Part 9: Non-profit council-controlled organisations

Local government: Results of the 2006/07 audits.

9.1
In this Part, we comment on issues and developments for non-profit council-controlled organisations (CCOs) for the year ended 30 June 2007, including:

  • reporting on performance; and
  • the number of CCOs that local authorities have exempted from the accountability requirements in the Local Government Act 2002 (the Act).

Background

9.2
Most non-profit CCOs are now meeting the SOI-related and broader accountability requirements expected by the Act.

9.3
However, a small but persistent number of CCOs are not adequately addressing their accountability obligations. For non-profit CCOs, there is the possibility, under section 7 of the Act, that they could be exempted from these requirements. It appears some local authorities are yet to fully address this matter.

9.4
The non-profit CCO sector includes entities associated with local authorities that deliver services on behalf of, or in partnership with, local authorities. The services include activities such as museums, libraries, swimming pools, and other community facilities such as theatres, sports grounds, and events centres. Many of the activities are regarded as charitable and are delivered by charitable trusts.

9.5
Non-profit CCOs have been subject to the accountability requirements of the Act since 1 July 2003. Before that, only local authority trading enterprises were subject to the accountability requirements.

9.6
The Auditor-General is currently the auditor of 91 non-profit CCOs. The Auditor- General also audits 118 council-controlled trading organisations and another 84 organisations that are related to local authorities but are not CCOs, including entities that have been exempted from being CCOs under section 7 of the Act.1

Reporting on performance of council-controlled organisations

9.7
The Act's accountability requirements are generally more complex than those that apply to the non-profit entities under their trust deeds or rules.

9.8
An important part of the accountability framework for CCOs in the Act is the requirement to prepare an SOI at the start of the reporting period. The SOI should set out the CCO's planned objectives and activities for the next three years, and set the performance targets that the CCO must report against in its annual report. Local authorities have the opportunity to influence the direction of their CCOs by commenting on draft SOIs. If a CCO has subsidiaries, it must prepare an SOI covering the whole group.

9.9
A CCO's annual report must include:

  • a comparison of the performance of the CCO against measures and targets in the SOI; and
  • an explanation of any material variances between that performance and the SOI.

9.10
As well as auditing the financial statements of a CCO, we are required to report on the performance targets and other measures by which performance was judged against the entity's objectives. In other words, the audit opinion must cover the entity's report on its performance, measured against its SOI (performance information).

9.11
These requirements have applied to non-profit CCOs since the period starting 1 July 2004.2 We have monitored compliance with these requirements for the last three years.

9.12
In 2007, we published a report of our performance audit on compliance with SOI requirements. The report examined compliance by 54 public entities in producing, and later reporting against, their SOIs. Our examination included CCOs and council-controlled trading organisations. We found broad compliance with legislative requirements by the public entities that we looked at, but were disappointed with the quality of performance targets used by some of those entities to measure their performance and later report on that performance.

9.13
Although most CCOs now have SOIs in place and report against them, seven (nearly 8% of the non-profit CCO sector) did not meet this important accountability requirement.3 For the years ended 30 June 2005, 30 June 2006, and 30 June 2007, we issued qualified audit opinions for several CCOs for failing to include performance information in their annual reports. They failed to do this because they did not have an SOI in place to report against. We were particularly concerned where CCOs did not have an SOI in place for the following period either. It is disappointing to note that, in some instances, a CCO has received a non-standard audit report for the same reason in consecutive years.

9.14
In some cases, the CCOs were inactive (for example, they were name protection companies). Although there may be little point in such entities producing an SOI, the requirement applies unless the local authority has exempted the CCO. We were surprised that local authorities had not more actively used the power in section 7 of the Act to exempt small non-profit CCOs from the accountability regime.

9.15
We did not qualify the audit report of inactive CCOs (such as name protection companies or dormant companies that did not do anything during the year),4 provided the entity had disclosed the breach of law in its financial statements.

Exempted organisations

9.16
Section 7 of the Act provides for entities to be exempted from the requirements for CCOs. There are two ways in which a CCO may be exempted:

  • The Governor-General, on a recommendation from the Minister of Local Government, can exempt a CCO that is already subject to appropriate accountability under an Act other than the Local Government Act 2002. The Minister must be satisfied that the entity's accountability under the other Act is of a similar nature and effect to that required under the Local Government Act 2002.5
  • A local authority can exempt small non-profit CCOs under section 7(3). The Act does not define “small”, but a local authority cannot exempt a council-controlled trading organisation. When exempting a non-profit CCO, the local authority must consider the nature and scope of the activities provided by the CCO, and the costs and benefits of an exemption to the local authority, the CCO, and the community.

9.17
A local authority may revoke an exemption at any time. It must review any exemption within three years of granting it and then review the exemption at least every three years.

9.18
The power for local authorities to exempt small CCOs from the requirements was included in the Act to address concerns raised about compliance costs for small non-profit entities. Once exempted, an entity is no longer a CCO (for the period of the exemption) and is not subject to any of the accountability requirements of the Act.

9.19
An exemption under the Act does not affect accountability requirements in other legislation, such as the Incorporated Societies Act 1908 or the Charities Act 2005, or provisions in an entity's own trust deed or rules.

9.20
Several local authorities have inactive companies that meet the definition of a CCO. Examples of “inactive” companies are companies formed for name protection purposes or companies that used to carry out trading activities but are retained for tax or other reasons.

9.21
Where a former trading company is inactive, it is unlikely to be a council-controlled trading organisation and can therefore qualify for exemption by the local authority under section 7(3) of the Act.

9.22
We reported last year6 on the extent to which local authorities had used the exemption power in section 7(3) since the enactment of the Act. We found:

  • As at 30 June 2006, local authorities had exempted 74 entities under section 7(3).
  • Thirty-two of the 85 local authorities had used the exemption power.
  • The exempt entities were a mixture of small trusts and inactive companies – for example, companies formed for name protection purposes.
  • Forty-four trusts, 25 companies, and five other entities had been exempted.
  • City councils tended to have the most CCOs and had therefore made the greatest use of the exemption power, with Auckland City Council and Manukau City Council exempting 10 and nine entities respectively.

9.23
As part of the audit for the year ended 30 June 2007, we asked our appointed auditors for local authorities to advise us of any exemptions made or renewed in the period 1 July 2006 to 30 June 2007:

  • As at 30 June 2007, local authorities had exempted a further 15 entities under section 7(3) and renewed a number of earlier exemptions.
  • As previously, the exempt entities were a mixture of small trusts and inactive companies.
  • Although some local authorities had renewed exemptions previously made, others appeared to be overdue for renewal.

9.24
Thirty-two local authorities have seen clear advantages in exempting a total of 89 entities. It is relevant that local authorities further review the rationale for exemption – especially for those non-profit CCOs where they are currently breaching the law but for which the full CCO provisions of the Act may be unwarranted.

Conclusion

9.25
We have commented in previous reports that local authorities and CCOs appeared to be slow to learn and meet the accountability requirements in the Act. We are pleased to note that, in the last couple of years, local authorities have been making use of the exemption power in section 7 of the Act to reduce compliance costs for small non-profit entities.

9.26
However, there are still a number of non-profit CCOs that may benefit from their related authority considering exemption from the Act's CCO requirements. Local authorities are urged to consider this matter, particularly where it may limit the level of administrative burden on a small non-profit CCO.

9.27
Most CCOs are now meeting the accountability requirements in the Act in terms of producing an SOI and reporting against it. We are less satisfied with the quality of the performance measures in the SOIs.

9.28
We are currently reviewing our audit approach to non-financial performance reporting in response to statutory changes in recent years (such as the Local Government Act 2002). For now, we are focusing on entities that report against outcome and output information (such as local authorities). When this work is complete, we will look at the reporting of performance for entities that assess performance against the achievement of corporate objectives (such as council-controlled organisations).

1: Local authority trading enterprises were created by the Act's predecessor and are broadly equivalent to for-profit CCOs, called council-controlled trading organisations under the Act.

2: Non-profit CCOs were not required to have an SOI in place for the period starting 1 July 2003.

3: See Part 8 for a complete description of the non-standard audit opinions issued. In addition to these seven non-profit CCOs, another 12 entities required to have an SOI had not completed an SOI as required.

4: See Part 8 for an explanation of a qualified opinion.

5: The Otago Museum Trust Board, the Canterbury Museum Trust Board, and the Museum of Transport and Technology Trust Board have been exempted by this procedure.

6: Local government: Results of the 2005-06 audits (June 2007), Wellington, page 25.

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