Part 6: The Controller function and the appropriation audit

Central government: Results of the 2006/07 audits.

6.01
The Controller function and the appropriation audit carried out by the Auditor- General are important aspects of the Auditor-General’s work that supports Parliamentary authority over government expenditure.

6.02
In this Part, we briefly outline the public finance principles underpinning this work and the work’s main features. We then discuss unappropriated expenditure in 2006/07, and also report on some other matters we have had to consider in this area during the past year.

Summary

6.03
Departments1 should pay particular attention to ensuring that all public expenditure is within appropriate bounds, and should be satisfied that they have effective processes to support this aim.

6.04
We continue to see instances of unappropriated expenditure requiring approval or validation, including some clear breaches of appropriation. We emphasise again the need for departments to ensure that there is appropriate authority at the time of incurring expenses and capital expenditure, and for all departmental net assets that they hold, and the need for departments to improve their financial forecasting.

6.05
We recommend that departments carefully consider the scope of appropriations, in conjunction with the guidance available from the Treasury, before they are included in the Estimates of Appropriation for approval by Parliament.

6.06
We encourage early communication between departments and appointed auditors on any potential issues, such as remeasurements.

Public finance principles

6.07
Public expenditure is governed by two important principles, those of:

  • appropriation; and
  • lawfulness of purpose.

6.08
The system of appropriations, as defined in the Public Finance Act 1989 (the Act) is the primary means by which Parliament authorises the Executive to use public resources. Under this system, expenses and capital expenditure by departments should be incurred only in accordance with an appropriation or other statutory authority, and net assets held by departments should not exceed the limits for which they have authority from Parliament.

6.09
Lawfulness of purpose includes, but is wider than, the principle of appropriation. To be lawful, expenses or capital expenditure must be incurred not only in accordance with an appropriation, but also within the bounds of the legal authority or capacity that enables the department to engage in the activity concerned.

6.10
Departments must pay particular attention to ensuring that all expenses and capital expenditure are lawful on both counts, and that effective systems and processes are in place to support this aim.

6.11
The Treasury provides useful guidance on the system of appropriations. This includes:

  • A Guide to the Public Finance Act;2
  • Putting It Together: An Explanatory Guide to the New Zealand Public Sector Financial Management System;3
  • A Guide to Appropriations;4 and
  • Treasury Circular 2006/04: Unappropriated Expenditure - Avoiding Unintended Breaches.5

6.12
During the year, the Treasury issued two further circulars of significance to appropriations. Treasury Circular 2006/7: Unappropriated Expenditure 2006/076 provided information and templates for the process to be followed in dealing with 2006/07 unappropriated expenditure, and Treasury Circular 2007/05: Multi-Year, Revenue Dependent and Department to Department Appropriations7 provides an overview of three appropriation options that provide greater financial flexibility.

Operating the Controller function

6.13
The legislative provisions for the Controller function are set out in sections 65Y to 65ZB of the Act.

6.14
Key features of the Controller function are:

  • Departments provide information to the Treasury about the expenses and capital expenditure incurred against the authority available. The Treasury collates and monitors this information throughout the year.
  • The Treasury supplies monthly reports,8 to enable the Controller to fulfil the role (section 65Y).
  • Each month the Office of the Auditor-General (OAG) and departments’ appointed auditors operate the Controller function using 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 a Memorandum of Understanding between the Treasury and the OAG.9
  • The Controller can direct a Minister to report to the House of Representatives if the Controller has reason to believe that 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 if the Controller believes the payments may be applied for a purpose that is not lawful or outside the scope, amount, or period of appropriation or other authority (section 65ZA).

6.15
The formal operation of the Controller process is underpinned by the audit work carried out on appropriations. This work is now explicitly recognised as part of the basic functions of the Auditor-General in section 15(2) of the Public Audit Act 2001. The Auditor-General’s appointed auditors must carry out an appropriation audit as part of the annual audit of each department, to:

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

Unappropriated expenditure in 2006/07

6.16
There were 46 instances of expenditure outside the terms of an appropriation during the 2006/07 financial year, involving 19 departments. This is a significant reduction from the previous year (84 instances involving 21 departments), the first full year of operation of the Act following its amendment.10

6.17
All instances of unappropriated expenditure are reported in the Financial Statements of the Government of New Zealand,11 and the individual financial statements of the relevant departments. Figure 4 shows a summary for 2006/07.

Figure 4
Categories of unappropriated expenditure during 2006/07, by number of instances and number of departments


 Number of instances Number of departments
Expenditure in excess of appropriation:

Approved under section 26B 14 9
Validated by legislation under section 26C 23 11
Expenditure without appropriation or other authority 7 5
Net assets in excess of authority 2 2

6.18
These figures show that the majority of instances of expenditure in excess of appropriation were approved by legislation under section 26C of the Act. A number were able to be approved under section 26B, which provides for a Minister to approve expenses or capital expenditure incurred in excess of an appropriation, up to the greater of:

  • an amount not exceeding $10,000; or
  • 2% of the total amount of that appropriation.

6.19
In keeping with the general drive in recent years to encourage better forecasting and attention to financial authorities, the Treasury guidance now encourages departments to identify at an early state the possible need for additional authority. Seeking approval in advance of incurring such expenses enables a department to avoid a situation of unauthorised (and therefore unlawful) expenditure occurring. In situations where expenditure has already been incurred, validation under section 26C will be needed.

6.20
In our experience, there are instances where departments could have avoided breaches of appropriation through better forecasting and through more timely requests for imprest supply.

Net asset holdings

6.21
The Act sets a limit on the net assets that departments may hold. Section 22(3) 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).

6.22
Two departments breached their net asset limits during 2006/07. While this is fewer than the four in the previous year, we continue to see potential issues arising in this area in the current financial year. It is a complex area, from both a legal and an accounting perspective.

6.23
Departments should therefore take care in projecting net assets, and in monitoring the actual net asset levels throughout the year. We encourage them to seek advice early if they identify a possible risk.

Remeasurements

6.24
The Act makes provision for remeasurements. These are financial transactions that are defined so as to be excluded from the meaning of expenses used in the Act, and therefore, unlike other expenses, do not require an appropriation. The Act also provides authority for the reported net asset holdings of a department to increase as a result of a remeasurement of an asset or liability. Consequently, such an increase will not result in a breach of appropriation, even where the projected net asset limit is exceeded. An example of a remeasurement is the revaluation of land and buildings.

6.25
Remeasurements are defined in section 2 of the Act as “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. They do not include, for example, revisions that result from transactions or events directly attributable to actions or decisions taken by the Crown. For example, the revaluation of student loan receivables following a policy decision to change the applicable interest rate is not a remeasurement, and would therefore be subject to appropriation limits in the usual way.

6.26
In July 2006, the Treasury issued a paper entitled Measuring Remeasurements12 to provide useful guidance in this area.

6.27
From our Controller function and appropriation audit work, we are frequently required to consider whether transactions or events result in a remeasurement. We regularly find that determining whether transactions give rise to remeasurements is a matter requiring careful judgement. The legal and accounting issues are not straightforward.

6.28
Departments therefore need to take care when assessing transactions as remeasurements, and refer to the guidance available from the Treasury in doing so. We also encourage early discussion between departments and appointed auditors where appropriate.

The significance of appropriation scope

6.29
The authority provided by an appropriation is limited to the scope of the appropriation, and is not allowed to be used for any other purpose.

6.30
Departments should take care that the scope of appropriations they administer are well specified so as to provide an effective basis for this authority. Scope specification will meet this objective where it:

  • acts as an effective constraint against non-authorised activity;
  • does not inappropriately constrain activity intended to be authorised.13

6.31
Conversely, a poorly defined appropriation scope undermines the effectiveness of Parliamentary approval and scrutiny of expenditure.

6.32
The Treasury has an ongoing programme of providing guidance and improving the quality of appropriation scope statements. In September 2005, the Treasury issued a paper entitled Scoping the Scope of Appropriations14 to provide guidance for departments in developing appropriate descriptions, before they are included in the Estimates of Appropriation.

6.33
The Treasury is currently promoting clearer and more robust appropriation scope specifications as part of its Review of Accountability Documents work programme, and plans to issue further information in the context of this programme.

1: Reference to "departments" in this article means government departments and Offices of Parliament.

2: See http://www.treasury.govt.nz/publications/guidance/publicfinance/pfaguide/.

3: See http://www.treasury.govt.nz/publications/guidance/publicfinance/pit/.

4: See http://www.treasury.govt.nz/publications/guidance/appropriations/guide.

5: See http://www.treasury.govt.nz/publications/guidance/circulars/pdfs/tc-2006-04.pdf.

6: See http://www.treasury.govt.nz/publications/guidance/circulars/pdfs/tc-2007-06v2.pdf.

7: See http://www.treasury.govt.nz/publications/guidance/circulars/pdfs/tc-2007-05.pdf.

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

9: The joint understanding and expectations about 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 (www.treasury.govt.nz). (The MOU is being updated to take into account current practice and matters requiring emphasis or further clarification.)

10: By the Public Finance Amendment Act 2004.

11: Those for 2006/07 are disclosed in the Financial Statements of the Government of New Zealand for the year ended 30 June 2007, pages 93-97.

12: See http://www.treasury.govt.nz/publications/guidance/appropriations/remeasurements/remeasurements.pdf.

13: Scoping the Scope of Appropriations, page 2. See paragraph 6.25.

14: See http://www.treasury.govt.nz/publications/guidance/appropriations/scope/ssappropriations.pdf.

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