Auditor-General's overview

Annual Plan 2008/09.

I am pleased to present my annual plan for 2008/09. During the coming year, my Office will continue to focus on achieving our 2004-09 strategic plan. This plan for 2008/09 is based around three main strategies:

shaping our services to anticipate and respond to Parliament’s and other stakeholders’ needs and our changing environment;
building our capability to create and deliver our services; and
fostering relationships and ways of working that support our strategic plan.

We have also begun preparing a new strategic plan for 2009-12.

It has been my honour and privilege to serve as Auditor-General. I am committed, when my term of office finishes in 2009, to leaving the Office in as good a heart and with people of as high a calibre as I inherited from my predecessor, David Macdonald. Therefore, while an incoming Auditor-General will bring their own priorities, I want to ensure that the Office’s strategies, intentions, and risks are clearly laid out as a basis on which they can chart the course for their own term of office.

Main risks and issues

Significant changes in the accounting and auditing profession and in the legislative and operating environments of public entities continue to have a major effect on our work.

In the public sector, these include:

increasingly high public expectations and scrutiny, particularly about ethical conduct, and transparent and accountable decisions and transactions;
an expectation that public entities will work collaboratively to better integrate services to the public, and that public entities will consider the longer-term effects of their activities (especially in managing finite or fragile environmental resources); and
changes in 2004 to the Public Finance Act 1989 and the Local Government Act 2002, and enactment of the Crown Entities Act 2004. These Acts require changes to be made to the planning, budgeting, and reporting responsibilities of many public sector entities.

A significant change in the accounting and auditing profession is the adoption of New Zealand equivalents to International Financial Reporting Standards (NZ IFRS) in the public sector for periods starting on or after 1 January 2007. Earlier adoption was permitted. The local government sector decided to comply earlier, and prepared NZ IFRS compliant financial statements for the year ended 30 June 2007. Most other entities within the public sector will follow a year later (that is, for the year ending 30 June 2008).

Another significant change in the accounting and auditing profession is the adoption of New Zealand equivalents to International Standards on Auditing. This will probably mean a significant change to the Auditor-General’s auditing standards during 2008/09.

Shaping our services

These changes increase complexity for those preparing financial reports and those auditing them. This puts pressure on both the quality and the cost of the audit work carried out. These changes have also created an environment in which financial expertise and audit assurance expertise are in high demand.

For several years, we have identified our key strategic risks to be the loss of our independence and audit failure. We have also included two additional strategic risks: loss of capability and loss of reputation.

The changes in the public sector and the accounting and auditing professions, together with the continuing difficulty in finding and retaining suitably qualified and experienced staff, mean that these risks remain. In particular, I note that arrears in issuing public entities’ audit reports increased from 315 in 2005/06 to 360 in 2006/07. Arrears may increase further during 2007/08.

I am concerned that the demands created by changes within the accounting and auditing profession have meant that our audit work has had to focus more heavily on entities’ financial statements. This has been at the expense of public-interest audit work based on fuller consideration of the risks and challenges that entities face in their strategic, governance, and operational contexts.

We are therefore working to rebalance our audit effort so that the audit of each individual entity takes this fuller perspective into account, to the extent deemed appropriate by that entity’s appointed auditor. This should result in a stronger emphasis on non-financial reporting, waste, probity, and accountability. Over time, this may affect how our audits are costed, resourced, carried out, and reported.

I have also, in response to the main risks and issues I see, identified several areas for us to focus on.¹ I have selected these areas because they are strongly related to my statutory role and because these concerns tend to be challenging for the public sector. They cover both central and local government, and are areas where, in my view, public sector performance should be improved. The areas of focus are:

probity;
fraud;
sustainable development;
stewardship and management of infrastructure assets; and
performance information.

I expect our work in these areas to involve the full range of our audit assurance services (annual audits, performance audits, inquiries, and advice and assistance).

I believe that the decision to base New Zealand standards on IFRS (which were written to be applied by large profit-oriented entities) acknowledged that the needs of the public sector are different and would therefore require different treatment. In my view, the new standards will be credible only if they are seen to:

specifically consider public sector issues;
incorporate appropriate changes to IFRS so that the public sector is able to apply them sensibly; and
incorporate appropriate guidance to assist the public sector to apply the standards.

As this is not happening in all cases, I am becoming increasingly concerned about the credibility of the new standards and have begun to voice my concerns publicly. If New Zealand is to remain at the forefront of public sector management, it is vital that accounting standards are sensible in the context of the New Zealand public sector.

To ensure that our annual audits comply with changing financial reporting and auditing standards, public sector audit fees have been increasing to keep pace with the wider international demand for assurance services. That fee pressure is likely to continue for the foreseeable future, given the prevailing market conditions. I have systems in place to ensure that audit services are provided at a reasonable cost to public entities. For example, I regularly seek independent assurance that our fee-monitoring mechanisms ensure that fee levels are fair and reasonable for audited entities. However, I must also ensure that audits are performed well, both now and in the future. To do this, my audit service providers must be fairly remunerated.

Building our capability to create and deliver our services

Recruiting and retaining good staff and continuing to invest in developing our staff is a core component of our strategic plan. This is becoming increasingly critical in the current tight labour market. We have recently been fortunate with a very successful Audit New Zealand graduate recruitment round. Although graduates tend to be highly mobile, this is a significant and much needed boost that has increased the Office’s total staffing by nearly 15%.

In 2007/08, the Office decided to use the Lominger Competency Framework as the basis for personal development within the Office. In the coming year, I will be focusing on staffing - in particular, in Audit New Zealand - through:

resourcing and aligning staffing needs with our future business model;
strengthening the management and leadership skills of our people, including further embedding the national professional development programme;
enhancing our High Potential and Talent Management programmes to recognise, reward, and develop high performers; and
developing a staff retention programme.

In 2007, I also initiated a peer review of the Office by a team of our international counterparts to let us know whether we are operating effectively and efficiently, and in keeping with good practice. The results of the peer review team’s work were published on 15 April 2008.

Feedback from Parliamentary consultation

Under section 36(1) of the Public Audit Act 2001, our proposed work programme is subject to Parliamentary consultation. We sought feedback on two occasions - once on an early draft of our proposed work programme for 2008/09 and again on the statutory Draft annual plan 2008/09.

Feedback we have received from members of Parliament mainly supported the approach we have taken to determining the Office’s work programme. The feedback included:

suggestions for projects in future years;
requests for more information, which we have responded to;
guidance on the scope and relative emphasis we should place on some studies and other areas of concern; and
a suggestion to consider more work on procurement across the public sector.

I thank Parliament for this feedback, and will ensure that we incorporate it into our scoping of the forthcoming studies and into development of our 2009/10 work programme.

Having regard to the requirements of section 36(3) of the Public Audit Act, I acknowledge that the Finance and Expenditure Committee provided written response to the statutory Draft annual plan 2008/09, and note that neither the Speaker nor any committee of the House requested any change to our work programme priorities.

I am confident that the performance audits we intend to conduct in 2008/09 are relevant and likely to be useful to Parliament, public entities, and the public.

Fostering relationships and ways of working that support our strategic plan

To shape our services to anticipate and respond to Parliament’s and other stakeholders’ needs and our changing environment, we need to foster relationships so we can understand those needs and our environment. Our efforts are most productive when they are part of collaborative work with others - whether internally across audit service providers and teams within the Office, with our international counterparts, or with others working to improve the public sector.

I have in the past remarked on the exceptional collaborative working that occurred during our audits of the 2006-16 Long-Term Council Community Plans (LTCCPs). Indeed, we expect such collaboration to continue as we begin planning for the 2009-19 LTCCP audits, which will be undertaken during 2008/09. The approach taken to the LTCCP audits provided a “living” example of how my audit service providers - while coming from different accounting firms - could work together to create greater value for the public sector from their individual efforts. In 2003, when I decided to shift to an allocation method for contracting audits, I hoped it would be a cost-effective way of encouraging auditors to share methodologies and work together to improve audit work. I’m therefore pleased to see collaboration emerging across audit service providers as the way we seek to shape our products and services.

We also benefit from collaboration with the various interest and sector groups that make up the public sector through our liaison work and participation in working parties on financial management and accountability.

Over 2008/09, I expect my staff to continue participating on the major accounting and auditing standard-setting bodies in New Zealand. Although this takes a lot of time, I support such involvement as long as the public sector voice is heard and standard-setters respond appropriately to the public sector issues identified.If I feel that this no longer happens, I will review the nature and extent of our involvement. We will also continue participating in several of the international standard-setting bodies for the accounting and auditing professions, as these international standards will apply to New Zealand’s public sector entities. I have concerns from time to time about the implications of these standards for the public sector, and I consider it important that we continue to work cooperatively with such bodies to ensure that public sector issues have international consideration.

In view of the difficult labour market and the increasing "internationalisation" of accounting and auditing standards, we have been putting more effort into our relationships with our international counterparts. We have benefited in the past from an increasing number of secondment arrangements and are exploring the range of countries from which we may be able to second staff. Such secondments also contribute to the professional development of our staff.

While the 2008/09 financial year has a number of challenges in store for us, I am confident that we have the systems and processes in place to achieve our strategic and annual plans. Most importantly, in fulfilling the statutory purpose of the Auditor-General, I am fortunate to be working with exceptionally skilled and talented people within the Office of the Auditor-General, Audit New Zealand, and our other audit service providers. I look forward to achieving the objectives of this annual plan with them during 2008/09.

K B Brady
Controller and Auditor-General

12 May 2008

1: See Appendix 2 for more detailed discussion.

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