3. Overview

"……audit does not exist merely to check on what public organizations are doing, it must also act as a catalyst for change through constructive but critical challenge. Increasing insight and facilitating foresight is set to feature ever more prominently in this task."

Joseph McHugh, Deputy Editor, Public Finance, CIPFA, London, 2007¹

3.1.
The Auditor-General’s Office (the Office) is a relatively small but highly regarded organisation both in New Zealand and internationally. The Office operates in the context of a developed, highly performing and sophisticated national economy and an innovative public service that has been used as a model by many countries. On the one hand, limited resource availability and product scope might inhibit performance compared with that of other similar Offices but, on the other, the foregoing factors tend to raise expectations of the Office. The Review Team was conscious of such a tension but concluded, in relation to a number of performance criteria, that the Office would rate highly both absolutely and relatively in any international comparison.

3.2.
A central requirement of any professional audit practice is to know and understand the environment in which audit activity is conducted. The Team not only had the opportunity to speak with an extensive range of stakeholders of the Office to test its own knowledge and understanding of the New Zealand Public Sector, it also had the advantage of tapping into the wide-ranging experience and knowledge of Neil Walter, throughout the Review, as a Team Member. Neil provided considerable background information for the Team, including a Paper on the New Zealand Public Sector as Attachment 5 to this Report. The Paper provided a useful context for the Review, particularly with its focus on performance and results.

3.3.
The Review Team was impressed by the robust legislative framework applying to the public sector and to the Office. The Public Audit Act 2001 was intended to strike an acceptable balance between:

• the independence of the Auditor-General, in particular the ability to act without direction or improper influence by the Executive or the Legislature;
• the need for a sound working relationship between the Auditor-General, Parliament and the Executive; and
• the need for the Auditor-General to be properly accountable to Parliament.

3.4.
Importantly, establishing the Auditor-General as an Officer of Parliament was to ensure the Auditor-General’s independence. The Office accepted that the Controller and Auditor-General, as an Officer of Parliament and a Corporation Sole has the same level of accountability as comparable entities in the public sector. It is recognised that the Auditor-General’s role as an Officer of Parliament does create a tension between being accountable to Parliament while recognising that Parliament is best served by an Auditor-General free from any political interference. The same comment applies to the statutory position of Deputy Auditor-General. The effectiveness of the Office is enhanced by the seamless integration of governance at the top of the organisation, reflecting the complementary and cooperative relationship between the two current appointees.

3.5.
While some concerns were expressed to the Review Team about the clarity of roles and relationships between the Auditor-General (and the Office) and Parliament, the legislative intent is quite clear. Differing perceptions about action taken, or not taken, are best addressed by direct and open communication. Independence is called into question when one is involved in processes or related decision-making and is also responsible for the review or audit of the activity. It was clear that the Auditor-General and the Office are very sensitive to issues of independence and accountability and the appropriate action, including independent review, to provide assurance to the various stakeholders, not least to Parliament itself.

3.6.
Particular issues examined by the Review Team included the organisation and structure of the Office (covering the role and effectiveness of sector managers and any apparent duplication of activities); relationships with its various stakeholders; audit planning, selection, methodology and conduct (including contestable and “allocation” approaches to auditor selection and the coverage and conduct of “enhanced” financial statement audits); knowledge management, performance management and assessment; quality assurance; implementation of audit findings and recommendations; and the complex and rapidly-changing nature of the work of the Office.

3.7.
The Office has undergone significant and wide-ranging change since the last Peer Review in 2001. Its workload has increased in both volume and complexity. Its legislative and operating environment has altered in a number of ways. Its budget and staffing establishment have expanded. And significant improvements have been made to its structures, systems and operations.

3.8.
The relationships of the office with its key stakeholders are generally very positive. Its work is respected across government. Central agencies in particular see it as supportive of their efforts to improve public sector performance. It is highly regarded by local government. Parliamentary Select Committees depend heavily on advice from the OAG and appointed auditors in their examination of departmental estimates and annual reports. Ministers find it helpful to receive annual financial audit reports on their portfolio agencies and spoke well of the work of the Office. Parliament also values the Office’s work, although the recent inquiry into electoral advertising has obviously strained the Auditor-General’s relations with political parties. Recent independent stakeholder surveys bear out the high levels of satisfaction encountered by our team.

3.9.
Except as discussed in sub-section 5.3, the financial and assurance work of the Office is largely non-discretionary. The main areas of discretionary work are performance audits and inquiries, which make up around 10 per cent of the Office’s activities. While the financial audit and assurance work of the Office is well established and accepted, performance auditing is still developing and growing in importance, reflecting a significant increase in resources in 2004. Overall, we found a high level of satisfaction with the OAG’s performance audits. Interviews with Ministers, Select Committees and public entities yielded a range of generally positive comments. The results of the OAG commissioned 2007 Stakeholder Feedback Interviews showed all respondents satisfied with the quality of OAG performance audits and 86 per cent satisfied with their usefulness. There was only the occasional questioning as to whether all the subjects covered really warranted scrutiny by the Auditor-General.

3.10.
We found considerable process rigour around quality assurance, with no fewer than five reviews conducted in the year preceding our own review. These reviews have all commented positively on the OAG’s performance audits, while also usefully signposting ways in which further improvement can be made. We note that, at present, much of the quality assurance effort is focussed towards the end of an audit or indeed after an audit report has been published. We consider there would be merit in applying more of this resource to earlier points in the audit lifecycle.

3.11.
With 14 performance audits to deliver in 2007-08 and a core audit staff of 15 performance auditors, there is a question as to whether present core staffing levels for performance audits provide sufficient continuity and capacity to do justice to the range and number of audits tackled each year. The selection processes for performance audits could also be refined, primarily around a more proactive engagement with Members of Parliament and public entities. While improving quality of audits and recommendations is of prime importance to the reputation and credibility of the Office, there is also the imperative to ensure that recommendations are actually being implemented effectively. A closer working relationship with Select Committees could assist in this respect.

3.12.
May 2006 saw the introduction of an Inquiries Manual designed to rationalise processes and procedures across the Office, centred upon good practice established in earlier inquiries. The Manual represents an important decision-making tool and is an important means for the Auditor-General to demonstrate, with clear and comprehensive documentation, that processes have been diligently and consistently applied.

3.13.
In 2006-07, there were two specific quality assurance exercises applied to the inquiries function which identified a number of areas of the Inquiries Manual that might need strengthening, as well as a need in some inquires for more documentation to properly record key decisions and positively demonstrate compliance with the Manual.

3.14.
As with the OAG’s performance audits, the 2007 Stakeholder Feedback Report found 100 per cent of respondents satisfied with the OAG’s handling of inquiries, compared with a figure of 75 per cent in 2006.

3.15.
Our overall assessment is that the Office has coped well with the challenges of recent years and is performing its tasks professionally and well. It has the feel of an outward-looking and forward-looking organisation. The feedback from stakeholders on its performance was generally positive, as noted earlier, with some suggesting that the Office could do even more to contribute to improving public sector management in New Zealand. We found management and staff alike to be well attuned to the changing requirements and expectations placed on the Office. Both the OAG and Audit New Zealand now seem to us to be well positioned to respond to the further challenges that lie ahead.

3.16.
As with other Audit Offices and private sector accounting firms, the OAG and Audit New Zealand have an ongoing problem of attracting and retaining suitable professionals not only to undertake audit programmes, but also to maintain - and hopefully improve - research and development capacity, add value to audits and improve relationships with all stakeholders. At least three related factors need to continue to be addressed to meet staffing concerns - providing suitable personal development and professional training as well as state-of-the-art audit tools; providing a comprehensive and varied audit programme that is relevant to stakeholders as well as being demanding and interesting to staff; and promoting stakeholder relationships that enhance understanding and acceptance of the work of the auditor.

3.17.
The Review Team saw its main tasks as information gathering, assessment, assurance and adding value. Full access was provided to all documentation and relevant personnel both within and outside the Office. The Team had sufficient expertise to undertake all assessments without any other assistance. This reflected both the professional qualifications and the wide experience of individual Team Members. Thus it had full confidence in its ability to provide assurance across the full range of the Office’s activities - of both an audit and a non-audit nature.

3.18.
The Team considered it would best add value largely by supporting and reinforcing observed better practice. This included offering a number of suggestions for improvement based on Team Members’ knowledge and experience. The opening quote to this overview was a recent reflection of the views of Auditors-General in the United States and United Kingdom, suggesting the need for more audit focus on strategic planning, governance, risk management and performance measurement and reporting. In addition, the Team took into account the increased involvement of the private sector in public service delivery and issues associated with cross-agency delivery of government programmes.

3.19.
A Draft Report was provided to the Auditor-General for any comments and/or suggestions - basically on facts and accuracy. The final Report includes his comments where relevant.

3.20.
The following sections of the Report, led by individual Team Members, outline what we found and what improvements we suggest.

1: Comment included in a Public Management and Policy Association Report entitled “Watchdogs Straining at the Leash”. Edited by Michaela Lavender, November 2007 (page 5)