Part 8: LTCCP audit opinions and timeliness of adoption

8.1
Our core reporting responsibility is to effectively report on whether the draft LTCCP (in the LTCCP Statement of Proposal) and the final LTCCP are fit for purpose– that is, whether they meet the intended purposes of the Act and are of ongoing usefulness to the local authority and its community. We express "being fit for purpose" in our overall audit opinion:

In our opinion the LTCCP … provides a reasonable basis for long term integrated
decision-making by the [council] and for participation in decision-making by the
public and for subsequent accountability to the community about the activities
of the [council].¹

8.2
The audit opinion emphasises that the LTCCP is future-focused and is relevant in assessing the local authority’s actions in terms of:

• its expressed intentions outlined in the LTCCP;²
• enabling the local community to participate in future decision-making, with reference to the LTCCP; and
• a benchmark against which to measure actual services provided to the community by the local authority.

8.3
Our audit opinion then concludes on whether the necessary elements are in place to support this assessment. We conclude separately, but in support of the overall opinion, on the:

• information’s compliance with the legislative requirements of the Act – in other words, that the requisite information has been provided;
• adequacy (in terms of quality) of the underlying and supporting information used;
• reasonableness of the assumptions used;
• adherence to appropriate accounting practice³ when preparing prospective information; and
• suitability of the forecast information and performance measures as a means of assessing the performance of the local authority.

8.4
The majority of our fieldwork was carried out in preparing to deliver an audit opinion on the LTCCP Statements of Proposal. The review of the final LTCCPs centred on observing and assessing the results of a local authority’s process of consultation with its community and the subsequent decisions made by that local authority to finalise its LTCCP.

8.5
The Act does permit a “shortened” form of audit opinion to be provided on the final LTCCP. Section 94(2) of the Act enables the form of the opinion to be limited to a confirmation of, or amendment to, the LTCCP Statement of Proposal opinion. However, in all cases, we issued a full audit opinion on the final LTCCP, rather than issue any abbreviated form. We adopted this approach because the finalised LTCCP (including its audit report) stands in its own right.

8.6
Both the LTCCP Statement of Proposal and the audit opinion on the statement become obsolete once the final LTCCP is adopted. Most local authorities removed their LTCCP Statement of Proposal from their websites when they published their final LTCCP.

8.7
In our view, this approach by local authorities was logical and required us to include a full audit opinion on the final LTCCP. The adopted LTCCP remains in force for three years.⁴

Unqualified and non-standard audit opinions

8.8
There are 85 local authorities in New Zealand. This meant that we issued 85 separate audit opinions on the 2006-16 LTCCP Statements of Proposal and then, after the local authorities consulted with their communities and finalised their LTCCP, we issued a further separate 85 audit opinions.

8.9
The bulk of our audit work was carried out in delivering the audit opinion on the draft LTCCP, which is contained in the LTCCP Statement of Proposal. The audit opinion on the final LTCCP also required substantive work. While, in general, the amount of work on the final LTCCP was less, substantial audit effort was required in some instances.

8.10
We were able to issue our standard unqualified audit opinion for 72 of the 85 LTCCP Statements of Proposal and for 68 of the final LTCCPs. Overall, we see this as a positive outcome. Clearly, the audit opinion is determined on the evidence available in each situation. However, it does indicate that the majority of local authorities were able to issue final LTCCPs that are useful for ongoing planning, decision-making, and accountability by the local authority concerned – in other words, information that is fit for purpose.

8.11
A non-standard audit opinion is one that contains:

• a qualified opinion; and/or
• an explanatory paragraph.⁵

8.12
The Appendix summarises the non-standard audit opinions that we issued for both the LTCCP Statements of Proposal and the final LTCCPs.

8.13
The analysis of non-standard audit opinions shows that, generally, the opinion received on the LTCCP Statement of Proposal remained after the LTCCP was finalised. However, an analysis of overall non-standard opinions shows that two of the 13 local authorities that received non-standard opinions on their LTCCP Statement of Proposal were able to have that qualification removed at the time they issued their final LTCCP.

8.14
A further eight local authorities’ final LTCCPs were qualified because of inadequacies in their LTCCP Statement of Proposal Summary, which is required for effective consultation. Two of these had already received a non-standard audit opinion on their Statement of Proposal. This meant that the overall number of non-standard audit opinions increased from 13, by a net increase of six, to 17 on the final LTCCPs.

8.15
For most of the local authorities that were issued a non-standard audit opinion, the matter giving rise to the qualification was of such a nature that it could not be remedied in time. For instance, those local authorities that did not have adequate asset information would generally be unable to correct the absence of relevant information within the limited time available between the LTCCP Statement of Proposal and adoption of the final LTCCP.

Our conclusions

8.16
We are responsible for reporting our audit opinion on the LTCCP. We have no mandate to require any action of the local authority – particularly where we report a qualified opinion. Where local authorities received a non-standard audit opinion, they were still able to continue to adopt the LTCCP and, as it is closely allied to the planning process, set their rates for the next financial year.⁶ The LTCCPs with their defects are still "in force".

8.17
This means that some local authorities have set their strategic direction based on inadequate underlying information and with levels of service that probably cannot be delivered by the proposed level of expenditure. This position is accentuated for those local authorities we issued with a "full adverse" audit opinion. In our view, these LTCCPs were not fit for purpose.

8.18
In some situations, local authorities have indicated they will try to rectify the issues raised by our audit opinion before the next LTCCP for 2009-19. This will probably require them to pursue an amendment to the existing LTCCP.

8.19
The non-standard audit opinions generally reflect the cumulative effect of a number of matters. An LTCCP is required to be integrated. Consequently, an opinion matter may affect a range of aspects within the LTCCP. The lack of adequate underlying information means that not only is the prospective financial information unsupported but also the costs of delivering desired levels of service cannot be demonstrated. Further, it probably also means that funding approaches and levels are less certain and, as shown in a number of our opinions, often overall financial prudence cannot be demonstrated.

8.20
We consider these matters to be of serious concern for the ratepayer, as well as undesirable.

8.21
We note that the local government sector is beginning to revise its understanding and definition of good practice. It is focusing on those areas where the majority of issues arose during the 2006-16 LTCCP round. These were:

• underlying information (with specific emphasis on asset management planning);
• performance frameworks;
• assessing levels of service; and
• a local authority’s contribution to community outcomes through its activities.

8.22
The sector groupings dealing with these matters intend to work with the sector before the next round of LTCCPs for 2009-19 to achieve improved planning and information for their ratepayers and their communities. We endorse this process, and, where it is relevant, we are working with these groupings to develop improvements.

8.23
The clear implication of this work is that the sector will define and expect a higher level of acceptable practice in these areas. To the extent those changes are consistent with our statutory role as auditor, our future audit opinions will report against the improved standard that the sector expects of its members when the next LTCCPs, due to start on 1 July 2009, are prepared and consulted on.

8.24
We note the eight audit opinions on final LTCCPs that received a "minor qualification" for producing inadequate summaries of the LTCCP Statement of Proposal.⁷ We were surprised at the difficulty local authorities had in meeting the requirement.

8.25
Summaries are pivotal to consultation.⁸ LTCCPs are substantial documents, and the ability to summarise the major matters is important for local authorities to effectively communicate and to enable debate within the community. Local authorities are not unused to such requirements. Consequently, we were disappointed with this result.

8.26
None of the qualifications affected our overall audit opinion, but the possibility remains in the future that a significant deficiency could affect our view of the overall reasonableness of the final LTCCP in meeting its purpose.

Timeliness of adoption

8.27
The development of an LTCCP is a substantial undertaking – arguably one of the largest from a corporate perspective. It requires co-ordination of effort and resource from throughout the local authority and the linking of substantial information sources.

8.28
Obvious examples include:

• Growth in population affects most activities of a local authority. The assumption adopted on growth in population should be consistently used throughout the local authority.
• Underlying asset information (such as maintenance cycles and renewal profiles) affects not only asset management but also financial projections.

8.29
We have noted that the sequencing of information is important. Because it is central to the development of an organisation-wide document, the sequencing of information is ideally developed on a council-wide basis. It is at its most effective when combined with a sound project management process.

8.30
We asked local authorities to outline the basis they used to prepare the draft LTCCP in the self-assessment process we began in mid-2005. The results indicated that the sector was generally adopting a project management approach to preparing the draft LTCCPs and, indeed, for the final adoption of the LTCCP after its consultation stages.

8.31
The sector struggled to meet the deadlines it initially projected. In general, we formed the view that few local authorities actually adhered to project management principles.

8.32
The evidence to support this view was that:

• the majority of local authorities were unable to complete draft LTCCPs by the date they projected;
• the minimal time available to our auditors between preparation and adoption of the draft LTCCPs (and associated LTCCP Statements of Proposal);
• the lack of time for local authorities to carry out their own quality control processes before releasing information to our auditors; and
• truncated ted or less than optimal time for local authorities to consider and weigh up the effect of submissions from the consultation process to enable the LTCCP to be adopted before 1 July 2006.⁹

8.33
By October 2005, there were signs that the sector would find it difficult to meet LTCCP completion deadlines. Matters still outstanding at that date were:

• often incomplete asset management plans or information;
• some local authorities yet to decide on an appropriate approach to developing the LTCCP – in particular, deciding on appropriate software to build the LTCCP financial model; and
• a general concern that performance frameworks – including levels of service – were incomplete.

8.34
Despite these incomplete matters, local authorities still projected that their LTCCP Statements of Proposal, containing the draft LTCCPs, would be generally complete and cleared by the auditor by 12 April 2006. This was the date we had calculated as optimal to enable a local authority to consider the auditor’s report, make changes if necessary, and publish the LTCCP Statement of Proposal for consultation. Further, this enabled adequate time for actual consultation and enough time for a local authority to consider those submissions before adopting the final LTCCP by 30 June 2006.

8.35
At 18 January 2006, all but seven of the 85 councils were predicting that their LTCCP Statement of Proposal would be completed in time for an audit opinion to be given and to meet the recommended time of 12 April 2006. In reality, at 12 April 2006, we were still waiting to receive 12 LTCCP Statements of Proposal for initial review, and a further 10 were still in the process of clearance.

8.36
The last two LTCCP Statements of Proposal were not cleared until 30 June 2006 and 19 July 2006 respectively.

8.37
There was a similar scenario for the adoption of the final LTCCP. Because of the number of local authorities going to consultation later, many were forced to truncate consideration of submissions (once the statutory minimum period for consultation and receiving submission was concluded)¹⁰ and adopt the final LTCCP close to or on 30 June 2006.

8.38
Seven final LTCCPs were adopted after the statutory required date of 30 June 2006. Four were adopted in July 2006, two in August 2006, and the last outstanding LTCCP on 14 September 2006.

8.39
While these late adoptions breached the statutory requirement, we generally supported these local authorities taking their time to get their documents "right" rather than rushing them through to meet the statutory deadline. This view was based on the importance of the LTCCP in setting direction rather than a disregard for a statutory provision. In all instances, the local authorities acknowledged they had breached the statutory timeline.

8.40
From our analysis of the seven final LTCCPs adopted after 30 June 2006:

• two had significant strategic issues that needed adequate analysis – in particular, after the calling for, and hearing of, submissions;
• one was the result of a senior staff change in the lead-up to the preparation and adoption of the LTCCP Statement of Proposal (containing the draft LTCCP); and
• four were late, in our view, because of either poor processes or inadequate information.

Our conclusions

8.41
The development of an LTCCP is a significant local authority-wide undertaking, requiring the sequential development of various sources of information from different parts of the organisation.

8.42
It is an important statutory responsibility that sets the immediate direction of the local authority for the medium term.

8.43
Some local authorities managed the process well, planning and adhering to timetables. Their project planning process generally gave the ratepayer and broader community appropriate time to be involved in consultation and deliberation.

8.44
Regrettably, the majority of local authorities did not appear to maintain adequate project management disciplines, and most of them had to delay their intended adoption dates for either their LTCCP Statement of Proposal or their final LTCCP. This risked rushing the process and truncating the time needed for optimal consideration of all aspects of this important planning process.

8.45
Clearly, there is a need for local authorities to address the issue of timeliness of LTCCP preparation to ensure adequate participation by the community in their decision-making process.

Audit fees

8.46
Consistent with professional audit practice, we sought to advise local authorities of our estimate of fees in advance of auditing the LTCCP. Usually, the fee estimate would stand, subject to "client performance" or potentially (and less likely) that the fee estimate compared to actual cost was different to the effective time taken to do the job.

8.47
In all circumstances, we sought to align the setting of the LTCCP fee with our usual letter of undertaking process and provided support systems for local authorities wanting further information on fees.

8.48
However, all of those involved faced a unique situation. Based on our research, there was no precedent either locally or internationally for estimates of an audit of 10 years of prospective information, as required in the LTCCP.

8.49
Our approach was to build onto our methodology development processes with an analysis and estimate of the likely fees associated with the audit. Both the methodology development and fees assessment drew on the collective experience of all three audit service providers¹¹ that carry out audits in the local government sector on the Auditor-General’s behalf.

8.50
A task group, comprising representatives from the audit service providers, considered the likely fee, based on the assumptions that each local authority would:

• implement adequate project management and quality control over their LTCC P development processes;¹²
• develop underlying information, assumptions, and performance frameworks in a timely manner; and
• make draft documents available with adequate time for elected member input and subsequent auditor review and provision of an audit opinion.

8.51
On this basis, the task group estimated that the LTCCP audit fee would range between 50% and 65% of the annual 2004/05 audit fee. (Figure 27 shows the range of audit fees). There is an element of economy of scale to the assessed fee: the larger local authorities have an estimate tending to 50% of the audit fee, while the smaller local authorities converged towards the 65% level.

Figure 27
Range of estimated fees for LTCCP audit in 2006

Band	Number of councils
$20,000-29,999	9
$30,000-39,999	34
$40,000-49,999	20
$50,000-59,999	12
$60,000-69,999	3
$70,000-79,999	2
$80,000-89,999	2
$90,000-99,999	1
$100,000-109,999	-
$110,000-120,000	2
(Median $39,964)

8.52
We published the general basis for our fee estimates through our LTCCP newsletter for the sector and informed each local authority directly. While our auditors had some minor discretion to seek to vary the fee estimate for known issues, few did so because of the inherent uncertainty in predicting the fee and the uniqueness of the situation.

8.53
The collective fee estimate totalled nearly $3,700,000.

8.54
In association with the estimated fees, the task group also estimated the resource requirement on the three audit service providers based on auditor hours. Overall, it was estimated that about 23,000 hours would be required to undertake all 85 engagements.

8.55
The assumptions on which we based the resource and fee estimates were generally over-optimistic, with the sector generally being unprepared and late in delivering required draft documents. This had the inevitable effect of increasing the hours of audit teams and the fee costs of the audits.

8.56
The audits actually required more than 34,000 auditor hours (a 48% increase over the estimate). In addition, more input was required by senior members of the audit team than anticipated – in particular, the input at partner/audit director level was proportionately greater than estimated. Individual auditors began steps to recover costs for the extra hours.

8.57
The Auditor-General reviewed the costs incurred, revenue generated, and reasons for the variations on estimates. It was generally felt that substantial time had been spent discussing with local authorities their statutory obligations under the Act and, in effect, assisting them to implement the new planning provisions. Auditors devoted substantial time to these discussions with individual local authorities in the period leading up to Christmas 2005. However, most of the time taken related to the various states of preparedness of individual local authorities.

8.58
In conjunction with the audit service providers, we agreed that, other than in a few exceptional cases, the auditors would not pursue any additional fee over and above the original estimate.

8.59
The decision not to seek additional fees was welcomed by the sector. It was recognised that the auditors had contributed significantly to the development of local authorities’ strategic planning approaches and, generally, the fee write-off enabled individual local authorities to learn from the first round of audited LTCCPs without the "penalty" of extra fees.¹³

8.60
While recognising this benefit to the sector, we have indicated that the sector should not expect that our approach to auditing the 2009-19 LTCCPs will be similar. In short, local authorities need to act on what they have learned from their experiences in producing the 2006-16 LTCCP and review their processes to ensure that the changes we have indicated as necessary are actually implemented for the 2009-19 LTCCP round.

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1: This is a direct quotation from our audit opinion on the final LTCCP. The same wording is used in the LTCCP Statement of Proposal audit opinion.

2: Section 96(1) of the Act notes that an LTCCP is “a formal and public statement of the local authority’s intentions”.

3: This is described in the Act as generally accepted accounting practice, which is outlined in FRS-42.

4: Section 93(3) of the Act.

5: For further discussion on non-standard audit opinions, see our report Local government: Results of the 2004-05 audits, "Part 1.7 Non-standard audit reports issued", parliamentary paper B.29[06b].

6: Through section 95(4) of the Act, the LTCCP also constitutes the annual plan in its first year of the LTCCP's application. The annual plan is closely associated with setting rates.

7: Section 89 of the Act. The summary is required to summarise the "major matters" in a form determined by the local authority. This resonates with our comments in the Auditor-General’s Overview about the "right debate".

8: Section 89(c) of the Act.

9: We discussed optimal times to enable adequate consideration of issues by local authorities in our LTCCP newsletter No. 8, issued in December 2005.

10: Section 83(2) requires that this phase take at least one month.

11: Audit New Zealand, Deloitte, and Ernst & Young.

12: As previously noted, this assumption was reasonable because the sector was generally indicating through the self-assessment process that it was implementing relevant controls.

13: There was a substantial range of fee write-off related to each local authority. A few local authorities largely delivered "on time" and with sufficient quality that the LTCCP audit could be brought within the initial fee estimate. There was also a high correlation between these local authorities’ 2006-16 LTCCPs and the audit confidence that could be taken into the audit of their 2005-06 annual report. In these few instances, the auditors were able to discount their audit fees for the 2005/06 annual report.

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