Part 6: Approach to auditing the 2009-19 Long-Term Council Community Plans

Local government: Results of the 2006/07 audits.

6.1
The Auditor-General has a statutory duty to issue an audit opinion on a local authority’s draft and final Long-Term Council Community Plan (LTCCP). The LTCCP articulates a local authority’s strategy (informed by community desires and the reality of the community’s circumstances). The LTCCP also provides an integrated view of the policies and actions required to support the strategy.

6.2
Both the LTCCP and the requirement for it to be audited are unique to New Zealand.

6.3
In 2006, we audited the long-term planning of local authorities for the first time. Throughout 2007, we have been reviewing the process and methodology for auditing LTCCPs.

6.4
This Part reports on how we have carried out the review, and provides information to Parliament on our approach to the 2009-19 LTCCP audit.

Background

Results from audit of 2006-16 Long-Term Council Community Plans

6.5
In 2007, we provided a substantial report to Parliament called Matters arising from the 2006-16 Long-Term Council Community Plans.1 The report includes commentary from four experts on sustainable development, performance information, asset management, and financial management and strategies.

6.6
Although the 2006-16 LTCCPs had improved compared to the 2004-14 LTCCPs, we also reported on significant matters that are now being addressed by the sector in its preparation of the 2009-19 LTCCPs:

  • the need for improvement in asset management planning;
  • the lack of linkage and flow in relation to the performance frameworks; and
  • the need for LTCCPs to be strategic and user-centred documents.

Sector activity since the 2006-16 Long-Term Council Community Plans

6.7
Good practice has been defined since 2006 by the sector through guidance material prepared by sector organisations, such as Society of Local Government Managers (SOLGM) material2 and National Asset Management Steering Group (NAMS) guidance. The SOLGM guidance material includes:

  • Living through the LTCCP – planning to plan, project management, managing the process;
  • Piecing it Together – preparing an LTCCP;
  • Your Side of the Deal – guidance on developing a performance management framework; and
  • Dollars and Sense – financial management.

6.8
Many local authorities have reviewed their 2006-16 LTCCP processes, started project planning for the 2009-19 LTCCP, and established LTCCP project teams. Some local authorities have started discussions with us and the auditor, which all parties have found useful.

6.9
A critical consideration is to “size” the task of preparing the 2009-19 LTCCP. Local authorities have been asking questions such as “Will it be a substantially new document or an incremental change?”

6.10
Other questions local authorities are asking are:

  • “What will be the nature of the changes to the existing direction?” An early discussion with newly elected councillors about their policy parameters will be critical in determining this.
  • “What have the last two to three years told us about the well-being of our communities, or about the state of our infrastructure?”
  • “What were the results of the 2006-16 LTCCP planning process? For instance, are there areas of underlying information that need development?” (Further development could be required for underlying information for assets, for assumptions or for a more robust performance framework.)

Revising our methodology for the 2009 Long-Term Council Community Plan audit

6.11
During 2007 and early 2008, we reviewed the audit methodology and processes used for auditing the 2006-16 LTCCP. Much of our revision has been to align our approach to the SOLGM guidance material and the NAMS guidance (see paragraph 6.7).

6.12
We talked with the auditors and sector representatives, did our own internal quality assurance, and established a steering group of staff from the Office of the Auditor-General and auditors to guide the development of the 2009- 19 methodology. The steering group has considered the quality assurance comments and drawn on other research and development work on performance management we have carried out since 2006.

6.13
We have worked with two “user groups” to provide an assessment of the usability and clarity of the methodology. One group assessed the methodology from an auditor’s perspective, and the other group brought together sector experts to assess whether sustainable development issues are addressed adequately.

6.14
We delivered initial training on our revised methodology to audit teams in March and April 2008, and we will be repeating this. We will provide support to our auditors during the process.

6.15
We have contributed to sector training days, and have met, and will continue to meet, with local authorities.

Approach to 2009-19 Long-Term Council Community Plan audit

Audit methodology

6.16
The audit methodology has two main areas of activity:

  • preparing for and planning the audit, expected to occur during the middle of 2008; and
  • carrying out the audit of the Statement of Proposal for the draft LTCCP, and the audit of the final LTCCP. Most of this work is expected to occur between February and June 2009.

6.17
Our revised methodology is set out in Figure 6.1.

First part of the audit – preparation and planning

6.18
This first part of the audit is mainly about the systems and practices used by the local authorities. It covers planning and risk identification, and the development of the audit plan, as shown in Figure 6.1. The audit focus is on the systems that underlie what goes into an LTCCP – such as governance, decision-making processes, consultation, engagement with Māori, preparation of asset and activity plans, clarity of financial strategy, and how local authorities are preparing and using performance frameworks. We are asking these questions because we recognise that the LTCCP is an aggregation of many decisions over time. The information and consultation on which these decisions are based form part of the statutory obligations and underlying information required of local authorities and on which we are required to report.

6.19
As in the 2006-16 LTCCP audit, a self-assessment by the local authority is part of audit planning. Auditors will use the self-assessment to become familiar with the local authority, but will primarily use it to identify risks for the audit.

6.20
The self-assessment requires each local authority to outline its systems that support working with outcomes, decision-making and consultation, and the financial management provisions of the Local Government Act 2002 (the Act). The self-assessment will also help to identify the areas in which councils would like to improve.

Figure 6.1
Summary of our revised LTCCP audit methodology

Figure 6.1: Summary of our revised LTCCP audit methodology.

6.21
Section 14(1)(h) of the Act requires local authorities to take ”a sustainable development approach”.

6.22
The self-assessment will help us to assess local authorities’ responses to the section 14(1)(h) requirement in their decision-making and consultation, governance, and other processes during the preparation phase. Later in the audit process, we will consider how the local authority has made its approach to section 14(1)(h) evident, in its assumptions, asset and activity planning, and performance management information. We will not be assessing whether local authorities are achieving sustainable outcomes.

Second part of the audit – carrying out the audit

6.23
The second part of the audit is the audit of the LTCCP Statement of Proposal, and of the final LTCCP. Our primary approach is to identify, confirm, and assess local authorities’ major processes and controls for information gathering, budgeting, preparing a performance framework, reviewing policies as required by the Act, and producing the LTCCP Statement of Proposal and adopted LTCCP.

Audit emphasis

6.24
Our audit methodology for the 2009-19 LTCCP includes a particular emphasis on whether local authorities:

  • have implemented a sustainable development approach (section 14(1)(h) of the Act);
  • have provided clear information to the public about important issues, choices, and the implications of those choices – the “right debate”3 (section 93(6) of the Act);
  • show transparency in financial management strategies and prudence (section 101(1) of the Act);
  • have performance frameworks and measures that provide meaningful
  • assessment of performance (clause 2(2)(a) of Schedule 10 of the Act); and
  • have provided adequate underlying information (section 94(1)(b) of the Act).

6.25
Our reporting obligations under sections 84(4) and 94(1) of the Act provide us with three “themes” or broad audit objectives:

  • quality of underlying information and assumptions (section 84(4)(b) of the Act) – do your underlying processes support robust and relevant information going into the LTCCP Statement of Proposal?
  • performance information (section 84(4)(c) of the Act) – will the performance information provide a meaningful assessment of the service provided to the community?
  • legislative compliance (section 84(4)(a) of the Act) – have you done what the Act requires in respect of the processes that support the preparation of the plan?

6.26
The three themes provide the structure for the audit modules and the basis for our reporting on the LTCCP Statement of Proposal and the final adopted LTCCP. However, as the LTCCP is an integrated planning document, the effects of the audit on each module may not be limited to that particular module. For instance, issues in the asset management plans could affect whether the performance information systems provide reasonable information.

Theme 1 – quality of underlying information and assumptions

6.27
The modules in this theme of the methodology are highly interrelated, reflecting the integrated nature of the LTCCP.

Module 1 – asset and activity management

6.28
This part of the audit will focus predominantly on examining the detail of a selection of groups of activities that have been identified through the audit planning process as being the main activities. The remaining activity areas will be examined on an overview basis.

6.29
The asset and activity management module focuses on assessing the control environment that has been established by local authorities for the development and recording of the activity, and activity information, underlying the groups of activities. The extent of detailed review of asset and activity management plans, and how much testing is needed of the flow of data from these plans into the financial model and the LTCCP document, will be based on the robustness of the control environment. The detailed review might be able to be reduced if controls are found to be of a sufficiently reliable standard.

Module 2 – levels of service

6.30
The focus in this module is on identifying levels of service as they are reflected in the performance management framework and disclosed in the LTCCP Statement of Proposal. The module also focuses on confirming the consistent application of the levels of service in the development of the underlying information on which the LTCCP is based.

6.31
This module is closely related to the requirements of module 6. Our focus in module 2 is on confirming consistency between the narrative descriptions of levels of service and the financial provisions to deliver the described level of service, and confirming completeness of the financial reflection of the levels of service narrative. Our focus in module 6 is on the structure of the performance framework around those levels of service as a meaningful assessment of planned performance.

Module 3 – linkages of information and consistency with other plans and policies

6.32
The focus in this module is on confirming that the other plans and policies of local authorities have been accurately applied in the development of the LTCCP. The purpose of this work is to ensure that the LTCCP (particularly through the financial forecasts) is consistent with the commitments that local authorities have made through their adopted plans and policies.

6.33
Our consideration through this module will not be limited to checking the flow of numerical data from other local authority plans to the LTCCP. It will also consider the consistency of policies and strategies reflected in the narrative of these plans with the LTCCP.

6.34
We will also consider the presentation of local authorities’ financial information in the group of activity statements in conjunction with this module.

Module 4 – assumptions

6.35
In developing an LTCCP, the local authority has to make assumptions about the future and take positions on various issues.

6.36
Clause 11 of Schedule 10 of the Act sets out the requirements for disclosing the assumptions underlying the financial and non-financial estimates that local authorities make in preparing their LTCCP. The disclosure of assumptions allows readers of the LTCCP to make their own judgement as to the assumptions’ quality and reliability.

6.37
Our expectation is that local authorities will consider the applicability of assumptions that are broader than just financial in nature. There are many other assumptions of a more complex and strategic nature dealing with the uncertainties surrounding environmental, social, economic, and cultural changes in the future that local authorities also need to consider. Many of these more complex and strategic assumptions will relate to issues or events that may arise much further into the future than the term of the LTCCP, but for which preparation may be needed in the current LTCCP time frame.

6.38
Our audit will evaluate how appropriate and complete the forecasting assumptions and risks identified by local authorities for the development of the LTCCP are. We will also consider the application of the adopted forecasting assumptions and risk classifications to the development of the underlying information in the LTCCP.

Module 5 – Generally Accepted Accounting Practice

6.39
Our focus in this module is confirming that the prospective financial statements comply with the requirements of Generally Accepted Accounting Practice (GAAP) and in particular the requirements of the Financial Reporting Standard No. 42: Prospective Financial Statements (FRS-42).

6.40
FRS-42 requires prospective financial statements to be prepared based on the following general principles:

  • The best information available is used.
  • The assumptions and resulting information are reasonable and supportable.
  • The information meets the qualitative characteristics, which means that they are understandable, relevant, reliable, and comparable.

6.41
FRS-42 also requires the accounting policies applied to the prospective financial statements to be those that the local authority intends to use in the future for reporting historical financial statements. Therefore, a critical part of developing GAAP-compliant forecasts is incorporating the most recent developments of the New Zealand equivalents to International Financial Reporting Standard (NZ IFRS) as it relates to the local authority during the life of its LTCCP.

6.42
FRS-42 includes a number of other requirements designed to help the reader understand the basis for preparing the financial forecasts.

Theme 2 – performance information

Module 6 – performance framework

6.43
Local authorities are required to provide services that meet the needs of their communities in an effective and efficient way.4 To demonstrate accountability for the delivery of these services, local authorities need to provide enough sound performance information in the LTCCP to show:

  • the services that will be carried out and why;
  • the service levels required to meet the needs of their communities or other duties and intentions of the local authority; and
  • the planned level of service to be delivered.

6.44
Specifically, the LTCCP must include “a statement of the intended levels of service provision for the group of activities, including the performance targets and other measures by which actual levels of service provision may meaningfully be assessed”.5

6.45
The forecast service performance information includes the levels of service, the performance measures, and the performance targets. These should be set within the broader context of social, economic, environmental, and cultural well-being. Community outcomes and local authorities’ strategic objectives and duties should also be considered. Together, these elements comprise the performance framework.

6.46
Effective performance reporting expresses useful, appropriate performance information in a structured, systematic, and logical way, allowing the reader to readily understand and link the achievement of performance targets with the overall aims of a local authority.

6.47
Our focus will be on assessing whether the local authority has a comprehensive and systematic approach to performance management. We will assess the performance management framework by considering the main elements of the framework, the links, context, and logical flow, and the consistency with which the framework has been applied to groups of activities. We will also consider the quality of the forecast service performance information, particularly whether it will provide an appropriate basis for understanding and measuring the performance achievements of the local authority in the future.

Theme 3 – legislative compliance

Module 7 – decision-making and consultation

6.48
In this part of the audit, we will assess the quality and effectiveness of a local authority’s decision-making and consultation processes leading up to the LTCCP. We will also assess the decisions proposed within the LTCCP Statement of Proposal. This will require evaluation of selected decision-making and consultation processes against the requirements set out in the Act.

6.49
Our audit will focus predominantly on the decision-making and consultation processes employed by the local authority. In making our assessment, we will review a sample of decisions and consultation processes.

Module 8 – document presentation

6.50
This module focuses on the legislative compliance of the LTCCP Statement of Proposal document, which is the document that the public sees. The module focuses on the information that the Act requires in an LTCCP, and the logical links that should be made between elements of the contents of the LTCCP to enhance the readability of the document.

6.51
We expect local authorities to have specific quality assurance checks to confirm the compliance of the Statement of Proposal, the Statement of Proposal summary,6 and the adopted LTCCP, and to be confident with the presentation requirements.

Module 9 – financial prudence

6.52
The focus of this module is on evaluating local authorities’ financial strategy and assessing whether that strategy, as presented in the LTCCP Statement of Proposal, is financially prudent and transparent. The module also focuses on the financial management principles and requirements that are set out in sections 100 and 101 of the Act.

6.53
Financial strategy is an important element of the articulation of the “right debate” (see paragraph 6.60). For consultation processes to be effective, it is important that the reader of the LTCCP Statement of Proposal is able to understand the strategy being used by the local authority. The reader should not need expertise in the analysis of financial statements to understand the strategy.

6.54
Although there is an inherent complexity in developing and applying a financial strategy, at the broadest level, we would expect a local authority to be able to articulate its strategy in terms of the following questions:

  • What position do we want the local authority to be in at the end of the LTCCP period?
  • Why do we want the local authority to look like this in the future?

6.55
It is also important that a local authority is clear about its financial strategy – who pays what, when, and why?

6.56
Our focus in working through this module is on developing an understanding of local authorities’ answers to these questions. We will evaluate whether the local authorities’ strategies are prudent and presented in a transparent way to the readers of the LTCCP. It is not the auditor’s role to “second guess” a local authority’s policy decisions. Our focus will be on assessing the effects of a local authority’s policies with respect to financial prudence.

6.57
Local authorities have been encouraged since the 2006-16 LTCCP round to articulate their financial strategy more clearly. We urge local authorities to consider how they will express their strategy as they develop their LTCCPs.

Module 10 – the right debate

6.58
The role of the LTCCP Statement of Proposal, and the Statement of Proposal summary in particular, is to support and foster the occurrence of the “right debate” in the community. For this “debate” to occur, and for it to be focused on the “right” issues, the LTCCP Statement of Proposal document must provide the community with enough balanced information about the strategic and other key issues, choices, and implications facing them. This will allow the community to effectively evaluate the issues and therefore participate in the decision-making process led by their local authority.

6.59
Section 89(a) of the Act requires the Statement of Proposal summary to be a “fair representation of the major matters in the statement of proposal”. It has a pivotal role in ensuring that the right debate occurs, as it is the primary consultation document for the community. Therefore, it is essential that the summary is not only a fair reflection of the overall content of the LTCCP Statement of Proposal document, but also that it makes the strategic and other key issues, choices, and implications reflected in the LTCCP Statement of Proposal accessible to the community.

6.60
Our focus will be on assessing whether the:

  • LTCCP Statement of Proposal and Statement of Proposal summary documents achieve an appropriate standard of readability and clarity for a moderately informed reader; and
  • issues that the local authority has focused on and presented in the Statement of Proposal are complete – have the LTCCP Statement of Proposal and the Statement of Proposal summary addressed the strategic and other key issues and choices that the community needs or wants to address, and have the implications of options been fully disclosed?

Audit timelines

6.61
The LTCCP draws together plans, policies, decisions, and information from throughout the organisation and its community. The LTCCP has complex and interrelated information needs. We recognise that local authorities will be preparing their LTCCP over an extended period.

6.62
We are aware that many local authorities and auditors want to have an “auditing as you go” approach. This is consistent with the approach in the audit methodology, which places considerable emphasis on planning the approach to, and audit of, the 2009-19 LTCCP.

6.63
The “auditing as you go” approach depends on good project management and good communication between a local authority and its auditor.

6.64
The broad phases of the 2009-19 LTCCP audit are shown in Figure 6.2.

Figure 6.2
Phases of the 2009-19 LTCCP audit

Period to 31 July 2008 Formal arrangements and fees set in place Planning the audit, including considering the results from the self-assessment done by local authorities
October 2008 to February 2009 Interim auditing fieldwork – “auditing as you go”
February 2009 to June 2009 Completing auditing fieldwork on the LTCCP Statement of Proposal document Office of the Auditor-General-based review of all proposed opinions for consistency Final auditing fieldwork on the final LTCCP to be adopted after local authorities’ public consultation processes Delivery of opinions to local authorities

1: Parliamentary paper B.29[07c].

2: Towards 2009 initiative.

3: See paragraph 6.59, and also Part 4 of this report for further discussion.

4: Section 14(1)(a)(ii) of the Act.

5: Clause 2(a) of Schedule 10 of the Act.

6: Section 89(a) of the Act requires local authorities to prepare a summary of the Statement of Proposal.

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