Summary

Statements of corporate intent are important public accountability documents required by law to be produced by a range of public entities each year. The statements should set out an entity's planned objectives and activities for the next three years. This includes setting performance targets that the entity must report against in its annual report. Shareholders are given an opportunity to influence the direction of an entity by commenting on its draft statement.

Given the importance of statements of corporate intent for public accountability, we were interested to find out how well public entities were complying with their legislative requirements. We carried out a performance audit, in which we examined the compliance of 54 public entities in producing, and later reporting against, a statement of corporate intent. Our examination included Crown Research Institutes, energy companies, port companies, and State-owned enterprises required to produce a statement of corporate intent. We also included council-controlled organisations and council-controlled trading organisations required to produce a statement of intent. The legislative requirements for their statements of intent are very similar to the legislative requirements for statements of corporate intent.

Our findings

Compliance with legislative requirements

All the types of entity we looked at are required to include the next three financial years in the content of their statements. The intention of this requirement is to provide shareholders and the wider public with information about the intentions and direction of a public entity for the medium term. We found several cases where public entities, especially smaller council-controlled organisations and council-controlled trading organisations, produced statements of corporate intent that included only one year. This reduced their usefulness as a forward-looking accountability document.

There was also some mixed coverage of subsidiaries in the statements we examined, even though the statements are legislatively required to include the activities of the group – the parent entity and any subsidiaries. In some cases, there was no indication in the statement that the public entity had any subsidiaries.

The governing legislation relevant to the entities we examined is very specific about the content that must be included in the statements. Although there was broad compliance with most content requirements, we found some examples where the required content was missing.

The use and quality of performance targets

Performance targets are one of the most important ways a statement of corporate intent provides public accountability. They enable a public entity to state how it intends to measure its success against its stated objectives. However, we also acknowledge that, for many public entities operating in a competitive business environment, the information about their future intentions and objectives needs to be balanced against issues of commercial sensitivity.

Most entities we examined provided a wide range of targets with which their performance could later be measured, including non-financial measures. The Crown Research Institutes, energy companies, and State-owned enterprises we examined used the widest range of performance targets and measures. There were several examples among other entity types where only a narrow range of financial targets was used.

Only two-thirds of the statements we examined had performance targets that could all be measured. In several cases, the performance targets were so vague that no meaningful assessment could later be made about whether the targets had been met.

More than half of the statements used performance targets that were all easy to understand or explained any technical terms. However, among the remainder, we found financial variables or technical terms stated as targets that, in our view, might not be easily understood by readers.

The effectiveness of some useful entity objectives in the statements (for example, being a good employer) was diminished when the entity failed to provide performance targets or other measures for those objectives.

Performance reporting in annual reports

Most annual reports we examined reported actual performance against targets set in their corresponding statements of corporate intent or statements of intent. However, in many cases the entity gave this reporting a low profile (such as providing a comparison table at the back of the financial statements). We also found several instances where there was only selective reporting of the performance targets. Entities seldom provided an explanation for any significant variance between their actual and intended performance.

Our recommendations

We recommend that public entities:

1. comply with their statutory obligation to include the next three financial years in the content of their statement of corporate intent or statement of intent;
2. suitably include subsidiaries in their statement of corporate intent or statement of intent, within the accounting policies and within the summary of the nature and scope of their activities;
3. include a range of financial and non-financial performance targets or other measures in their statement of corporate intent or statement of intent, to enable a full assessment of their objectives and activities;
4. ensure that performance targets and other measures used in their statement of corporate intent or statement of intent are measurable;
5. ensure that performance targets and other measures used in their statement of corporate intent or statement of intent are easy to understand, and clearly define any technical terms;
6. ensure that all the performance targets and other measures set in their statement of corporate intent or statement of intent clearly link to the objectives also included;
7. clearly report in their annual reports their actual performance against all the targets and other measures set in their corresponding statement of corporate intent or statement of intent; and
8. clearly explain in their annual reports material variance of actual performance against performance targets set in their corresponding statement of corporate intent or statement of intent. Reasons should be provided if any targets are no longer relevant.