Introduction
This is our report on the 2006/07 audits of the local government sector. Most of these audits were of regional and territorial local authorities and their subsidiary entities.
This is the third year that all regional and territorial local authorities reported under the full requirements of the Local Government Act 2002 (the Act). It is the first year after the sector’s decision to adopt the New Zealand equivalents to International Financial Reporting Standards. Under the Act, the Long-Term Council Community Plan (LTCCP) is now the basis of a local authority’s annual financial and performance accountability to its community. From 2006/07, each local authority reported against its audited 2006-16 LTCCP.
Purposes of this report
The purposes of this report are to:
- tell Parliament and the local government sector about matters arising from carrying out our role as auditor of the sector;
- comment on various financial management and reporting, governance, and administration issues;
- highlight some matters and make some observations on development contributions; and
- summarise the findings from some performance audits carried out during the year that affect local government.
Review of 2006/07
By the end of 2006/07, and particularly after the local government elections in October 2007, many local authorities started working on their project plans for preparing and adopting their 2009-19 LTCCPs. The 2009-19 LTCCPs will come into effect on 1 July 2009.
This start by local authorities was complemented by the effective work of the Society of Local Government Managers, in association with Local Government New Zealand, to help the sector by bringing together the lessons of the 2006-16 LTCCP and defining good practice. In addition, the National Asset Management Steering Group updated its important volume relating to identifying and describing levels of service. The new information was available to the sector after 30 June 2007.
These moves are an encouraging sign in contrast to the evidence of under-preparation for the 2006-16 LTCCP and the subsequent affect on our audits.1 Local authorities will be maintaining a focus on planning for and preparing their LTCCPs for much of 2008/09.
The 2006/07 financial year was in the middle of the three-year period between elections. It should have been a comparatively quiet year leading up to the local authority elections. However, three matters particularly affected the sector:
- timeliness of reporting performance;
- amendments to LTCCPs; and
- the change to New Zealand equivalents to International Financial Reporting Standards (NZ IFRS).
Timeliness in reporting on performance
The sector has shown a negative trend in completing its reporting obligations for 2006/07. Sixteen local authorities (nearly 19% of all local authorities) were unable to complete the preparation and adoption of audited financial statements by the statutory deadline (the end of October, which is four months after the balance date). Seven (nearly 10% of the sector) were still unable to report by 31 December 2007. There is a real risk that at least two local authorities will be unable to adopt audited financial statements by 30 June 2008 – a full 12 months after their balance date.
While many in the sector are getting ready for their 2009-19 LTCCPs, a significant number of local authorities are still trying to finish their reporting from 2006/07.
The adoption of NZ IFRS clearly affected the workload of local authorities. However, 69 of the 85 local authorities were still able to cope within the existing statutory time limits.
While we were able to issue audit opinions in February 2008 on the financial statements for Invercargill City Council and its subsidiaries for the years ended 30 June 2005 and 30 June 2006, it remains one of the local authorities with unsigned financial statements for 2006/07. This continues to be an unsatisfactory result for the community of Invercargill.
Amendments to the Long-Term Council Community Plans
As the “middle year” between the last and the next required LTCCPs, local authorities continued to pursue a substantial number of amendments to their 2006-16 LTCCPs. This shows the prospective nature of LTCCPs and the dynamic nature of local authority work. Generally, the process for amendments worked well. However, we note that there are a number of financial policy amendments, mainly to comply with section 102(6) of the Act.
We continue to receive about 180 ratepayer enquiries annually – many of them about a local authority’s decision-making and consultation processes under the Act and within the context of the adopted LTCCP. In most instances, we have been able to form the view that the processes used by the local authorities have been reasonable and there are no grounds for us to carry out an inquiry. We hope that our responses to ratepayers – while not always giving the response or redress they may want – help them understand the decision-making processes under the Act.
During the year, we published our guidance on observed good practice for decision-making and consultation by local authorities.2
Reporting on local authorities’ achievements under the LTCCP is important – both on the levels of service they planned to provide to the community and on how they are contributing to promoting the well-being of the community. Local authorities are required, under clause 15 of Schedule 10, to report on these aspects in their annual reports, and we have continued to analyse and comment on this reporting. While the results are getting better there are still substantial improvements to be made.
We have raised this matter with the sector and identified that it will be an important focus of the audit of the 2009-19 LTCCPs.
New Zealand equivalents to International Financial Reporting Standards
Most local authorities adopted reporting against the new NZ IFRS in 2006/07. The adoption of NZ IFRS caused a great deal of work for all local authorities and has partially contributed to a less timely rate of reporting financial results to communities.
We hold a broader concern about the appropriateness of NZ IFRS for local authority reporting. The NZ IFRS add a level of complexity to reporting financial results, when there is a need for simplicity and clarity in reporting to the communities that local authorities serve. Instead, local authorities’ notes to the financial statements have doubled in size even though they were designed to aid disclosure to the main financial statements. We are yet to be convinced this is a favourable or helpful trend.
We are specifically concerned that some standards (such as NZ IAS 23 on borrowing costs) will give rise to significant issues of concern to the sector when preparing the 2009-19 LTCCPs.
We continue to work with the Accounting Standards Review Board to seek an approach to standard setting that focuses on helping the reader of local authority and other public entities’ accountability statements.
Conclusion
Meeting the requirements of the Act and NZ IFRS dominated 2006/07. Many local authorities met the various requirements, including “living with the LTCCP”.
However, we remain concerned that some local authorities are not dealing well with meeting the Act’s requirements. Their inability to meet normal accountability requirements, combined with newly elected local authorities and the move into the next phase of LTCCP planning, means that these local authorities are already “on the back foot” in meeting the challenges of 2008/09.
1: Controller and Auditor-General, Matters arising from the 2006-16 Long-Term Council Community Plans, June 2007.
2: Turning principles into action: A guide for local authorities on decision-making and consultation, September 2007.