Our desired overall outcome is trust in the effectiveness and efficiency of the public sector. The Auditor-General helps create trust in the effectiveness and efficiency of the public sector by providing independent assurance and advice to Parliament and the public that governance and management arrangements are suitable to address five main areas¹ – our intermediate outcomes – and where they are not by saying so. These five main areas are that public entities:

• carry out activities in keeping with Parliament’s intentions, and in an effective and efficient manner;
• carry out activities, resourcing, and accountability requirements within the authority granted by Parliament;
• obtain and apply resources in an economical manner;
• meet parliamentary and public expectations of an appropriate standard of behaviour for the public sector; and
• give full and accurate accounts of their activities, and of their compliance with Parliament’s intentions, through the annual reporting cycle.

We gather the information necessary to provide this independent advice and assurance through our output classes:

• Provision of audit and assurance services - performing audit and related assurance services as required or authorised by statute. The Auditor-General is required to audit the Financial Statements of the Government, public entities’ financial statements, and other information that must be audited.
• Parliamentary services - providing advice and assistance to select committees and other stakeholders, and performing the Controller function. Through this function, the Office provides independent assurance to Parliament that departments and Offices of Parliament have incurred expenses and capital expenditure for purposes that are lawful and within the scope, amount, and period of the appropriation or other authority.
• Performance audits and inquiries - carrying out, and reporting on, performance audits and inquiries of public entities under the Public Audit Act 2001, and responding to requests for approvals of pecuniary interest questions regulated by the Local Authorities (Members’ Interests) Act 1968.

Our outcome measure of trust in the effectiveness and efficiency of the public sector is that New Zealand’s Transparency International Corruption Perception index score over the next three years is maintained or improved. In 2007, New Zealand’s score was 9.4 and ranked first equal on the index with Denmark and Finland.

Figure 2 summarises our outcomes, our outputs, and our strategy.

For each output class, we report against our impact and output measures and their associated standards. Two sets of tables are presented, reporting on the impact measures and the output measures associated with each output.

The impact measures help us understand whether our outputs are having the effect we want (as required by section 40(d)(i) of the Public Finance Act 1989). As they focus on impacts, we can seek only to influence, rather than control, performance against these measures. The output performance measures and standards help us understand whether we are producing quality outputs within time and resource constraints (as required by section 41(1)(e)(ii) of the Public Finance Act 1989).

Our Statement of service performance comprises pages 27-36, 42-44, 46, 50-54, and 57-59.

Figure 2
Summary of our outcomes, our outputs, and our strategy

Provision of audit and assurance services

This output class relates primarily to the Auditor-General’s statutory duty to carry out annual audits of the financial reports, and in some cases performance information, of about 4000 public entities, including the Financial Statements of the Government. This output class also includes other audits that the Auditor-General is required to do by statute, such as the three-yearly audits of local authorities’ Long-Term Council Community Plans (LTCCPs), and other assurance services provided to public entities on behalf of the Auditor-General. The cost of this work is funded mainly by fees paid by the public entities being audited. In 2007/08, annual audits and other assurance services accounted for 86% of our total expenditure.

The major portion of this output class relates to annual audits, delivery of which is supported by several key processes including:

• appointing auditors and monitoring audit fees;
• setting the Auditor-General’s auditing standards;
• maintaining auditor independence; and
• quality assurance of annual audits.

There are two main products from an annual audit:

• the audit report; and
• the management report.

The audit report is addressed to the readers of the financial statements and performance information. It provides the auditor’s independent opinion on whether the financial statements and performance information fairly reflect the public entity’s performance and financial position. If the financial statements fairly reflect the public entity’s financial performance and position and, where applicable, service performance information, the auditor issues an audit report with an unqualified opinion. However, if the auditor identifies a material² error or omission in the financial statements or performance information, the auditor issues an audit report with a qualified opinion.

The management report is addressed to the governing body or the senior management of public entities. It sets out any significant issues identified by the auditor during the audit and provides recommendations for improving the public entity’s controls, systems, and processes.

Where public entities are subject to financial review by select committees, we report the results of annual audits to responsible Ministers and select committees. These reports include a grading for entities, based on our assessment of their management control environment, financial and service performance (where required) systems and controls.

Appointing auditors and monitoring audit fees

The Auditor-General appoints auditors to carry out the annual audits of public entities on his behalf. He appoints auditors from a pool of 54 audit service providers that includes Audit New Zealand and private sector accounting firms, ranging from the four major chartered accountancy firms to sole practitioners. Most audits are allocated directly to an auditor, but during the year two auditors were appointed to an audit after a competitive tender – one was for a listed port company and the other followed the merger of two state-owned enterprises operating in the commercial market.

Because we mainly use an allocation approach, we monitor audit fees at the point of negotiation between the appointed auditor and the entity. We also provide a comparative analysis to help resolve any concerns about proposed audit fees. Our objective is to ensure that audit fees are fair to the public entities subject to audit, while being set at a level that provides a fair return to the auditors for the work required of them to meet the Auditor-General’s auditing standards.

During 2007/08, the Auditor-General appointed or reappointed the existing auditors to conduct the audits of 176 public entities and their subsidiaries.

Setting the Auditor-General’s auditing standards

Under section 23 of the Public Audit Act 2001, the Auditor-General is required to publish his auditing standards, by way of a report to the House of Representatives, “at least once every 3 years”. The Auditor-General’s Auditing Standards were most recently published in May 2008. These standards are available on our website (www.oag.govt.nz).

Section 23 also requires that each annual report must include a description of any significant changes made to the standards during the year. As part of the May 2008 re-publication, minor revisions were made to all of the auditing standards, and no other changes have been made since May 2008.

Work is currently under way to incorporate into the Auditor-General’s auditing standards any responses considered necessary in respect of New Zealand equivalents to International Standards on Auditing. That work will also consider what other changes need to be made to the standards in respect of the audit of non-financial performance information and the reporting by appointed auditors to the Auditor-General.

These changes may require publication of the Auditor-General’s auditing standards earlier than May 2011, the next scheduled publication date.

Maintaining auditor independence

High independence standards are set for both the Auditor-General’s employees and appointed auditors from chartered accounting firms, and compliance with these standards is regularly monitored. During the year, we identified one instance where concerns were raised about whether the Auditor-General’s standard on independence had been breached. The breach concerned the merger of two accounting firms and the audit of a small public entity. Prior to the merger, the audit was performed on behalf of the Auditor-General by one of the firms, and the Chairperson of the Board of the entity was a partner in the other firm. Upon merging, the new firm elected to retain the audit, which meant that the Chairperson (who continued as a partner in the new firm) was required to promptly relinquish his role as a Board member to avoid a self-review threat to independence. However, for various reasons, the Chairperson did not resign from the Board promptly, and this resulted in the independence breach. The Auditor-General put measures in place to reduce the effect of the breach to an acceptable level.

Quality assurance of annual audits

Because the Auditor-General is responsible for auditing all public entities, we ensure that audits are performed effectively and efficiently. We carry out quality assurance reviews of appointed auditors to ensure that they have complied with the relevant professional standards, as well as the Auditor-General’s own published auditing standards. We aim to review the performance of each of our appointed auditors at least once every three years.

Measuring our performance for output class: Provision of audit and assurance services

2007/08 forecast main impact measures and standards	2007/08 Actual	2006/07 Actual	2005/06 Actual
The number of public entities’ audited financial reports issued within the statutory timeframe is improved (or at least maintained), measured against the previous two years.	Total audits due for completion in year: 3946 Percentage on time: 78%	Total audits due for completion in year: 3949 Percentage on time: 83%	Total audits due for completion in year: 3962 Percentage on time: 84%
The number of public entities’ audited financial reports containing qualified opinions is reduced (or at least maintained), measured against the previous two years.	Total qualified opinions: 91 or 2.3%	Total qualified opinions: 96 or 2.4%	Total qualified opinions: 95 or 2.4%
Public entities’ acceptance of Audit New Zealand’s management report recommendations is improved (or at least maintained), measured against the previous two years.	Accepted: 72% Rejected: 4% Noted, under consideration, or not responded to: 24%	Accepted: 64% Rejected: 1% Noted, under consideration, or not responded to: 35%	Accepted: 53% Rejected: 8% Noted, under consideration, or not responded to: 39%
Central government entities’ management control environment, financial information and service performance3 information systems and controls are improved (or at least maintained), measured against the previous two years.	Management control environment: Very good: 38% Good: 51% Needs improve-ment: 11% Poor: 0% Financial systems and controls: Very good: 21% Good: 68% Needs improve- ment: 11% Poor: 0%	Not applicable – benchmark data was collected in 2007 for our first assessment of central government entities’ management control environment and financial systems and controls aspects.	Not applicable – benchmark data was collected in 2007 for our first assessment of central government entities’ management control environment and financial systems and controls aspects.

2007/08 forecast measures and standards of output delivery	2007/08 Actual	2006/07 Actual	2005/06 Actual
Less than 10% of the outstanding audit reports at 30 June 2008 are because of inaction on our part.	Total arrears at 30 June: 453 55% due to inaction on our part.	Total arrears at 30 June: 362 51% due to inaction on our part.	Total arrears at 30 June: 312 Not applicable – new measure for 2007/08.
All management reports are issued within six weeks of issuing the audit report.	93% issued within six weeks.	95% issued within six weeks.	96% issued within six weeks.
Audit New Zealand’s client survey* shows that, overall, 75% of respondents are satisfied with the quality of Audit Zealand’s work (including the expertise of staff and the quality of the entities’ relationships with Audit New Zealand.	On a scale of 1 to 10, 75% of respondents gave overall service ratings of 7 or greater.	On a scale of 75% of 1 to 10, 68% of respondents gave overall satisfaction ratings of 7 or greater.	75% of respondents satisfied.
Quality assurance reviews for all appointed auditors are completed during a three-year period. Of the auditors reviewed in any given year, 95% achieve a result of satisfactory or better.	All completed. 93% achieved satisfactory or better.	All completed. 84% achieved satisfactory or better.	All completed. 85% achieved satisfactory or better.
An annual independent review of our processes confirms the probity and objectivity of the methods and systems we use to allocate and tender audits, and monitor the reasonableness of audit fees.	Review undertaken and confirmation provided (see pages 37-39 for the reviewer’s report).	Review undertaken and confirmation provided.	Review undertaken and confirmation provided.
The Officers of Parliament Committee accepts any significant proposals for an appropriation increase in audit fees and expenses.	No significant proposal made for new measure for an appropriation increase in audit fees and expenses.	Not applicable – new measure for 2007/08.	Not applicable – new measure for 2007/08.

* In 2008/09, the client satisfaction survey has been extended to include other audit service providers in addition to Audit New Zealand.

Audit completions, reporting, and arrears

An important aspect of the performance of public entities is the issuing of audited financial statements within statutory timeframes so that those interested in the accountability of public entities receive our audit assurance as soon as possible after the year end.

As Figure 3 shows, public entities did not meet all of their statutory timeframes. Overall, the timeliness of audit completions fell, with 78% of the audits due for completion in the year being finished within the statutory timeframe compared to about 83% in the previous two years.

Figure 3
Audits completed on time

Sector*	Total audits** due in 2007/08	Number on time in 2007/08	Percentage on time in 2007/08	Percentage on time in 2006/07	Percentage on time in 2005/06
Central government
Government departments	43	43	100%	100%	100%
State-owned enterprises	144	66	46%	52%	59%
District health boards	47	30	64%	69%	73%
Tertiary education institutions	121	87	72%	67%	59%
Crown research institutes	57	29	51%	58%	59%
Other entities***	319	214	67%	68%	60%
Central government total	731	469	64%	66%	63%
Local government
Local authorities	85	75	88%	99%	98%
Other council organisations	179	138	77%	78%	84%
Energy companies	57	43	75%	97%	81%
Ports and airports	65	52	80%	94%	76%
Licensing trusts	45	29	64%	71%	73%
Fish and game councils	14	14	100%	100%	92%
Other local government	249	91	37%	52%	54%
Local government total	694	442	64%	74%	73%
Schools	2521	2167	86%	91%	93%
Total for all sectors	3946	3078	78%	83%	84%

* In all of the sectors except government departments and local authorities, we have included any related subsidiaries within the total of the main entities.

** “Total audits due” is the number of audits in each sector which had an expected completion date between 1 July and 30 June.

*** The “Other entities” group in the central government sector includes Māori Trust Boards, Rural Education Activity programmes, section 19 audits, subsidiaries of government departments, crown entities not separately identified, crown agents, and miscellaneous other central government entities.

As anticipated by the Auditor-General in the Annual Plan 2008/09, the number of audits outstanding at 30 June 2008 is also higher than in the previous two years, increasing from 312 to 453 over the two years. Figure 4 shows the number of audits outstanding at 30 June 2008.

Overall, the number of arrears has grown, largely because of changes in the public sector and changes in professional standards, together with the continuing difficulty in finding and retaining suitably qualified and experienced staff. The transition to the new accounting standards (NZ IFRS) has had a major impact on public entities in the last year. However, there are other reasons for the increased number of arrears, including auditor performance, which we intend to address. This will include continuing to seek explanations from those auditors who don’t meet our expectations, and taking action where necessary.

Our assessment is that 55% of the arrears at 30 June 2008 were caused by inaction on our part compared with 51% at the end of the previous year. The target of less than 10% of the outstanding audit reports at 30 June being caused by inaction on our part is particularly challenging, and is unlikely to be achieved until we have managed to bring total arrears down from the current level of 453 to about 150. We will be working with our audit service providers to ensure that the main obstacles to prompt completion of audits are removed, with the objective of significantly reducing the number of arrears in total and those that are our responsibility.

As mentioned in last year’s annual report, priority has been given to audit work in larger public entities at the expense of smaller audits such as cemeteries and administering bodies (for example, hall boards).

Over the medium term, and as the requirements of NZ IFRS stabilise, we would like to see improvement in the timeliness of public sector audit completions. We will also be monitoring more closely, and seeking to improve, our own timeliness in completing audits and reporting.

Figure 4
Audits outstanding at 30 June

Sector	Total audits due in 2007/08	Arrears at 30 June 2008	% Arrears at 30 June 2008	Arrears at 30 June 2007	Arrears at 30 June 2006
Central government
Government departments	43	0	0%	0	0
State-owned enterprises	144	0	0%	3	4
District health boards	47	12	26%	13	6
Tertiary education institutions	121	23	19%	33	36
Crown research institutes	57	4	7%	3	0
Other entities	319	50	16%	54	72
Central government total	731	89	12%	106	118
Local government
Local authorities	85	4	5%	2	1
Other council organisations	179	17	9%	21	18
Energy companies	57	12	21%	3	15
Ports and airports	65	2	3%	0	1
Licensing trusts	45	8	18%	5	4
Fish and game councils	14	0	0%	0	0
Other local government	249	141	57%	92	51
Local government total	694	184	27%	123	90
Schools	2521	180	7%	133	104
Total for all sectors	3946	453	11%	362	312

Comments on the individual sectors are summarised below.

Central government and local government sectors

Sixty-four percent of audits in both the central and local government sectors were completed within the statutory timeframe in 2007/08. The completion rate for central government has changed only slightly from the previous two years (66% and 63% respectively).

In general, the slowest completion rates related to the audits of subsidiary entities. Auditors have given priority to completing group accounts, with many of the subsidiary entities not being material to the group accounts. We intend to ensure that sufficient priority is also given to completion of subsidiary audits in future to improve our overall performance.

While it is pleasing to note the slight reduction in the number of audits in arrears in the central government sector at 30 June 2008 compared with a year earlier, the same cannot be said of the local government sector. Most of the arrears are smaller audits where priority has been given to other audit work.

We remain particularly concerned about the continuing pattern of audit arrears in the Māori Trust Boards sector (included in the “Other entities” category above), which we reported on to Parliament earlier this year⁴. We will continue to work directly with Maori Trust Boards to bring these audits up to date as soon as possible.

Schools sector

The majority of the public entities subject to audit by the Auditor-General are schools. In the previous two years, we have managed to complete over 90% of school audits within the statutory timeframe and held the number of arrears at 30 June to below 150. The statutory date for school audits is 31 May, only a month before the end of our reporting year, so there will always be a reasonable number of school audits in arrears at 30 June. Unfortunately only 86% of audits were completed on time in 2007/08, and 180 were in arrears at the end of the year (7% of the total).

The principal reason for the slower completion rate in 2007/08 was the transition to new accounting standards (NZ IFRS). We worked closely with the Ministry of Education to mitigate the impact of the transition, but it was inevitable that such a major change would cause difficulties in many schools. The other main reason was a major exercise to regularise unlawful expenditure incurred in previous years by a large number of integrated schools.

We are not aware of any changes of the same magnitude for the schools audits to be completed in 2008/09, and therefore anticipate that we will be able to achieve a similar performance to previous years.

Management reports issued within six weeks

This year we issued 93% of our management reports within six weeks of signing the audit report, which is slightly down on our performance in the previous two years. See Figure 5. We intend to increase the focus on timely completion of management reports during 2008/09.

Figure 5
Management reports issued within six weeks

Sector	Total due in 2007/08	Total on time in 2007/08	Percentage on time in 2007/08	Percentage on time in 2006/07	Percentage on time in 2005/06
Central government
Government departments	43	43	100%	95%	100%
State-owned enterprises	124	108	87%	98%	96%
District health boards	45	38	84%	80%	90%
Tertiary education institutions	123	99	80%	95%	85%
Crown research institutes	49	49	100%	100%	100%
Other entities	314	282	90%	92%	93%
Central government total	698	619	89%	94%	93%
Local government
Local authorities	81	52	64%	75%	81%
Other council organisations	174	121	70%	77%	86%
Energy companies	61	59	97%	95%	92%
Ports and airports	62	50	81%	84%	89%
Licensing trusts	42	28	67%	93%	77%
Fish and game councils	14	14	100%	100%	93%
Other local government	191	162	85%	88%	95%
Local government total	625	486	78%	84%	89%
Schools	2333	2288	98%	98%	99%
Total for all sectors	3656*	3393	93%	95%	96%

* The total number of management reports due in 2007/08 is not the same as the “Total audits due in 2007/08” shown in Figure 3. This is because the due dates of management reports are dependent on, but different to, the dates that audits are completed, and these two different sets of dates do not fall identically within the financial year.

Results of our annual audit opinions and Ministerial reporting

A “qualified audit report” is issued in accordance with the New Zealand Institute of Chartered Accountants Auditing Standard No. 702: The Audit Report on an Attest Audit (AS-702). AS-702 describes three types of qualified audit opinions (a “disclaimer of opinion”, an “adverse” opinion, and an “except-for” opinion), which may be issued in different situations.

A fuller definition of a “qualified audit report” and the situations where the different types may be issued is set out in our report Central government: Results of the 2005/06 Audits (parliamentary paper B.29[07a], 2007, pages 31-34).

Figure 6 provides an analysis of all qualified audit reports issued in 2007/08. Information for the previous year is provided for comparison.

Figure 6
Qualified audit reports issued in 2007/08 compared to 2006/07

Type of qualified audit report	2007/08	2006/07
Disclaimer of opinion	1	6
Adverse opinion	12	10
Except-for opinion	78	80
Total	91	96
Total of all audits due for completion	3946	3949
% qualified	2.3%	2.4%

There was a small reduction in the proportion of qualified audit reports issued compared to all audits due for completion in the year – a decrease from 2.4% in 2006/07 to 2.3% in 2007/08.

The reason for this overall decrease was because the number of non-school audit reports containing disclaimers of opinion decreased. This mainly came about because fewer entities entered the Auditor-General’s mandate during 2007/08 as compared to the previous year, which meant that there were fewer situations where we were unable to gain sufficient audit assurance on the opening position of those entities.

Further details on the nature of qualified audit opinions are included in our reports:

• Central government: Results of the 2006/07 audits; and
• Local government: Results of the 2006/07 audits.

2007/08 was the first year in which we prepared Ministerial letters using our revised approach to grading – Environment Systems and Controls, which replaced “the five management aspects”. This year therefore provides baseline data for future reporting for the Management Control Environment and the Financial Information Systems and Controls. For the 2006/07 year and the 2007/08 year, the Service Performance Information and Associated Systems and controls aspect was not graded. Gradings are expressed as being “very good”, “good”, “needs improvement”, or “poor”. We were pleased that, in this first year, no gradings of “poor” were given.

Acceptance of Audit New Zealand’s management report recommendations and client satisfaction results

Figure 7 provides an analysis of public entity acceptance of Audit New Zealand‘s management report recommendations. It is pleasing to see a positive trend of increasing acceptance of our recommendations.

Figure 7
Client acceptance of Audit New Zealand’s management report recommendations

The results of the client satisfaction survey also showed a pleasing improvement from 2006/07. Our 2007/08 overall satisfaction rating returned to the 2005/06 level, with 75% of respondents rating service at 7 or greater on a scale of 1 to 10. The client satisfaction survey report noted that Audit New Zealand should continue to focus on being client-focused through:

• strengthening relationships with clients;
• conducting a business audit rather than an accounting audit;
• identifying issues and providing help to identify solutions; and
• sharing best practice information and identifying beneficial information from entities experiencing similar issues.

Quality assurance reviews

There are five levels of quality assurance rating, assessed using the reviewers’ overall judgement of the quality of the audit work carried out. The five levels are “excellent”, “very good”, “good”, “satisfactory” and “re-review”.

Of the 44 appointed auditors reviewed during the 2007/08 year, three received a rating of “re-review”. Follow-up reviews of appointed auditors are normally carried out within the next year.

Audit fees

Our independent reviewer again assessed our fee-setting and monitoring systems (the full report is included at pages 37-39). The reviewer concluded that the processes by which audits in the public sector have been allocated and fees have been set in the financial year to 30 June 2008 have been carried out with due probity and objectivity.

As noted in the Auditor-General’s overview, however, there is continuing pressure on audit fees. Fees for all types of audits continue to be affected by the costs associated with changes in auditing and financial reporting standards – particularly the ongoing implementation of NZ IFRS – and the increasing cost of employing accountants and related audit staff.

Figure 8 summarises the movements in audit fees from 2005/06 to 2007/08, based on those audit fees that had been agreed at the time when the analysis was prepared, and shows how the factors described in the previous paragraph have continued to affect both the hours and the average hourly cost of undertaking audits across the public sector.

Figure 8
Analysis of movements in audit fees from 2005/06 to 2007/08

	2006/07 to 2007/08				2005/06 to 2006/07
	Number of entities	Increase in total fee	Due to hours	Due to charge out rate	Number of entities	Increase in total fee	Due to hours	Due to charge out rate
Government departments	35	10.1%	-2.9%	13.0%	45	5.4%	5.2%	0.2%
State-owned enterprises	16	7.5%	4.1%	3.4%	16	9.8%	5.9%	3.9%
Crown entities	37	7.5%	2.0%	5.5%	51	19.0%	8.5%	10.5%
District health boards	28	5.0%	0.1%	4.9%	36	4.1%	-0.8%	4.9%
Crown Research Institutes	7	14.4%	-2.0%	16.4%	10	14.8%	7.5%	7.3%
Tertiary education institutions	19	2.7%	-0.9%	3.6%	28	1.7%	0.1%	1.6%
Energy companies	24	4.7%	6.4%	-1.7%	27	4.6%	3.7%	0.9%
Local authorities	46	6.6%	2.2%	4.4%	58	10.5%	2.9%	7.6%
Local government subsidiaries	64	10.7%	2.8%	7.9%	96	19.6%	26.2%	-6.6%
Port companies	7	-3.3%	3.5%	-6.8%	8	0.7%	-6.0%	6.7%
Licensing and community trusts	12	6.7%	5.3%	1.4%	15	8.2%	0.8%	7.4%
Māori Trust Boards	2	10.4%	0.0%	10.4%	5	46.9%	28.7%	18.2%
Schools	2456	12.3%	12.6%	-0.3%	2445	6.8%	2.8%	4.0%
Other	30	25.8%	15.0	10.8%	37	6.2%	3.0%	3.2%
Total	2783	9.1%	5.9%	3.2%	2877	8.4%	4.5%	3.9%

Notes:

1. 1. Movements in total audit fees comprise movements in audit hours and movements in charge-out rates of staff engaged on the audits.
2. 2. Fee movements are based on those of entities with balance dates falling within the financial year of the Office (for example, the 31 December 2007 audits of schools are included as fees in the 2007/08 year).

Financial performance of output class: Provision of audit and assurance services

	2007/08 Actual	2007/08 Supp. Estimates	2006/07 Actual
	$000	$000	$000
Income
Crown	150	150	150
Other	58,505	58,708	58,474
Expenditure	(58,624)	(58,858)	(58,750)
Surplus/(Deficit)	31	-	(126)

DAVID GASCOIGNE

P O Box 2793
New Zealand

Tel: +64 4 498 5120
Fax: +64 4 498 5001
Mobile: +64 274 405 405
e-mail: [email protected]

7 August 2008

Mr Kevin Brady
The Controller and Auditor-General
PO Box 3928
WELLINGTON

Dear Mr Brady

ANNUAL REPORT OF THE INDEPENDENT REVIEW OF AUDIT ALLOCATION AND TENDERING PROCESSES

1. You have retained me as an independent evaluator of the basis upon which auditors are appointed to act on your behalf.
2. his is my report on those processes for the financial year ended 30 June 2008. I confirm that I am independent of the Office of the Auditor-General (OAG), Audit New Zealand and all private sector audit firms.
3. My instructions require me to evaluate the processes involved and to report upon the probity and objectivity with which they are implemented. No limitation has been placed upon the manner in which I carry out my assignment.
4. There are three distinct types of processes:
   1. an allocation made by the Auditor-General of an auditor for a given entity, in accordance with “the audit allocation model”;
   2. an appointment of an auditor for a given entity, following a contestable tender; and
   3. a re-appointment for a further term of an approved auditor’s contract to audit a particular entity.
5. In the past financial year, the Auditor-General appointed auditors for 14 new entities. The “audit allocation model” under which those appointments were made has been the principal method of allocation since 2003. There is a well-established set of criteria for those appointments. There has been no evident dissatisfaction expressed by those entities either with the method or with the terms of any of the appointments effected during the year.
6. The appointment of auditors through a contestable tender process is now reserved for large entities, generally those with a commercial focus, and for some schools.
7. In the past year, a contestable tender process was used in respect of two separate entities – a newly merged State Owned Enterprise and a listed Port Company in which the majority shareholder is a public entity. In each case, an evaluation of the tenders was conducted by a panel comprising the chair of the entity’s audit committee, a representative of the OAG, and an independent chair. Each panel evaluated the tenders and made a recommendation – unanimous in each case - to the Auditor-General about the appointment of a particular auditor. Both recommendations were accepted. I monitored the meeting of each of the panels and saw all relevant correspondence. I consider that the processes that were followed were both objective and fair, and the conclusions that were reached were, on all the information available, appropriate ones.
8. During the financial year, existing auditors were re-appointed to audit 63 public entities and their subsidiaries for a further term. In addition, in 111 instances a change was effected, with a different auditor being appointed in place of an existing one. The circumstances leading to these latter appointments were various: for example, retirement of an auditor, rotation of auditors within a firm. Again, in the case of all 174 appointments covered by this paragraph 8, there has been no evident dissatisfaction expressed as to the method or the terms of appointment.
9. I now deal separately with the audit of state schools. In the previous 2006/2007 financial year, there was a co-ordinated exercise, and new audit arrangements were completed for some 2,460 schools. The bulk of those arrangements are still current, so there were few appointments – and no reappointments - made in the past year. In fact, auditors were appointed, by the allocation model, in respect of only seven new state schools and 16 schools had changed audit arrangements due, mainly, to changes in the Audit Service Providers. There were no contentious issues arising from those appointments. No appointments were made by way of a contestable tender process.
10. During the course of the past year, a number of entities raised questions about the level of increase in fees in respect of the second or third year of a term of appointment. There were 14 such instances. I have read the correspondence and sought explanations about all of them. In each case, the OAG provided analyses of the fees and of factors influencing fees in the sector concerned. Those analytical and comparative analyses are becoming increasingly comprehensive. They are helpful in assisting some resolution of the questions raised. In fact, there has been a resolution in all but two instances. In those two outstanding cases, further discussion is evidently required. I will monitor progress with that during the coming year. I do note, however, that the Public Audit Act does contain a mechanism for resolving the position, should an impasse be reached.
11. In March of this year, an International Peer Review Team which you had appointed delivered its “Report on the Efficiency and Effectiveness of the Office of the Controller and Auditor-General of New Zealand”. I have read the Report and your response to the suggestions for improvement, insofar as they are relevant to the work which I undertake. I have borne in mind the points that have been made when considering what has taken place in the past year and my approach to this present report.
12. In my view, the OAG is moving sensibly towards the implementation of suggestions relating to the allocation and appointment of auditors and the setting of fees and monitoring, where that can appropriately be done. I will continue to review this during the course of the coming year.
13. I should now make two general comments. First, during the course of the financial year, I have been supplied by the OAG with a range of information about the relevant processes. I have also sought additional information and have made particular enquires. In all cases, my enquiries have been responded to fully and promptly.
14. Secondly, during the year, the OAG has continued its efforts to improve the scope, quality and usefulness of the financial analyses that it makes available to entities and to their approved auditors. Those analyses should assist in the refinement of the processes approved by you and implemented by the OAG.
15. I now state my overall conclusions. On the basis of the written material I have seen and the explanations I have been given, I consider that the processes adopted by you and by the OAG on your behalf, in relation to the appointment and allocation of auditors for audits falling within your mandate, during the financial year to 30 June 2008 have been appropriate for their purpose, and have been applied in a way which is fair and appropriate, having regard to the rights, interests and obligations of the parties concerned.
16. That observation applies both to the way in which auditors have been appointed or re-appointed, and to the way in which enquiries as to that process, or as to the appropriateness of a proposed audit fee, have been dealt with. In cases where issues have been raised by entities as to fee levels or as to performance standards, those issues have been or are being dealt with fairly and professionally.
17. Taking everything into account, my conclusion is that the processes by which audits in the public sector have been allocated and fees have been set in the financial year to 30 June 2008 have been carried out with due probity and objectivity.

Yours faithfully

David Gascoigne DCNZM CBE LLM

Parliamentary services

This output class includes two outputs:

• Advice and assistance – to select committees and other stakeholders; and
• Controller function – carrying out the Controller function.

Advice and assistance

Because of our annual audits, performance audit and inquiry work, the Auditor-General has a broad overview of public entities both individually and throughout sectors. Through our services to Parliament, we provide advice and assistance to select committees, Ministers, and individual members of Parliament, as well as to central agencies and other public sector representative groups, to assist them in their work to improve the performance and accountability of public entities.

The main ways in which this advice and assistance is provided is through:

• reports and advice to select committees to assist their financial reviews of government departments and Officers of Parliament, State-owned enterprises, and Crown entities;
• reports and advice to select committees to assist their examination of the Estimates of Appropriations; and
• reports to responsible Ministers on the results of the annual audits.

We also provide advice and assistance through:

• reports to Parliament and other constituencies on matters arising from our annual audits (including tabling two reports in Parliament on the results of our 2006/07 audits in central and local government);
• responding to requests and participating in working parties on matters related to financial management and accountability with other stakeholders, including government departments, central agencies, local authorities, professional bodies, sector organisations, and other public entities; and
• working with Auditors-General in other countries to encourage, promote, and advance co-operation in the field of public audit. This includes our roles as Secretariat of the Pacific Association of Supreme Audit Institutions (PASAI – formerly SPASAI, the South Pacific Association of Supreme Audit Institutions), membership of various committees of the International Organisation of Supreme Audit Institutions (INTOSAI), and acting as executing agent for the Pacific Regional Audit Initiative (for which we received funding from the Asian Development Bank, with co-financing from the Japan Special Fund and the Government of Australia.)

Measuring our performance for output class: Parliamentary services (advice and assistance)

2007/08 forecast main impact measure and standard	2007/08 Actual	2006/07 Actual	2005/06 Actual
Select committees confirm that our advice assists them in Estimates of Appropriation and financial review examinations.	100% of respondents rated us 4 or better on a scale of 1 to 5, as assessed through our stakeholder survey.	86% of respondents rated us 4 or better on a scale of 1 to 5, as assessed through our stakeholder survey.	New measure for 2006/07.

Figure 9
Stakeholder feedback on Parliamentary services impact

2007/08 forecast measures and standards of output delivery	2007/08 Actual	2006/07 Actual	2005/06 Actual
Reports and advice are given to select committees and Ministers at least two days before an examination, unless otherwise agreed.	100%	100%	New measure for 2006/07.
An internal review of a sample of financial review, Estimates, and Ministerial reports confirms that they meet relevant standards and procedures, including that reports are consistent in their framework and approach and are peer-reviewed in draft.	Confirmed by internal review of a sample of reports.	Confirmed by internal review of a sample of reports.	New measure for 2006/07.
At least 85% of select committee members we survey rate the advice they receive from us as 4 or better on a scale of 1 to 5 for:
quality	80%	100%	100%
usefulness.	83%	86%	New measure for 2006/07.
At least 85% of other stakeholders we survey rate the advice they receive from us as 4 or better on a scale of 1 to 5 for:
relevance and usefulness.	100%	100%	New measure for 2006/07.

Figure 10
Stakeholder feedback on Parliamentary services outputs

To assess the relevance, value, and timeliness of our advice and assistance to select committees, Ministers, and other stakeholders, we conduct an independent stakeholder survey. For 2007/08, there were falls in our stakeholder ratings for the quality and usefulness of advice to select committees. Both output measures fell slightly below our target standard of 85% of select committee members surveyed rating our advice as 4 or better on a scale of 1 to 5 (see Figure 10 and preceding table).

However, we note that our impact measure, in which we ask whether our advice assists select committee members in their Estimates and financial review examinations, showed an increase in ratings compared to the previous year (see Figure 9 and preceding table). The evaluation and recommendations noted that the results:

… show that the Office is continuing to perform at a high level.

Where the scores are reduced, this is primarily because of the smaller number of interviews conducted this year compared to last, meaning that lower ratings of one or two stakeholders or a higher number of ‘Don’t knows’ have a greater impact on the percentage ratings.

The survey report recommended that the Office address the Health Committee’s concerns, which were primarily about relationship management. We propose to explore this with the incoming Health Committee of the new Parliament, to allow us to address the committee’s concerns.

The report also recommended that the Office assess the identified improvement areas noting that “stakeholders commented that while they were happy to suggest improvements, these were minor compared with their overall satisfaction and respect for the Office and the quality of its work.” In particular, these improvement areas relate to the varying interests of select committees For example, we received suggestions from the Chairpersons of two different committees that we should:

• consult select committees on report content - to understand what a committee might want to see covered in our reports, on the basis that, since the OAG already has to review the financial information, other matters may be more relevant for a committee’s review;
• provide more detailed financial analysis in select committee briefings - to provide more in-depth financial analysis as a basis for committee members to ask more searching questions when conducting reviews.

We are considering how we can get greater input from select committees on their particular interests and concerns in order to better shape our reporting to their needs, while still performing our role of advising on the results of our audits and the observations and issues that arise from these.

Our internal review of financial review, Estimates, and Ministerial reports concluded that appropriate systems are in place to meet the Office’s responsibilities in providing advice to select committees on Estimates examinations and financial reviews, and that the key controls identified had been operating effectively over the period. Several minor recommendations for improvement were made, and these have been addressed. One area currently outstanding relates to more fully reporting the adequacy and appropriateness of the performance measures contained within the Statement of Intent within the Estimate examination briefings. Improving performance measures and reporting is an Office-wide focus. Extensive effort went into providing feedback on forecast information prepared by entities, with audit views being provided in financial review briefings.

Controller function

The “Controller” function of the Controller and Auditor-General exists to provide independent assurance to Parliament that expenses and capital expenditure of departments and Offices of Parliament have been incurred for purposes that are lawful, and within the scope, amount, and period of the appropriation or other authority.

The Office of the Auditor-General and appointed auditors carry out standard operating procedures to give effect to the Controller function in keeping with the Auditor-General’s auditing standards and the Memorandum of Understanding with the Treasury. This involves reviewing the monthly reports provided by the Treasury, and advising the Treasury of any issues arising and the action to be taken.

Each year, we report to Parliament on the significant issues arising from the operation of the Controller function.

Measuring our performance for output class: Parliamentary services (Controller function)

2007/08 forecast main impact measure and standard	2007/08 Actual	2006/07 Actual	2005/06 Actual
Expenses and capital expenditure of departments and Offices of Parliament are incurred for purposes that are lawful and within the scope, amount, and period of the appropriation or other authority. Where there is a breach or suspected breach, actions are taken in accordance with the Auditor-General’s powers and auditing standards, and the Memorandum of Understanding with the Treasury.	The operation of the monthly Controller process and the appropriation audit were carried out to ensure that this measure was achieved.	New measure for 2007/08.	New measure for 2007/08.

There were 46 instances of expenditure outside the terms of an appropriation during the 2006/07 financial year, involving 19 separate departments. This was a significant reduction from the previous year (84 instances involving 21 departments), the first full year of operation of the Controller function following the 2004 amendments to the Public Finance Act 1984.

Arrangements to fulfil the requirements relating to Offices of Parliament have been established, and information provided. A new Memorandum of Understanding with the Treasury is soon to be finalised that will apply for the new financial year.

2007/08 forecast measures and standards of output delivery	2007/08 Actual	2006/07 Actual	2005/06 Actual
Monthly statements provided by the Treasury are reviewed for the period September to June inclusive. Advice of issues arising and action to be taken is provided to the Treasury and appointed auditors within five working days of receipt of the statement.	All monthly procedures have been followed, and agreed timescales achieved.	All monthly procedures have been followed, and agreed timescales achieved.	All monthly procedures have been followed, and agreed timescales achieved.
Internal quality assurance is undertaken to gain assurance that our policies, procedures, and standards in relation to the Controller function have been applied appropriately.	Review to be undertaken in the first quarter of 2008/09, following completion of the Controller function work for 2007/08.	An internal review undertaken in May 2007 confirmed that the design of the work to address the Controller function and appropriation audit is appropriate.	Not applicable.

An internal quality assurance review was undertaken in May 2007. While it noted that the design of work to address the Controller function and appropriation audit was appropriate, it also noted some variable practices. The review made several recommendations for improvement, primarily around revising audit procedures and providing training for auditors of government departments. The actions on these recommendations was reported to the Office’s Audit and Risk Committee in December 2007, and work was commenced or completed over the rest of 2007/08 on all of the recommendations made in the May 2007 review. A follow-up review will be undertaken in 2008/09 following completion of the Controller function work for 2007/08.

Financial performance of output class: Parliamentary services

	2007/08 Actual	2007/08 Supp. Estimates	2006/07 Actual
	$000	$000	$000
Income
Crown	3,064	3,063	2,890
Other	6	-	9
Expenditure	(3,014)	(3,063)	(2,785)
Surplus	56	-	114

Performance audits and inquiries

This output class includes two outputs:

• Performance audits – reports to Parliament and other constituencies on matters arising from performance audits and special studies; and
• Inquiries – undertaking and reporting on inquiries relating to central and local government entities.

We published 22 main outputs during 2007/08 covering performance audits, others studies, and inquires. Appendix 1 on pages 113-120 summarises these outputs. A copy of each report is also published on our website: www.oag.govt.nz.

Performance audits and other studies

A performance audit is a significant and in-depth audit covering issues of effectiveness and efficiency. It provides Parliament with assurance about specific issues or programmes and their management by the relevant public entity or entities. We also undertake other studies that may result in published good practice guidance on topical issues of public sector accountability and performance to assist public entities to better manage these issues.

To select performance audits and studies, each year we undertake a process of environmental scanning, identification of issues and risk assessment, and assurance response identification, to help determine how we can use our discretionary resources to best effect.

In deciding the discretionary work programme, the Auditor-General considers that – regardless of any other work he might do – he has a responsibility to Parliament and the public to regularly provide assurance about the activities of public entities that are large and complex, and/or where it is difficult to assess their performance.

Core areas of interest for the Auditor-General include:

• major public investment or liability management (focusing on the New Zealand Debt Management Office, Accident Compensation Corporation, New Zealand Superannuation Fund, Government Superannuation Fund, Earthquake Commission, and Student Loans Scheme);
• major public revenue management or generation (focusing on the Inland Revenue Department and New Zealand Customs Service);
• major asset management or infrastructure spending or management (focusing on health, correctional facilities, education, de fence, conservation, transport, housing, and energy);
• major expenditure including service delivery expenditure (focusing on health, education, and social security and welfare); and
• similar issues in the local government sector.

Guided by these core areas of interest, we identified areas within or throughout entities or sectors that warranted further examination. To assign priorities to these assurance interventions, we considered the:

• severity and significance of the issue;
• benefit to the public;
• extent to which the performance of the public entity or sector could be improved; and
• fit with the Auditor-General’s role and mandate.

We consulted with Parliament and other stakeholders on our draft annual plan (and in particular our proposed discretionary work programme) to ensure that stakeholders agreed we were addressing the issues of greatest relevance.

On pages 53-55, we describe our progress on the performance audits and other studies we proposed in our Annual Plan 2007/08.

Measuring our performance for output class: Performance audits and inquiries (Performance audits and other studies)

2007/08 forecast main impact measure and standard	2007/08 Actual	2006/07 Actual	2005/06 Actual
Entities accept or respond to the recommendations made in our performance audits, as assessed by internal review of three reports of performance audits published in the previous year and selected by our independent Audit and Risk Committee. The results of these reviews are presented to the Officers of Parliament Committee.	Three performance audits were reviewed and the results presented to the Officers of Parliament Committee. Our review concluded that our recommendations had been accepted by the relevant entities and either had been implemented or were being implemented.	New measure for 2007/08. However, in 2006/07, three performance audits selected by our Audit and Risk Committee were reviewed and the results presented to the Officers of Parliament Committee. Our review concluded that, in two cases, our recommendations had been accepted by the relevant entities, and, in the third case, some of our recommendations had been accepted. The accepted recommendations were being implemented at the time of our review.	New measure for 2007/08.

For 2007/08, the summarised results of our reviews of entities’ acceptance and response to recommendations made in the three selected performance audits were as follows:

• Our report was positively received by the entity, and the recommendations were implemented within six months of the publication of our report;
• The entity has told us that it has acted on all of our recommendations and is working on ongoing improvement including a particular focus on strengthening monitoring. We monitored the changes made through our 2007/08 annual audit work.
• Our report was viewed by the entity and its Minister as constructive and useful, with a project team being established to implement our recommendations. We maintained regular liaison with the project team to support the implementation of our recommendations.

2007/08 forecast measures and standards of output delivery	2007/08 Actual	2006/07 Actual	2006 Actual
We complete 19 to 21 reports on matters arising from performance audits and special studies, and inquiries.	22	20	22
Select committees and other stakeholders are satisfied with the proposed work programme of performance audits (as indicated by feedback on our draft annual work programme).	Feedback was sought on two occasions under section 36(1) of the Public Audit Act 2001. Feedback mainly supported the approach we took to the proposed work programme, and gave us guidance on the scope and relative emphasis we should place on one or two key studies.	Feedback was sought on two occasions under section 36(1) of the Public Audit Act 2001. Feedback mainly supported the approach we took to the proposed work programme, and gave us guidance on the scope and relative emphasis we should place on one or two key studies.	Feedback was sought on two occasions under section 36(1) of the Public Audit Act 2001. On the basis of the feedback we received, we reviewed and amended our proposed work programme.
At least 85% of the stakeholders that we survey rate our performance audit reports (relevant to their sector or interest), as 4 or better on a scale of 1 to 5 for
quality	50%	100%	100%
:usefulness.	66%	86%	New measure for 2006/07.
Our performance audit methodology reflects good practice for undertaking such audits, as assessed every second year by the National Audit Office of Australia.	The next review is scheduled for 2008/09.	The National Audit Office of Australia reviewed two performance audits looking at all aspects of the audit process, and endorsed the quality of the two audits.	New measure for 2006/07.
Each year independent reviews of two performance audits are undertaken. These reviews confirm the quality of these reports in terms of the presentation of administrative and management context, report structure, presentation, and format (including use of graphics and statistics), and the reasonableness of the methodology used and the resulting conclusions and recommendations.	Independent reviews of two performance audits confirmed the quality of the reports.	Independent reviews of two performance audits confirmed the quality of the reports.	New measure for 2006/07.
Internal quality assurance reviews on selected performance audit reports confirm that reports are prepared in keeping with the performance audit methodology.	Internal review confirmed that appropriate systems and and controls are in place that reports are prepared in keeping with the performance audit methodology.	Internal review confirmed that appropriate systems and controls are in place.	New measure for 2006/07.

Most work we undertake to ensure quality in our performance audit work confirmed that our work is of high quality and remained on a par with previous years. We also equalled our success of 2006/07 in which we completed the highest number of performance audits in the history of the Office. The International Peer Review Team also commented favourably on our performance audit work reporting that:

Overall we found a robust performance audit framework, with thorough processes and quality assurance arrangements complementing the findings of other external quality assurance reviews in recent years. The reports themselves were clearly written and easy to follow.

One of the measures we use to assess the effectiveness of our performance audits and other studies is feedback from a small sample of stakeholders as collected by an independent stakeholder survey. While consultation with select committees showed considerable support for our work programme, including the proposed performance audits, our 2007/08 stakeholder survey showed significant reductions in satisfaction for our performance audit work (see Figure 11). Stakeholder rankings for both quality and usefulness of performance audits fell well below our target for the year. Two-thirds of the stakeholders responded “don’t know” on satisfaction with the quality of performance audits, and half responded “don’t know” on satisfaction with the usefulness of performance audits. This reflects that only a very small number of respondents were in sectors to which our performance audits for the year were relevant.

We do not count these “don’t know” responses, and the results for 2007/08 are based on feedback from a very small numbers of stakeholders – two on quality and three on usefulness. The average scores for quality and usefulness were 4.4 and 4.0 respectively on a scale of 1 to 5, and are more consistent with previous years than the percentages of respondents rating satisfaction with quality and usefulness.

Figure 11
Stakeholder feedback on performance audit outputs

Our Five year Strategic Plan 2004-09 has seen the Office substantially increase the number of reports on performance audits, special studies, and inquiries it produces to 21 on average in each of the last three years, as we planned to do. This effort recognises that, relative to our international counterparts, the Office audits a very large number of public entities. We have very limited discretionary resources to undertake in-depth audit work, such as through performance audits, to provide Parliament with assurance about specific issues or programmes and their management by the relevant public entity or entities. This limited discretion means that our performance audits are undertaken with significantly lesser resource and costs than those of many of our peers – but also means that, at times, we are not able to do as much in-depth work as we would like. The International Peer Review Team made a number of recommendations about opportunities for improvement of our performance audits against what the Team described as a “back drop of informative and well-received reports”, including:

• More financial analysis would be helpful in some reports, particularly those that examine particular programmes and initiatives;
• More quantification of the costs and benefits of government programmes would help to determine whether entities are choosing the most cost-effective means of achieving their objectives;
• The Office of the Auditor-General might consider reviewing staffing levels for performance audits, looking in particular at continuity and at its capacity to do justice to the range and number of audits tackled each year;
• The Performance Audit Group should consider whether any topics for future audit lend themselves to an inquiry-style approach. By including some of these shorter studies, the Group would be able to offer a wider range of products and increase the flexibility of its approach.

During 2008/09 and 2009/10, we intend to carry out development work to allow us to explore and implement the recommendations of the International Peer Review Team and to strengthen the depth and relevance of our performance audit and other studies reports.

The independent reviews of two performance audits confirmed the quality of our performance reports making useful comments about opportunities for improvement. These mainly related to:

• How our recommendations are expressed, with reviewers viewers suggesting principles that recommendations be significant, targeted and measurable. We have revised our guidance for conducting performance audits to address this feedback.
• Presentation of reports, with some reviewers suggesting the use of photographs and simple graphics and colour to improve communication and readability. We have begun making some changes to address these suggestions.
• Ensuing that the scope of our audit work is well explained. We are reviewing scope statements to ensure that they are comprehensive and include a clear statement and explanation of what the audit does not cover and why, as well as what the audit does cover.

Progress against our Annual Plan 2007/08

On pages 57-58 of our Annual Plan 2007/08, we listed a number of performance audits and other studies that we proposed to start and/or complete in 2007/08. Much of that work is now complete.

Reports published during 2007/08 on completed performance audits and other studies were:

• Turning principles into action: A guide for local authorities on decision-making and consultation
• *Inquiry into Dunedin City Council and Otago Regional Council’s funding of the proposed stadium
• Management of conflicts of interest in the three Auckland District Health Boards
• Effectiveness of controls over the taxi industry: Follow-up report
• Implementing the Māori Language Strategy
• Liquor licensing by territorial local authorities
• New Zealand Agency for International Development: Management of overseas aid programmes
• Mental health services for prisoners
• New Zealand Trade and Enterprise: Administration of grant programmes – follow-up audit
• Audit committees in the public sector
• Inland Revenue Department: Effectiveness of the Industry Partnership programme
• Responses to the Coroner’s recommendations on the June 2003 Air Adventures crash
• Guardians of New Zealand Superannuation: Governance and management of the New Zealand Superannuation Fund
• Ministry of Social Development: Preventing, detecting, and investigating benefit fraud
• The Accident Compensation Corporation’s leadership in the implementation of the national falls prevention strategy
• Procurement guidance for public entities
• *Public sector purchases, grants, and gifts: Managing funding arrangements with external parties
• Managing funding to non-government organisations – from principles to practice
• *The Auditor-General’s observations on the quality of performance reporting
• *Charging fees for public sector goods and services
• Ministry of Education: Monitoring and supporting school boards of trustees
• Reporting the progress of defence acquisition projects.

* Additions to the work programme.

In addition, we completed work during 2007/08 on a performance audit looking at maintaining and renewing the rail network, the report on which was presented to the House of Representatives on 1 July 2008.

Variations to the 2007/08 annual work programme

Our actual work programme varies from that planned, in response to changing priorities, such as urgent work on inquiries that intervenes, and changes in government policy or entity circumstances affecting the timing or relevance of audits.

To help accommodate these inevitable changes, the planned work programme includes more performance audits than our target of 19 to 21 reports on matters arising from performance audits and special studies, and inquiries.

Six of the performance audits listed in our Annual Plan 2007/08 will now be completed in 2008/09. These are:

• Maintaining and renewing the rail network – report presented 1 July 2008
• Ministry of Education: Supporting professional development for teachers – report presented 26 August 2008
• Housing New Zealand Corporation – maintenance of state housing
• Ministry of Health – monitoring the implementation of the Primary Health Care Strategy
• Work and Income – effectiveness of case management of sickness and invalid beneficiaries
• Civil Aviation Authority (and Ministry of Transport) – follow-up on response to 2005 audit.

In addition:

• the proposed Local government – asset management planning performance audit was removed from the 2007/08 work programme – work to improve asset management practice in the sector is continuing through the National Asset Management Steering Group of the Association of Local Government Engineering New Zealand Incorporated, and we will be keeping a watching brief on this work with a view to determining whether we undertake a performance audit after the 2009-19 LTCCPs have been completed;
• the Local government – water services assessments audit will now focus on the management of demand for water; and
• the Health sector – management of funding to non-government organisations by District Health Boards performance audit has been replaced by an examination of procurement in District Health Boards that includes, but is not limited to, the funding of non-government organisations.

Inquiries

General requests for inquiries

The Auditor-General has discretion to inquire into a public entity’s use of resources. The Auditor-General can carry out inquiries on his own initiative or when correspondence from the public draws attention to particular issues.

We receive a large number of requests for inquiries each year. In 2007/08, we received 250 requests, which is within the usual range. By the end of the year, we had responded to 223 of these requests, and have carried 27 forward into the following year. We also completed 19 requests carried forward from the previous year.

Not all requests result in an inquiry. We consider each request received to determine the most appropriate way to proceed. Factors we consider include whether the Auditor-General is the appropriate authority to consider the issues, whether we have the resources to do so, and the seriousness of the issues raised.

We classify inquiries into three categories – “routine”, “sensitive”, and “major” – depending on how serious the issues raised are . A routine inquiry involves straightforward issues, and can often be carried out either by a review of documents or through correspondence and discussion with the public entity. It will not usually result in a published report. We always advise the correspondent of our conclusions and the reasons for them, and in some instances we advise the public entity of the matter.

Sensitive and major inquiries involve more complex issues and may attract a broader level of public interest and attention. In these inquiries, we will often review the entity’s files and may also formally interview people. We may report the results of these inquiries publicly, as well as advising the correspondent and the entity.

Measuring our performance for output class: Performance audits and inquiries (Inquiries)

2007/08 forecast main impact measure and standard	2007/08 Actual	2006/07 Actual	2005/06 Actual
Entities take action in response to concerns identified in inquiry reports, as assessed by follow-up on a sample of sensitive and major inquiries undertaken in the previous year.	We have followed up the one sensitive inquiry that was undertaken in 2006/07 (there were no major inquiries). The entity concerned has taken positive steps to address the comments we made.	New measure for 2007/08.	New measure for 2007/08.

2007/08 forecast measures and standards of output delivery	2007/08 Actual	2006/07 Actual	2005/06 Actual
80% of our findings on inquiries are reported to the relevant parties within: three months for “routine” inquiries* six months for “sensitive” inquiries* 12 months for “major” inquiries.*	91% (115 routine inquiries, 105 reported within three months). 82% (11 sensitive inquiries, 9 reported within six months) No major inquiries were undertaken.	95% (80 routine inquiries, 76 reported within three months). 0% (1 sensitive inquiry, not reported within six months). No major inquiries were undertaken.	New measures for 2006/07.
For enquiries under the Local Authorities (Members’ Interests) Act 1968, we complete 80% within 30 working days.	95% (103 received, 98 reported within 30 working days).	87% (47 received, 41 reported within 30 working days).	86% (49 received, 42 reported within 30 working days).
Responses to requests for inquiries and our administering of the Local Authorities (Members’ Interests) Act 1968 requests are undertaken in accordance with relevant policies, procedures, and standards as confirmed by internal quality assurance review.	Review was completed and confirmed that requests are undertaken in relevant policies, procedures, and standards.	Review was completed and confirmed that requests are undertaken in relevant policies, procedures, and standards.	Undertaken.

*These times are measured from the date we decide to start the inquiry, which may be later than the date we received the request to inquire.

As most of our inquiry work is responsive to issues arising during the year, the workflow can be uneven. In 2006/07, we had undertaken only one sensitive inquiry and no major inquiries. In 2007/08, however, we completed 11 sensitive inquiries, including inquiries on the funding arrangements supporting the proposed development of a new stadium in Dunedin, and into decisions made by Queenstown Lakes District Council for its regulatory and resource management services.

After a significant amount of preliminary work, we announced in April 2008 that we would not inquire into matters raised with us in relation to procurement practices at the Hawke’s Bay District Health Board, but would instead carry out a programme of work to provide assurance that necessary improvements were being made at that Board and to strengthen policies and practices across the District Health Boards sector. At the end of the year, we were close to completing a major inquiry into activities at the West Coast Development Trust and had just announced terms of reference for an inquiry into matters arising out of Immigration New Zealand.

Figure 12 provides a summary of the requests for inquiries dealt with during the year.

Figure 12
Summary of requests and inquiries dealt with during 2007/08

	Requests carried forward from 2006/07	Requests received during 2007/08	Requests dealt with during 2007/08	Requests carried forward to 2008/09
		250		27 requests (categorised on completion)
No inquiry	1		116
Routine inquiries	16		115
Sensitive inquiries	2		11
Major inquiries	0		0
Total	19	250	242	27

Enquiries under the Local Authorities (Members’ Interests) Act 1968

We also administer the Local Authorities (Members’ Interests) Act 1968, which governs the financial interests of members of local authorities. In 2007/08 we received 103 enquiries under this Act. This was slightly more than usual, in part because of the effect of the October 2007 local authority elections. We also carried forward seven enquiries from the previous year. See Figure 13.

Figure 13
Summary of Members’ Interests Act enquiries dealt with during 2007/08

	Carried forward from 2006/07	Received during 2007/08	Completed during 2007/08	Carried forward to 2008/09
Members’ Interests Act enquiries	7	103	110	0

We have recorded our view many times in recent years that the Act is in need of reform. It is poorly drafted, it operates unevenly, and the rationale for some of the requirements is unclear. Our experience during the 2007 local authority elections highlighted that the difficulties with the Act have practical consequences and can have a significant effect on the operation of the local democratic process. Resulting from the 32 requests for guidance that we dealt with, four people were either prevented or discouraged from standing as candidates because of the contracting rules in the Act, and two others had to rearrange their personal affairs to be eligible to be candidates. We remain of the view that the Act in its current form does little to strengthen democracy at the local level. Our annual publication on our activities in the local government sector includes an article discussing these issues and our recent experience with the Act in more detail.⁵

Our internal quality assurance review confirmed that our inquiry processes are operating well and offered some minor suggestions on areas of possible future improvement. As a result of these reviews and our own ongoing assessment of how well the new processes are operating, we are likely to make some further refinements to the basic process during the coming year.

Financial performance of output class: Performance audits and inquiries

	2007/08 Actual $000	2007/08 Supp. Estimates $000	2006/07 Actual $000
Income
Crown	6,407	6,407	6,295
Other	14	-	20
Expenditure	(6,223)	(6,407)	(6,018)
Surplus	198	-	297

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1: These five main areas reflect the mandate given to the Auditor-General in the Public Audit Act 2001.

2: Material is defined in AS-702: The Audit Report on an Attest Audit as:

A statement, fact or item that is of such a nature or amount that its disclosure, or the method of treating it, give full consideration of the circumstances applying at the time the written assertion or set of assertions is completed, has the potential to influence users of the audit subject matter in making decisions or assessments.

3: Service performance information and associated systems and controls were not graded in 2007/08.

4: Central Government: Results of the 2006/07 audits, 2008, parliamentary paper B.29[08a], Part 8, “Status of Māori Trust Board Audits”.

5: Local Government: Results of the 2006/07 audits, 2008, parliamentary paper B.29[08b], part 12, “Local Authorities (Members’ Interests) Act 1968”.

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