was nearly 70% below target.