4. Governance and Management

4.1 Introduction

4.1.1
Governance has been defined as “…the processes by which organisations are directed, controlled and held to account. It encompasses authority, accountability, stewardship, leadership, direction and control exercised in the organisation. It includes how an organisation is managed, its corporate and other structures, its culture, its policies and strategies and the way it deals with its various stakeholders.”²

4.1.2
The Controller and Auditor-General is an officer of Parliament. His powers and responsibilities are set out in the Public Audit Act 2001. The Auditor-General is independent of executive government and Parliament in discharging his statutory functions but is answerable to Parliament for the stewardship of the public resources entrusted to him. His primary task is to provide independent assurance to Parliament and the public that public entities and local authorities are operating in accordance with Parliament’s intentions and accounting for their performance. The governance issues facing the Auditor-General can be quite complicated - not least because he deals with a wide range of stakeholders in a fast-changing and often complex environment.

4.1.3
The Public Audit Act 2001 also sets out statutory status for the position of Deputy Controller and Auditor-General, who is also appointed by the Governor-General on the recommendation of Parliament. It confers on the Deputy position the same powers and many of the responsibilities of the Auditor-General. The two positions were obviously intended to be complementary and mutually supportive, and the Team found that this is how the relationship is working in practice. It was impressed with the sense of partnership that characterises the working relationship between the Auditor-General and Deputy Auditor-General.

4.1.4
Recent years have seen significant changes in the accounting and auditing professions as well as in New Zealand’s legislative and operating environment. A new Public Audit Act was passed in 2001. New accounting standards based on the International Financial Reporting Standards which came into effect on 1 January 2007 (earlier in the case of local government) affect virtually all public entities. The Local Government Act 2002 generated major new work for the Office, including the requirement to audit local authorities’ Long Term Council Community Plans (LTCCPs). Stakeholder demands on the Office are rising. More complex and more stringent managerial standards are now imposed on all public entities.

4.1.5
The Office has undertaken a major programme of organisational adaptation and improvement in response to these changes. Its annual budget increased from $36.8 million in 2001-02 to $69 million in the 2006-07 year. Over the same period the staffing of the OAG and Audit New Zealand has gone from 248 to 288. Strategic planning has been put on a more systematic footing. The contestable model of audit allocation has been replaced by an allocation model. It has developed a new project management unit and a research and development capability. It has merged the strategic planning and corporate service functions of the OAG and Audit New Zealand. Effort has gone into the development of knowledge management, risk management and business continuity frameworks. There is a stronger focus on professional development. An independent Audit and Risk Committee has been established, along with an internal audit function. Interaction with key external stakeholders has been stepped up. The Office’s planning and reporting processes have become more robust and transparent. Numerous external reviews and surveys have been commissioned by both the OAG and Audit New Zealand.

4.1.6
In terms of its output, the Office has placed a progressively stronger emphasis on performance and programme audits. Its regular financial audits now involve closer scrutiny of such areas as probity, waste, sustainable development, stewardship of assets and compliance and assessing the quality of service performance information in annual reports. It consults more widely on its discretionary work programme. More attention is being paid to the quality of its reports. A number of good practice guides have been produced aimed at lifting performance in the public sector. Links have been maintained and strengthened with regional and international professional groupings.

4.1.7
To give a brief picture of its current situation, the Office is now responsible for over 4000 financial audits and delivers 20 or so other reports per year - around 15 performance audit reports, and several reports on major inquiries, special studies, or good practice guides. It provides some 140 written reports to Select Committees each year - and a similar number of reports to Ministers on the results of annual financial audits. Each year it receives over 300 requests for inquiries. A small number of these result in major inquiries (e.g. 7 in 2005-2006). It engages over 60 external audit providers to carry out annual audits of public entities. The OAG staff numbers are currently about 71, while Audit New Zealand employs some 217 staff. In the Review Team’s opinion, this workload requires a strong emphasis on strategic direction and the careful management of risks to the reputation of the Office.

4.2 Organisation Structure

4.2.1
The OAG carries out strategic audit planning; sets policy and standards; appoints and oversees auditors; undertakes performance audits; provides reports and advice to Parliament; and carries out inquiries and other special studies. Audit New Zealand undertakes audits allocated to it by the Auditor-General and provides other assurance services to public entities within the Auditor-General’s mandate. It also contributes to other OAG work, including inquiries, performance audit and research and development projects.

4.2.2
Although technically responsible to the Auditor-General, for many years the OAG and Audit New Zealand operated as quite separate units. The main reason for this was a concern to avoid compromising Audit New Zealand’s ability to compete for work against private sector audit service providers under a contestable regime. It also reflected the public sector trend of those times towards separating service delivery from policy and regulatory work. In 2002, the decision was taken to more closely integrate the OAG and Audit New Zealand at a strategic planning level. The move to an allocation model for selecting auditors and the difficulties experienced in maintaining adequate levels of servicing for both units led to a decision in 2006 to merge the two sets of corporate service units into a shared servicing platform.

4.2.3
The OAG and Audit New Zealand Business Units are quite different in size and function. One is more a regulatory body, the other a service provider. Each has its own quite distinct operational requirements. For Audit New Zealand, the separate identity helps preserve the advantages of a specialist audit practice in such areas as recruitment, retention and contestability. Moreover, the Audit New Zealand operation is considerably larger and involves a number of offices spread around New Zealand. Both units operate flat structures that seemed to the Team appropriate to their functions.

4.2.4
Both units clearly benefit from being joined “at the head” (through the strategic planning undertaken jointly by their leadership teams) and now “at the feet” (through shared Corporate Services). The current arrangement is generally held to be an appropriate point of balance, allowing each business unit to operate in an appropriate way but, at the same time, ensuring a shared sense of direction and the efficient provision of corporate services. The structures and processes set up since 2006 seemed to all whom we interviewed to be working well. Protocols set out clearly how the relationships are to be managed. Ongoing attention is paid to ensuring that the degree of separation remains sufficient to guard against conflicts of interest but also allows integration or collaboration to be pursued where this holds out real benefits to the Office.

4.2.4
Office accommodation in Wellington is of a good standard and staff seemed generally satisfied with their current work environment. However, some importance attaches to bringing the OAG and Audit New Zealand staff in Wellington together under one roof when the lease on the current OAG building expires. The physical separation of the two offices makes communication difficult. We consider that a shared workplace would help foster a greater sense of teamwork and enhance informal communication as well as improve formal coordination. The Corporate Service units should preferably be located alongside both units.

4.2.5
We were told that a real estate agent is to be engaged to identify suitable office space for the two units. The preferred time frame for a shift is mid-2009. Our understanding is that staff representatives will be involved in the planning process. It seemed to the team that the move to a common space was of sufficient importance to the dynamics of the two units, and that the task of planning new office space is sufficiently complex, to warrant early attention being given to the establishment of a project team, including staff representatives, to work through the many issues involved in any shift to new premises. It will also be important that the Office be adequately funded for such a move.

Suggestions for Improvement

• A task force should be established to carry out planning and preparatory work on the proposed move to a new building housing both the Office of the Auditor- General and Audit New Zealand Business Units. Adequate funding needs to be provided for the move. Regular communication with, and involvement of, all those affected will be important for a successful outcome.

4.3 Governance Framework

4.3.1
The Auditor-General attaches considerable importance to the Office’s governance framework. It is the means by which strategies and policies are set; key risks are identified and managed; performance is monitored; work is coordinated; and appropriate and ethical behaviour is promoted. This is all the more important because the Office does not have the full range of public sector checks and balances on governance: the Auditor-General is a single, statutory officer with both governance and executive functions vested in him and is required to exercise his powers in an independent manner.

4.3.2
A comprehensive review of the governance arrangements and systems of the Office was carried out in late 2006 by an independent consultant who was formerly a Public Service Chief Executive. Overall, it gave high marks for the standard of governance in the Office, noting that good governance was deeply embedded in the organisation’s culture and leadership. Formal processes and actual behaviour were seen to be mutually reinforcing. The Auditor-General noted in his most recent Annual Report that all of the Review’s recommended improvements had been implemented or were being addressed.

4.3.3
In our view, the Auditor-General provides the Office with a high standard of leadership. There is a strong focus on results, the importance of building relationships, high ethical standards and the need for clear, open communication. The drive for continual adaptation and improvement comes from the top. The leadership culture aims at clear communication of expectations for ethical behaviour coupled with ongoing dialogue with staff. High standards and values are supported by processes and documents which help ensure that these standards are embedded in the organisation’s culture.

4.3.4
In the absence of some of the usual public sector checks and balances on governance it is important that the Office be run in as open and transparent a manner as possible. The Auditor-General is to be commended for the numerous steps he has taken to open the Office to external scrutiny. These include focus groups, peer reviews, advisory groups, external reviews of performance audits, independent checks on audit allocation decisions and fee levels, consultation with stakeholders on the discretionary work programme, an independent Audit and Risk Committee, climate surveys and external stakeholder surveys. The Auditor-General’s annual reports routinely carry an independent report on the audit allocation system as well as a statement from the Chair of the Audit and Risk Committee.

4.3.5
In recent years, the Auditor-General has moved to develop more specific measures against which to assess performance in his Annual Report and other accountability documents. A review was undertaken by external management consultants in 2006-07 to try to develop a more meaningful methodology that takes into account the widely varying size and nature of individual audits. The presentation of the Auditor-General’s Annual Plan for 2007-08 reflects a move towards greater specification of outcome information and performance measures in the OAG’s Statement of Service Performance.

Audit and Risk Committee

4.3.6
A four person audit and risk committee meets four times a year to provide the Auditor-General with the assurance he requires on key internal controls and processes. The Committee was established in 2003 and is composed largely of external appointees, all of whom are chosen for their expertise and experience. Its main functions are:

• risk management and internal control
• the internal audit function
• financial and other reporting
• governance framework and systems
• compliance with legislation and policy.

4.3.7
These functions are set out clearly in the Committee’s Charter. The Committee has completed and reviewed a number of reports in the past three years. Our team checked the follow-up action taken and was impressed by the Committee’s systematic and thorough approach. The Chair of the Committee confirmed to the Review Team that he was not aware of any significant risks that should be drawn to our attention. A similar assurance is contained in the Auditor-General’s Annual Report for 2006-07.

Internal and External Audit

4.3.8
The Office’s internal audit function has recently been contracted out to a major accounting firm. Previously, it was handled by a staff member - an arrangement which was not entirely satisfactory to either the Auditor-General or the Audit and Risk Committee.

4.3.9
We inspected the management reports issued by the Office’s external auditor for the past three years. The auditor confirmed that he had looked closely at such issues as probity, waste, legislative compliance and reporting on service performance (i.e. the elements now covered by “enhanced” financial audits) as well as the standard financial management issues. In response to our question, the external auditor confirmed that he had not as yet undertaken a broader performance audit of the Office, although this was allowed for in his terms of reference. He agreed that this was a possibility worth considering. We were told that the OAG and Audit New Zealand were transparent and open to deal with, and that the Office culture was a strong and positive one from an auditor’s perspective. The Auditor-General always insisted on a "hard" or "no holds barred" audit, and the Office had invariably taken prompt follow-up action on any recommendations.

4.3.10
No major issues were identified in the 2006-07 audit. The risks around IT systems that had been identified in a recent external review were regarded as being managed appropriately. The merger of corporate services was seen as a major advance. Financial management had tightened up and financial controls were up to standard. (This was also the conclusion of a review carried out in June 2007 by Ernst and Young, which commented positively on the improvements made in the areas of Finance and IT in particular.) The project management unit had completed good work on the standardisation of project management tools and disciplines. Formal project specification requirements had been established for all performance audits, major inquiries and research projects. The annual report was seen as accurately and fully reporting on the work of the Office. Its improved coverage of service performance in particular was commended by the external auditor.

Suggestions for Improvement

• It is suggested that consideration be given to having a performance audit undertaken of the Office by the External Auditor in the next year.

4.4 Management

4.4.1
The merging of corporate services initiated in 2006 is substantially completed. Both the OAG and Audit New Zealand now draw off common services in the areas of corporate planning, project management, human resources, finance, information technology, communications and reports, legal services and internal audit. By common consent, this arrangement is providing more effective and efficient support than was the case in the past. Managers and staff in both units expressed satisfaction to us about the level and standard of support services now being provided. While there is more to be done in such areas as information technology, the servicing problems that dogged both business units in the past seem now to have been largely resolved. A comprehensive review of the support services provided to Audit New Zealand under the new arrangements is about to commence, as is a review of business support services more generally.

4.4.2
The two remaining areas still to be fully brought together are contracts and document and record management. While a number of contracts have been standardised between the two offices, some service, maintenance and supply contracts have yet to be merged. Work is in train on this. The problem with documents and records management is partly the different systems in use in the OAG and Audit New Zealand (Silent One and Documents One respectively) and partly the difficulty of bringing practices into line with the requirements of the Public Records Act 2005. It is not yet clear whether the two systems will be merged or whether other mechanisms such as the intranet will meet the needs of shared documents and records.

Human Resources (HR) Management

4.4.3
The HR Division was observed to be performing its functions well. Communication with client divisions is of a high standard and the Office’s HR policies and practices compare well with those of other public sector organisations. The merger of OAG and Audit New Zealand HR systems is effectively complete, with shared staff, programmes and processes now in place.

4.4.4
The major HR challenge facing the Office at present is in the recruitment and retention of qualified and experienced staff. Several years of sustained economic growth and historically low unemployment mean that financial expertise and audit assurance experience are both in high demand in NZ at the present time. A number of audit staff continue to leave (often to go abroad) after their first three or four years in the job. To compensate for this trend, a number of auditors have been recruited from abroad. A major new recruitment campaign was being launched in the United Kingdom and South Africa as the peer review exercise took place. A recruitment specialist has been contracted in to the HR Unit for one year to manage this area of work. Secondment and exchange possibilities are also being pursued in selected countries. The recently-strengthened intern programme is producing good results, with an encouraging number of interns returning to take up full-time work with Audit New Zealand. In February 2007, 25 new graduates began work with Audit New Zealand. This programme is viewed by Audit New Zealand as a key element in its recruitment strategy.

4.4.5
Remuneration systems and levels are generally seen as appropriate. Remuneration levels are based on the widely-used Hay job evaluation system. A range from 80 per cent to 105 per cent of the market median is most commonly applied, depending on performance. The performance management system has been under revision recently but has a good level of acceptance among managers and staff alike. Regular appraisals are conducted against agreed objectives, using a standard form for staff at all levels. The goals and performance targets for individual employees are derived from unit work plans and well aligned with overall organisational objectives. While the forms differ slightly between the two business units, both require that performance be assessed against agreed targets and have an appropriate emphasis on self assessment, job-related competency evaluation and the identification of personal development needs.

4.4.6
Two superannuation schemes are available to staff: the recently-introduced Kiwisaver scheme and an AMP plan. All Office staff may join the Kiwisaver scheme. A position on the payment of employer contributions into this scheme will be taken once decisions are reached on the application of Kiwisaver to the broader State sector.

4.4.7
The OAG and Audit New Zealand face a major challenge in maintaining the necessary levels of skill and professionalism among their staff. General management and leadership training (including participation in Leadership Development Centre courses) are being emphasised. Action has been taken on the recommendation in the 2006 report on governance that senior staff be given greater access to guidance on feedback and coaching their staff. Likewise, workshops have been held to implement the report’s recommendations on how top managers should discharge their leadership responsibilities. A 360-degree feedback programme has been introduced to inform individual development plans. A specialist contractor was engaged this year to work on leadership and development training. Significant numbers of staff have participated in the Leadership Development Centre’s programmes. Senior staff have attended workshops aimed at equipping them with stakeholder relationship and staff management skills. Particular emphasis is placed on individual development programmes and high potential and talent management programmes.

4.4.8
The OAG and Audit New Zealand are also putting increased effort into professional and refresher training for their staff. For the past two or three years, the focus has been on providing tailored training courses for the central government legislative changes, the IFRS changes and the LTCCP exercise. There was a significant increase in per capita expenditure on training and professional development in the 2006-07 year. Audit New Zealand has recently reintroduced its national professional development programme for all audit staff. The Office encourages the development and maintenance of appropriate links with professional bodies.

Financial Management

4.4.9
Although work is still in progress in some areas following the merger of corporate services, the Finance Unit is seen as performing its tasks to a high standard. A number of staff commented on the improvements achieved since the merger. There now exists one financial management system, one set of accounts and one payroll function. Improvements have been made recently to the system for apportioning overhead costs between the OAG and Audit New Zealand. The 2006-07 external audit report commends the Office for the work done on rationalising the general ledgers and payrolls. Staff interviewed confirmed that the financial information generally met their needs. Financial reporting to the managers and leadership teams is also generally hitting the target. We inspected sample financial reports at both management and leadership level and found them to be of a good standard and useful for decision-making.

4.4.10
Audit New Zealand managers consider that they are receiving much improved support and reporting from the Finance team in such areas as fees and budgets. The reconciliation and consolidation of the different financial management information systems previously in use in the OAG and Audit New Zealand is not yet completed, but good progress has been made. A new costing approach is being developed to support the budget and payroll systems. The suggestion was made to us that the team might usefully be strengthened to enable it to provide more support in such areas as contract management.

4.4.11
The Office has been successful in securing additional funding for its new work stemming from legislative changes and changes in accounting and audit standards as well as for its increased focus on performance audits and enhanced financial audits. We were told that its current appropriation is adequate for its purposes. Therefore, the primary focus is on establishing appropriate financial priorities, not least across the Office’s audit programmes.

4.4.12
New instructions have recently been issued on sensitive expenditure. The External Auditor confirmed to us that the Office’s financial management and reporting systems were in good shape. Managers and staff seem well aware of their responsibilities in terms of financial management. The Audit and Risk Committee has conducted a number of reviews of the Office’s financial management systems and controls, and we saw evidence of strong follow-up action having been taken on its recommendations.

Project Management

4.4.13
The Project Management Unit’s responsibilities are diverse and organisation-wide. They encompass risk management; legislative compliance; maintaining the Office’s strategic and corporate planning processes; servicing the Audit and Risk Committee; overall performance evaluation; project management methodology; and overseeing the organisation’s reporting requirements.

4.4.14
In our view, the project management team has done valuable work on the standardisation of project management tools and disciplines. Formal specifications are set for all performance audits, major inquiries and research projects. We viewed the documents relating to the implementation of a legislative compliance programme and were satisfied that it provides positive assurance that appropriate processes are in place and is in line with good practice within the public sector. The Unit is seen by managers and the Audit and Risk Committee as making a valuable contribution to its other areas of responsibility.

Risk Management

4.4.15
The importance of an integrated and well-developed risk management policy, including regular reporting against the major risks, was emphasised in the 2006 report on governance. Substantial progress has been made towards this goal, but its completion remains a high priority for the Office. It is important that stakeholders have assurance that the organisation will achieve its objectives without running unacceptable risks. Key to this is ensuring that staff at all levels have sufficient knowledge and appreciation of the risks facing the organisation. It is essential to encourage ownership and commitment throughout the organisation.

4.4.16
Risk management is addressed in a number of ways by the Office. We examined the current state of documentation covering the framework. It encompasses strategic as well as operational and business risks for the organisation as a whole. Each unit has its own risk register, and each project proposal is required to be accompanied by a systematic appraisal of risks. Work is in train to ensure the strong involvement of all parties - leadership teams, managers, the Audit and Risk committee and, importantly, individual staff members. Establishing a more standardised and systematic approach to reporting against risks is also a focus. The project management unit, which has central responsibility for risk management in the Office, is conscious of the risk of becoming unduly bogged down in detail and process.

4.4.17
The two main strategic risks currently identified are loss of independence and audit failure.

4.4.18
The Office’s business continuity plan has perhaps suffered from a lack of attention in the past but is now in the process of being updated. It stands to be restructured into three separate parts: crisis management; business unit recovery; and IT service continuity. Use will be made of a business impact analysis to assess the consequences for the organisation of failure in any one of those areas. The timeline for the completion of this work has the business impact analysis done by the end of 2007, with the plans themselves ready for testing by March 2008.

Suggestions for Improvement

• High priority should be given to completing and rolling out the organisation’s risk management policy and updated business continuity plan in the current financial year.

Knowledge Management

4.4.19
Well-established knowledge management processes are important to cushion against the loss of key staff as well as to enhance efficiency and effectiveness by protecting institutional knowledge.

4.4.20
The Review Team notes that the 2007 CCH Intelligence Business Survey found that firms with a formal knowledge management programme consistently performed at a higher level as an intelligent business than firms without a programme in place. The significant benefits achieved included 76 per cent reporting increased efficiency and 63-69 per cent improved client service and productivity.

4.4.21
The Office has experienced some difficulty in instituting a knowledge management system. Factors such as office layout and different electronic document management systems have militated against it. The electronic document management system is being replaced in the next few months with a more user friendly system that has an appropriate classification framework and will allow the Office to meet its obligations under the Public Records Act 2005.

4.4.22
Work is also underway on mapping and documenting the Office’s core business processes, beginning with entity management and ASP management. Essentially the “knowledge” comes from staff, although a business analyst has been brought in to facilitate the mapping. This process will be extended across other core business processes in the coming months. Moreover, one of the Office’s main information systems - the audit status database (ASD) - is being enhanced. An element in this will be the provision made for stakeholders to add information - for example, about entities and contracts. Finally, the intranet is used as a repository of organisational information on such matters as policies and office news. A “team space” is also being developed to enable groups of staff to share information, documents and plans.

Suggestions for Improvement

• The leadership teams should maintain a strong focus on the implementation of a knowledge management system that will meet the present and future needs of the Office of the Auditor-General and Audit New Zealand.

Corporate Legal Services

4.4.23
The role of the legal team goes well beyond providing specialist services to the OAG and Audit New Zealand. It plays a critical organisational support role. As the provider of legal advice and services to other units, it is clearly doing an excellent job. Managers and staff we interviewed spoke highly of the legal team’s responsiveness as well as the quality of its advice. "Always there when needed" was the usual response to our questions. The team will occasionally buy in outside expertise but for the most part relies on its in-house capability. It has provided first-rate support in new areas of work such as the LTCCP exercise. However, its limited size and dependence on a very small number of highly experienced and able staff represent an organisational risk that needs to be watched carefully.

Information Technology

4.4.24
Without exception, managers and staff we spoke with were pleased with the desk-top and help desk services now being provided. Clearly, significant advances have been made in these areas in the past 18 months or so. A major outstanding piece of work however, relates to the two different document management systems in use in the OAG and Audit New Zealand. As noted earlier, the development of an integrated system is complicated by the need to comply with the Public Records Act, the different needs of the two units and the requirement to vary access rules for documents containing information of commercial sensitivity. The case for moving to a policy of restricted access (with open access only where needed) appears to have been strengthened with the merger of the two IT management systems.

4.4.25
A recent external audit report on the Office commended the IT team for the improvements effected in the ASD and the Inquiries Database. The IT governance arrangements were deemed to be satisfactory and the further development of the ICT strategic plan was seen as covering off the major issues identified in a previous management report. Regular quarterly reports on the IT/ISS plan are now furnished to the leadership teams.

Reports and Communications

4.4.26
The Reports and Communications Division has responsibility for exercising quality control over all OAG publications. It is charged with both editing and publishing all OAG reports. This is an important task, given that the reports represent the OAG’s “shop front” as well as the main way of getting its views across to a number of audiences around New Zealand. The Peer Review Team was impressed by the quality of the OAG reports and the unit’s clear statement of its objectives and performance benchmarks for 2007-08.

4.4.27
The group handles press enquiries and media relations, the Office’s websites and intranet, and the Audit New Zealand staff newsletter. The latter all looked to be of a high standard and were well regarded by managers and staff alike. The Review Team found them readily accessible and useful. A newsletter for Audit New Zealand’s central government clients has recently been restarted. Corporate branding and internal communication channels come within the unit’s responsibilities. It also takes an active interest in the provision of training in plain English writing. Presentation and clarity of reports add considerably to the Office’s effectiveness.

Research and Development

4.4.28
The strengthening of the Office’s research and development capability is a good example of the Auditor-General’s drive for continual improvement. On the basis of a well researched paper, the leadership team took decisions in May 2005 that led to the establishment and consolidation of a dedicated R&D Unit. Its work derives from the strategic plan and annual plans (notably the drive for product leadership) as well as changes in the operating environment. In its early stages, the unit has been required to develop strategies, methodologies and systems to cope with such developments as the adoption of IFRS and the introduction of LTCCPs for local government. It is working on the reshaping of services and products to better respond to the changing environment and meet the needs of stakeholders. A new system of ratings has been devised for financial audits, primarily with a view to focussing attention on what areas of activity would benefit from improvement. Standards for the audit of performance information are another area of focus at present. Tracking overseas trends and gathering intelligence also fall within the unit’s responsibilities.

Suggestions for Improvement

• Close attention should be paid to resourcing the R&D function at a level capable of supporting the strategic decision-making critical to the credibility and effectiveness of the organisation, as well as to its ability to respond appropriately to a fast-changing environment.

4.5 Performance Management

4.5.1
The Office’s key accountability documents are the annual plan and annual report. The combination of a five-year strategic plan and annual work plans seems to work well. We were impressed by the alignment between the longer and shorter term plans. The plans are well written. Targets and benchmarks are set out clearly. A full range of documents and reporting requirements support the plans. They give clarity of purpose and a strong sense of focus on key objectives. In the words of the 2006 governance report: "The Office has a clear purpose as expressed in its Strategic Plan as well as a coherent strategy to achieve it." Staff are encouraged to participate in the formulation of plans and considerable effort is made to secure their “buy in”.

4.5.2
The OAG’s timetable for the annual plan is a model of its kind. The current five-year strategic plan covers the period up to 30 June 2009. The Project Management Unit is responsible for providing the leadership teams with the tools and information for assessing progress against the agreed strategic direction of the organisation. A first meeting was held recently to begin work on the next five-year strategic plan.

4.5.3
A Charter promulgated for the leadership teams sets out clearly their respective roles and responsibilities. The Auditor-General chairs meetings of the OAG leadership team and attends the Audit New Zealand executive management team. Reports kept of these meetings showed evidence of focused strategic thinking and a strong emphasis on results.

4.5.4
Combined management team meetings support the leadership teams. The Office uses the full range of internal accountability documents to drive strategy down into more detailed work levels. We were impressed by the coherence of the business unit plans, team plans, and individual performance plans we inspected. All these documents were well aligned to the organisation’s strategic goals.

4.5.5
Management clearly pays close attention to performance monitoring and to ensuring that organisational capability keeps pace with changing requirements and increasing demands. Most recently, the focus has been on staff recruitment and professional development, project management, and research and development; embedding the shared services model; improving systems and processes; and strengthening organisational and professional capability.

4.5.6
The Project Management Unit is charged with responsibility for supporting the leadership teams in developing strategic and operational plans and in tracking progress against the agreed objectives. Structured and regular performance monitoring takes place on a regular basis at organisation, unit and individual levels. The combined management teams meet four times a year to evaluate the organisation’s overall performance. A range of performance measures have been identified to help chart progress. We viewed samples of the reports submitted to the leadership and management teams and found them to be of a high standard.

4.5.7
One area identified by the 2006 governance review, where improvement was thought possible, was the formalisation and documentation (for example, in strategic planning and performance management documents) of the high values expected in staff behaviour. Accompanying this was a recommendation for a closer, more explicit alignment between strategic plans and individual work plans. Both recommendations were accepted by the Office and are under action.

4.6 Culture and Values

4.6.1
Staff morale in both business units seems good, and has obviously improved with the strengthening of support services in the past couple of years. This was confirmed in a wide number of staff interviews. Leaders - and their leadership teams - in both the OAG and Audit NZ are positively viewed by staff. Interpersonal relations and communication between the two business units and between Wellington and district offices seemed to be positive. A number of staff went out of their way to comment positively on the strong emphasis placed by the Auditor-General and Executive Director on ethical standards and the independence of the Office. There is a sense of shared purpose and clear objectives evident in both business units. The leadership and senior management teams operate sound systems both jointly and individually, and information is disseminated as a matter of course to staff at all levels.

4.6.2
Both OAG and Audit New Zealand staff have come under pressure in recent years because of major changes in their operating environment and as a result of the turbulence that comes with internal restructuring. We were told that some employees had at times felt under extreme pressure as a result. In addition to the fast-growing workload, a contributing factor may have been that certain managers were themselves overworked and not well equipped to provide staff with the guidance and support needed at a time of far-reaching change. Staff numbers were also a problem. Our impression, however, is that managers are now receiving better professional support and training; that staff retention and recruitment is running better; and that more attention is now paid to the importance of maintaining an appropriate work/ life balance.

4.6.3
Recent independently-conducted climate surveys show that staff in both the OAG and Audit New Zealand rate highly in the areas of ethics, values and standards. In both cases scores, overall, were quite good and engagement levels seen as relatively high. The climate survey results were made available to staff through managers, many of whom ran discussion groups around them. Audit New Zealand has since focused on engagement, recognition and performance expectations; and the OAG on strategic directions and staff development.

4.6.4
A separate survey done of the Corporate Services staff showed some of the expected results of the turbulence arising from the merger of the two units since December 2006. Not unexpectedly, a number of staff felt uncertain about their future and were unsettled by the changes. Nonetheless, the overall picture is of a team of people who are highly motivated; have a clear sense of where the Office is heading; and see the Office as a positive place to work. As mentioned earlier, a review is currently underway of the conditions of service for the business support group.

4.6.5
So far as external perceptions of staff of the Office are concerned, the recent stakeholder surveys we inspected also gave out generally positive signals. Most ratings were in the “positive” to “very positive” category. The constructive nature of working relationships, sectoral expertise, staff professionalism and the organisation’s general credibility were seen as significant assets.

4.6.6
Performance against EEO and other targets seems satisfactory. Gender balance is in line with the State sector generally, and ethnic spread is similar - though the Office continues to have difficulty in recruiting suitably qualified Maori staff. Steps are being taken to ensure that recruitment strategies target the widest possible audience. The general distribution of staff by gender and ethnicity has not changed significantly in recent years. Staff turnover rates are satisfactory, particularly given the demand situation for the skills involved.

4.6.7
We examined the Code of Conduct. It seemed to us to cover the ground well and to provide clear guidance to staff on the behaviour expected of them. It is designed to supplement the terms and conditions of employment set out in letters of appointment and employment agreements. It covers such areas of conduct as honesty, discretion, conflicts of interest, non-discrimination, protected disclosures, disciplinary procedures, and care of property and resources. Work is in train on the consolidation and updating of policies in such areas as health and safety and leave, where there remains a lack of consistency across the two offices. A standard protected disclosures process is in place.

4.6.8
An Employee Assistance Programme is available to staff. There have been very few personal grievance cases in recent years. Satisfactory action has been taken on a number of recommendations made by the Audit and Risk Committee in the past two or three years on such issues as health and safety policies, leave management, support for study leave, and physical security vulnerability.

4.7 External Stakeholder Relationships

4.7.1
The Office’s relationships with key stakeholders are in good shape overall. As noted earlier, recent stakeholder surveys bear out the high levels of satisfaction encountered by the Peer Review Team in their meetings with government agencies, local government and Parliamentary Select Committees. The one exception to this is the strain that has come into the Auditor-General’s relations with political parties as a result of the electoral advertising inquiry - see below.

Government Agencies

4.7.2
Representatives of government agencies raised standard questions about the Office’s work - for example, the value of certain performance audits, lack of staffing continuity and fee increases. Generally speaking, however, they were positive about the balanced, professional and constructive approach taken by OAG and audit staff. The State Services Commission and Treasury value the work done by the Auditor-General to improve standards of governance and management around the public sector. Working relationships between central agencies and the Office seem generally positive and productive.

4.7.3
A recent stakeholder survey around government agencies showed that overall perceptions of the Office were positive and its staff well respected. Its advice to agencies was seen as useful. The OAG scored well in relationship management, with 89 per cent of stakeholders agreeing that working relationships were well handled. Suggestions for improvement included concentrating on financial audits (and in particular on any misuse of public money) and building greater staffing continuity.

Parliamentary Select Committees

4.7.4
Select Committees rate highly the support given them by the OAG. Given that they have no significant research capacity of their own (and depend largely on published documents, party research units and written responses to questions), they rely heavily on OAG assessments of both the financial health and the general performance of government agencies. OAG sector managers are a key - and valued - link between the OAG and Select Committees. Members of Select Committees are given an opportunity to comment on the Auditor-General’s discretionary work programme each year. The Chairs of the Committees with whom we spoke attached value to the OAG’s performance audits because of the insight they provided into the effectiveness and overall performance of agencies.

The Officers of Parliament Committee

4.7.5
The OPC was generally satisfied with the work of the Office. It expressed concern, however, at the way the recent inquiry into the funding of electoral advertising was handled. While recognising the difficult position in which the Auditor-General had been placed, Committee members voiced criticisms of both the process followed and the inquiry’s outcome. The difficulty of the situation in which the Committee found itself was perhaps the greater because its Chair is at the same time Speaker and Minister responsible for the Parliamentary Service. The Review Team was informed that the Committee would, in the future, be paying more attention to its oversight responsibilities in respect of the Office.

4.7.6
This concern with the outcome of the Auditor-General’s inquiry into electoral advertising was echoed by party political leaders and other members of Parliament whom we interviewed - although apparently not in the wider community. While we had no mandate to look at either the inquiry itself or the rights and wrongs of the complaints made, it was apparent that the previously good relationship between the Auditor-General and Parliamentarians had been damaged. Yet, the state of the relationship between the Officers of Parliament Committee and the Auditor-General is of prime importance to the effectiveness of the Office.

4.7.7
We were pleased to note that, at officials level, the Parliamentary Service and the Office are working hard to get parliamentary and government advertising rules clarified and restore greater harmony to the relationship. With the next general election looming, the issue of political advertising could cause further problems in the coming months. We consider that it might help if, in addition to his regular meetings with the Chair of the OPC, the Auditor-General and his senior staff were to meet in person with key Select Committees from time to time over the next few months in an attempt to build back better levels of understanding and confidence.

Suggestions for Improvement

• The Office of the Auditor-General and senior Parliamentary Service managers should continue their efforts to strengthen the relationship between the Office, the Officers of Parliament Committee and key parliamentary Select Committees.

Local Government

4.7.8
The Auditor-General and his staff are highly regarded by local government. The relationship came under a certain amount of strain with the introduction of Long Term Council Community Plans (LTCCPs), but there was a general sense of satisfaction and appreciation for the way the OAG, Audit New Zealand and other Audit Service Providers had worked together with local authorities to bed in the requirements of the Local Government Act 2002. The point was made to us that the Office had had to play the dual role of adviser and auditor in order to get the IFRS and the introduction of LTCCP process launched. More generally, the Office is seen by local authorities as knowledgeable about its sector, constructive in its approach, and reasonable to deal with.

4.7.9
Local Government New Zealand was similarly positive about the work of the Office. They saw the OAG as a credible watchdog and a constructive partner in improving the standards of governance in local government bodies. This view was echoed by the Society of Local Government Managers, which has an overall role responsibility for improving local body management capability. They saw the OAG team as highly professional, well informed and helpful. They value the support given by the OAG to their efforts to promote and support better management practices in the local government sector. They noted that the Auditor-General had established a Local Government Advisory Group to ensure clear, strong communication with the sector.

Professional Contribution

4.7.10
The OAG and Audit New Zealand are significant contributors to the advancement of the accounting and audit professions both within New Zealand and on the international stage - particularly in the South Pacific. Staff, either on behalf of their organisation or in an individual capacity supported by the Auditor-General, are directly involved in the governance of the Institute of Chartered Accountants in New Zealand through the Executive Board and are also active participants in the following:

• FRSB that sets the reporting standards in New Zealand;
• various working groups of the FRSB;
• Professional Standards Board that sets auditing and other professional standards in New Zealand; and
• several committees involved in the Institute’s annual report awards.

Similarly, on the international stage, staff from the OAG and Audit New Zealand are involved in the following, a number of which require a significant contribution:

• International Public Sector Accounting Standards Board (IFAC based) that develops, on an international basis, reporting standards for the Public Sector;
• various committees of the INTOSAI, including those contributing to Environmental Auditing and setting Professional Standards; and
• providing the Secretariat of the South Pacific Association of Supreme Audit Institutions, involving various ongoing initiatives and organising the SPASAI conference.

4.7.11
In addition, Audit New Zealand is involved in a number of international secondments and exchanges with comparable organisations in other countries. For relatively small organisations, the OAG and Audit New Zealand make a significant and much respected contribution, both nationally and internationally.

4.8 External Performance Assessment

4.8.1
As indicated earlier, the Auditor-General runs an open organisation and regularly seeks external assessment and validation of the Office’s goals and activities. As also noted, good progress has been made in the measurement of, and reporting on, levels of service performance and achievements against strategic goals. This is reflected in comments earlier in this report on the way in which performance is now being reported on in the Auditor General’s Annual Report.

4.8.2
Although independent of Parliament and executive government in carrying out his statutory duties, the Auditor-General is responsible to Parliament for his stewardship of the public resources entrusted to the Office. The OPC meets with the Auditor-General and his representatives from time to time to review such matters as the Office’s discretionary work programme and the evaluation framework for assessing the impact of performance audits.

4.8.3
An Independence Review Committee provides assurance that the Auditor-General’s judgements on independence matters are appropriate, having regard to such issues as stipulated standards and guidelines and his duty to act independently in terms of the Public Audit Act 2001. Following an Audit and Risk Committee review in 2005, processes for staff declarations on confidentiality and independence were tightened up and standardised across the two business units.

4.8.4
Each year an independent evaluation is made - and the results incorporated in the Auditor-General’s annual report - of the audit tendering and allocation process. Independent reviews are also undertaken of at least two performance audits a year.

2: Australian National Audit Office, August 2003. Public Sector Governance. Better Practice Guide. Canberra.