Part 5: Reporting on effects of activities in the annual report

Local government: Results of the 2006/07 audits.

5.1
The Local Government Act 2002 (the Act) contains a comprehensive reporting regime for local authorities. The audited annual report of each local authority is the main channel for reporting. Local authorities are required to plan for, and report on, the effect of their activities on the social, economic, environmental, and cultural well-being (the four community well-beings) of their communities.1

5.2
The Act requires the Auditor-General to report on whether a local authority has complied with these requirements.2

5.3
In this Part, we review how local authorities approached these requirements, which are set out in clause 15(d) and 15(f) of Schedule 10 of the Act respectively. We focus on:

  • the disclosure requirements of reporting on the effects of local authorities’ activities in their annual reports; and
  • local authorities’ statements of acquisition and replacement of assets.

5.4
This is the fourth time we have reported to Parliament on these disclosure requirements. In the past four years, we have observed a range of disclosures in response to the new requirements of the Act, from information being clearly available to the reader to no relevant disclosures at all. In some cases, information appears to be included in the annual report solely to meet the requirements of the Act, and is presented in such a way that it would be difficult for the reader to recognise the information as being included to meet the intentions of clause 15 of Schedule 10 of the Act (for example, it may be spread throughout the annual report rather than reported in one place).

5.5
To date, we have reported inadequate disclosures in our management letters to local authorities. Although we have observed some improvement in 2006/07, overall the reporting against the requirements of clause 15(d) and 15(f) of Schedule 10 of the Act remains well below what we would expect. As we move towards the 2009-19 Long-Term Community Council Plans (LTCCPs) round, we expect more from the local authorities’ performance reporting. The reporting required by clause 15(d) and 15(f) of Schedule 10 of the Act, and other parts of clause 15, are integral to the effective operation of the performance management framework of every local authority.

5.6
We expect local authorities to define how they will monitor progress towards achieving community outcomes3 through their 2009-19 LTCCP. Local authorities should also put in place systems to improve current reporting against the other requirements of clause 15 of Schedule 10 of the Act. Such systems need to capture, monitor, and evaluate progress towards achieving community outcomes. Therefore, we will be considering our reporting options and obligations where local authorities fail to provide relevant information that reasonably and coherently addresses the requirements of clause 15.

Background

5.7
To be able to meet the requirements of the Act, local authorities will need to prepare a comprehensive framework that links their monitoring of community outcomes, decision-making, and performance against levels of service to their reporting. Reports need to include the identified effects of activities on the four community well-beings. It is clear from our previous reports4 and the annual reports of local authorities that this is an area in which substantial improvement is still needed.

5.8
The Act requires LTCCPs to include frameworks for monitoring community outcomes.5 We also expect the report on progress to be published at a time when the information it contains will be useful to the community for preparing the next LTCCP. Such a report is required at least once every three years.

5.9
Figure 5.1 demonstrates the related requirements between the LTCCP and annual report planning and reporting.

5.10
The requirements in Figure 5.1 show that a local authority needs to understand how it will monitor progress towards community outcomes so that it can produce reports on the result of measuring that progress. Considering the best approach for achieving this continues to involve substantial debate.

5.11
Preparing the 2006-16 LTCCP obliged local authorities to distinguish between the requirement to report on community outcomes at least every three years, and the requirement to report on any measurement carried out that reflects a local authority’s contribution to achieving outcomes through its activities. Focusing on the performance accountability framework, Figure 5.2 demonstrates how the Act envisaged the reporting framework for outcomes and levels of service.

Figure 5.1
Related requirements in the LTCCP and annual report for each group of activities

LTCCP
(clauses 1 and 2 of Schedule 10 of the Act)		 Annual report
(clause 15 of Schedule 10 of the Act)
Identify the activities within the group of activities. Identify the activities within the group of activities.
Identify the rationale for delivery of the group of activities (including the community outcomes to which the group of activities primarily contributes). Identify the community outcomes to which the group of activities primarily contributes.
State the measures that will be used to assess progress towards achieving community outcomes. State how the local authority will monitor and report on the community’s progress towards achieving community outcomes (not less than once every three years). In relation to each group of activities, report the results of any measurement carried out during the year of progress towards achieving community outcomes.
Outline significant negative effects any activity (within the group of activities) may have on the four community well-beings. Describe the identified effects that any activity within the group of activities has had on the four community well-beings.
Identify additional or replacement assets needed to meet levels of service and/or demand – summary of clause 2(d). Describe any significant acquisitions or replacements of assets, the reasons for the acquisitions or replacements, and the reasons for variances with the LTCCP.

Note: Group of activities, as defined in the Act, means one or more related activities provided by, or on behalf of, a local authority or council-controlled organisation.

Figure 5.2 The feedback flow of performance in the Local Government Act 2002

Figure 5.2: The feedback flow of performance in the Local Government Act 2002.

Focus for reviewing the 2006/07 annual reports

Identifying effects on the four community well-beings, and disclosing significant acquisitions

5.12
In the past two years, we have reviewed how local authorities approached the annual report requirements of clause 15 of Schedule 10 of the Act. The focus in 2005/06 was to find out whether local authorities had made progress in the second year that the requirement applied to all local authorities. This continues to be our focus.

5.13
As well as the requirements for each group of activities listed in Figure 5.1, the annual report must contain:

  • an audited statement comparing the actual and intended levels of service provision, and giving the reasons for any variance between the actual and the expected service provision; and
  • an audited statement describing any significant acquisitions or replacements of assets carried out during the year, and giving the reasons for those acquisitions or replacements, and the reasons for any significant variation between planned and actual acquisitions and replacements.6

5.14
To date, the reporting under clause 15(d) and 15(f) of Schedule 10 of the Act has been the least well done of the annual report requirements.

5.15
As with most new planning and accountability provisions, we expected local authorities to show progress towards meeting these requirements. The progress is varied. Several local authorities indicated that they were continuing to do work in this area, particularly on identifying effects on the four community well-beings.

5.16
Some local authorities are still identifying how to monitor progress towards achieving community outcomes.7 If local authorities are having difficulty planning how to monitor progress, effective reporting on achievement is likely to continue to be a problem.

Identifying effects on the four community well-beings

What is required

5.17
Although the Act requires reporting against the four community well-beings, it does not specify how this is to be done.

5.18
A local authority needs to establish the framework within which it makes decisions and determines how well its own activities and services contribute to community outcomes. It also needs to be able to report on the effects of these activities.

5.19
It can be challenging for a local authority to identify and report on the full range of effects that an activity may have on each community well-being. For instance, some activities, such as water management and building roads, are often identified by local authorities as having a positive effect on community well-being. A general statement of this type does not adequately identify the effects that such infrastructure could have on social cohesion or environmental well-being or biodiversity.

What local authorities did

5.20
Overall, we observed some encouraging changes in the information presented in 2006/07 annual reports compared to the previous year. We noted that about 28% of local authorities improved their disclosures, 67% of local authorities made no change to their disclosures, and 5% made changes that diminished the quality of reporting in comparison to previous years. However, despite these improvements, and the obvious efforts to increase disclosures and make improvements, more than 45% of local authorities still did not meet the requirements of clause 15(d) of Schedule 10 of the Act – that is, 45% of disclosures did not effectively identify the effects of activities on the well-being of the community. These requirements have now been in place for three years, and we had expected a better performance.

5.21
The local authorities that presented the most comprehensive disclosures in previous years continued to do so this year. Some of the local authorities that made changes to their disclosures this year are also meeting a high standard of disclosure. However, in our view, some local authorities have achieved only a minimal level of compliance and could significantly improve their disclosures. It is disappointing that there is little evidence that local authorities are seeking to improve their disclosures.

5.22
Most local authorities provided information on:

  • the nature of their activities;
  • how activities contribute to one or more community outcomes;
  • how the activities were measured; and
  • their progress towards the objective.

5.23
Many local authorities discussed the effects of their activities. However, many of the effects identified appear to repeat a local authority’s aim or objective for that activity rather than report an identified effect. Local authorities need to distinguish between an identified effect of an activity, as required by the Act, and the effect they intend that activity to have. For example, the general statement that “this activity contributes to economic and social well-being through protecting the safety of residents” is describing an intended effect rather than an identified effect.

5.24
Under the Act, an annual report is required to report any identified effects, negative or positive. Consistent with reporting against its LTCCP, which requires a local authority to outline any significant negative effects of its activities, a small number of local authorities continue to identify only negative effects in their annual report. Although negative effects were thoroughly discussed in some of the reports, none of the reports that identified only negative effects met the requirements of the Act.

5.25
A few local authorities identified both negative and positive effects. These were presented as either written commentaries or in a table format.

5.26
A small number of local authorities provided information on the identified effect each activity had on each community well-being.

5.27
Other local authorities provided a report on each community well-being, outlining the local authority’s contribution and the effect of its activity on these areas.

5.28
Overall, we noted little change to the approaches taken this year to reporting identified effects compared to previous years.

5.29
Fewer local authorities reported that they were still developing the links between the outcomes, rationale, activity, performance measure, targets, and identification of effects in comparison to previous years. Most of those local authorities yet to meet the requirements of clause 15(d) of Schedule 10 of the Act indicate that they intend to do so. However, a few have yet to acknowledge and produce information to meet the new requirement.

Comments on identification of effects on the four community well-beings

5.30
We noted in our report in 20068 that local authorities needed to ensure that their identification of the effects of activities was more than simply reporting on the activity of the local authority. As there has been little change to disclosures, the same comment still applies.

5.31
To better meet the requirements, local authorities could:

  • move from restating local authority aims to identifying effects;
  • move to specific consideration and analysis of the effects of activities rather than make generalised statements; and
  • ensure that the performance management framework is an integrated package that links community outcomes and the rationale for local authority activity to performance measures, targets, and levels of service. With such a linked framework, it is easier for local authorities to report on progress towards community outcomes9 and the identified effects of activities.10

Conclusion on current state of reporting against clause 15(d)

5.32
The sector is still a long way from meeting the requirements of clause 15(d) of Schedule 10 of the Act – to clearly report the identified effects of activities on the four well-beings. Most local authorities provided clearly accessible information on what the local authority did, how it intended to enhance community outcomes, why it carried out the activity, and how it measured performance. This reporting does not meet the requirements of clause 15(d) of Schedule 10 of the Act to describe identified effects (although it fulfils other accountability requirements for the clear reporting of local authority activities back to the community).

Statement of acquisition and replacement of assets

What is required

5.33
The Act, through the LTCCP and the annual plan, creates the framework against which the annual report discloses actual results. This includes how assets will be maintained, replaced, and renewed, and how costs will be met.11

5.34
Significant asset acquisitions and replacements are noted in planning financial forecasts, and are disclosed in the budget sections of the LTCCP.

5.35
The annual report must include the information listed in Figure 5.1.

What local authorities did

5.36
We saw an encouraging amount of change in the information presented in the 2006/07 annual reports compared to the previous years. An improvement was evident in 22% of local authorities’ disclosures in 2006/07. There was a broad range of improvements, from asset acquisition information to explaining variances against budgeted acquisitions and explaining the rationale for acquisition and replacement decisions. However, not all of these local authorities complied with the requirements of clause 15(f) of Schedule 10 of the Act.

5.37
Some local authorities reported significant variations between the LTCCP and the actual asset programme. Few provided information of any depth on the reasons for these variations.

5.38
Local authorities that did provide information on, and reasons for, the variations did so either as notes to the financial statements or as part of reporting on the group of activities in the Statement of Service Performance.

5.39
In some cases, major variations were noted between the report by the mayor, chairperson, or chief executive and the financial statements and the Statement of Service Performance.

5.40
A small number of local authorities provided a list of all assets acquired and disposed of as a separate section in the annual report. They included the reasons for the acquisition or disposal of those assets. Where the information and explanations were clear and thorough, they provided a snapshot of all local authority acquisitions and replacement of assets.

5.41
We were concerned that a small number of local authorities presented asset information to a lesser standard in 2006/07 than in the previous year. This trend was also noted during our 2005/06 review.

Comments on statements about significant asset acquisition and replacement

5.42
Providing high-level information on significant asset decisions (for example, advising of delays to, or bringing forward of, major asset acquisitions) in the mayor’s or chairperson’s report is useful for the public. However, the mayor’s or chairperson’s report is not subject to audit, and cannot include all the information required by the Act.

5.43
Where variations were reported in the financial statements section, they were often aggregated. This does not provide the most accessible information to the community about specific actions carried out by the local authority for significant assets.

5.44
As we noted in previous years, putting financial and asset information in the Statement of Service Performance keeps the information on one topic within each group of activities. However, unless the variation and its reason are also clearly stated in that section, it is not easy to determine the difference between the LTCCP or annual plan projections and the actual expenditure or acquisitions carried out during the year.

Conclusion on current state of reporting against clause 15(f)

5.45
A significant number of local authorities still do not clearly address the requirements of clause 15(f) of Schedule 10 of the Act, with up to half of them inadequate. This is usually because there is no explanation of the reasons for the acquisition, replacement, or variation. In some cases, the local authority completely failed to address the requirements of clause 15(f) of Schedule 10 of the Act.

5.46
We remain concerned about this finding. Asset acquisition and replacement are important to sustaining and developing services. Most local authority plans – including the LTCCP – centre on the sustainable delivery of desired levels of service. Identifying an appropriate asset development programme that incorporates acquisition and replacement is central to demonstrating sustainability of services. Without this information, an important aspect of accountability is missing, and information useful to the reader is not available.

5.47
If we do not start to see improvements over time, we will be obliged to consider what effect failure to observe these requirements should have on our audit opinions.

Concluding comments

5.48
To be able to effectively meet the requirements of clause 15 of Schedule 10 of the Act, local authorities will need to have a comprehensive framework that links their monitoring of community outcomes, decision-making, and performance against levels of service to their reporting. Reports need to include the identified effects of activities on the four community well-beings. It is clear from our previous reports and the annual reports of local authorities that this is a challenge. It is an area in which substantial improvement is still needed.

5.49
We expect local authorities to define how they will monitor progress towards the achievement of community outcomes12 through their 2009-19 LTCCP. They should also put in place systems to improve current reporting against the other requirements of clause 15 of Schedule 10 of the Act. We will be considering our reporting options and obligations where local authorities fail to provide relevant information that reasonably and coherently addresses the requirements of clause 15.

1: Clauses 2 and 15 of Schedule 10 of the Act.

2: Section 99(1)(b) of the Act. In clause 15(e) and 15(f) of Schedule 10 of the Act, our obligation extends to actual verification of the information reflected in annual reports – in other words, we audit the disclosures.

3: Clause 15(c) of Schedule 10 of the Act.

4: Local Government: Results of the 2003-04 Audits, parliamentary paper B.29[05b], pages 61-87; Local government: Results of the 2004-05 audits, parliamentary paper B.29[06b]; pages 14-16, and Local government: Results of the 2005/06 audits, parliamentary paper B.29[07b], pages 14-21.

5: Clause 1(g) of Schedule 10 of the Act.

6: Clause 15(e) and 15(f) of Schedule 10 of the Act.

7: As required by clause 1(g) of Schedule 10 of the Act.

8: Local government: Results of the 2004-05 audits, parliamentary paper B.29[06b], page 16.

9: As required by clause 1(g) of Schedule 10 of the Act.

10: As required by clause 15(d) of Schedule 10 of the Act.

11: Clause 2(1)(d) of Schedule 10 of the Act.

12: Clause 15(c) of Schedule 10

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