Part 1: Auditor-General's introduction

1.1
Overall, the poor quality of non-financial performance reporting¹ by public entities is disappointing. It needs to improve significantly to allow Parliament and the public to hold public entities accountable for their use of taxes and rates and for the effectiveness of their service delivery.

1.2
For nearly 20 years, there have been statutory requirements for a range of public entities to report on their non-financial performance. Most of the requirements for performance reporting were introduced during the late 1980s and refined in the early 2000s.

1.3
Between 2002 and 2004, many of the statutory provisions about performance reporting were reviewed, which resulted in:

• greater emphasis on, and direction to entities about, the medium- to longer- term contextual and outcome information required; and
• a broadening of the range of entities required to report on their performance.

1.4
Nevertheless, there remains much to be done to lift the quality of performance reporting in the public sector to a satisfactory level.

Purpose of this discussion paper

1.5
The purpose of this discussion paper is:

• to set out my perspective about the purposes of performance reporting, its uses, why performance reporting is difficult, and possible future directions including my intentions for the work of my Office;
• to tell Parliament my observations about the quality of performance reports produced by the public sector in the last two years; and
• to set out my Office's conceptual framework for performance reporting. The framework is based on generally accepted accounting practice (GAAP) and statutory requirements. As such, it is based on principles that my staff will use in auditing performance reports.

Why reporting non-financial performance information is important

1.6
Performance reports are an essential component of accountability documents. Accountability documents ensure that government departments and other state sector entities can be held accountable to Parliament and the public, and that local authorities and their controlled entities can be held accountable to local communities. Parliament and the public rely on accountability documents to assess the performance of public entities and the effectiveness of public entities' use of taxes and rates.

1.7
As a result, there are legislative requirements for most public entities, including government departments, Crown entities (including district health boards, Crown research institutes, tertiary education institutions, and schools), and local authorities and their controlled subsidiaries to prepare information (in various forms) about their performance.

1.8
A core purpose of performance reporting is to provide for public accountability for the responsible use of public resources and regulatory powers, including demonstrating that public services are being delivered effectively and efficiently. Entities can be truly accountable only if they are transparent about both their financial and non-financial performance and the relationship between the two.

1.9
As well as their external accountability purpose, performance reports should reflect good management practice. Such practices involve clearly articulating strategy, linking strategy to operational and other business plans, monitoring the delivery of operational and business plans, and evaluating strategy effects and results.

1.10
Many public entities are required to produce forecast performance information, and to report against that forecast information in their annual report. For many entities, the information in the annual report (a statement of service performance, or SSP, which reports actual results against a forecast SSP) must be audited. For a smaller group of public entities (almost entirely local authorities), their forecast performance information must also be audited. Appendix 2 lists the performance reports that different types of entities are required to prepare, and the information that my Office is required to audit.

My Office's role in auditing non-financial performance information

1.11
My Office has worked to ensure that annual audits address whether entities have met statutory requirements and complied with generally accepted accounting practice (GAAP) in reporting their performance information.

1.12
Along with the central agencies and others, my Office has previously reported on the information required for Parliament to hold the Executive to account, and has also provided guidance and good practice advice.

1.13
Before the changes to the Public Finance Act 1989 in 2004, and the passing of the Local Government Act 2002 and the Crown Entities Act 2004, audit work would verify the information in the SSP. The audit would attest to the true and fair disclosure of the results in the SSP against the measures and performance targets set in the forecast SSP. However, verifying actual results against forecast results does not address the quality of the service performance information (for example, the appropriateness of the choice of subject matter, performance measures used, or performance targets set).

1.14
The changes in 2004 to the Public Finance Act 1989, and the passing of the Crown Entities Act 2004 and the Local Government Act 2002, have put greater emphasis on medium- and longer-term contextual and strategic information in performance reporting. Well-considered and well-prepared reports about planned and actual progress should provide useful insights into an entity – its purposes, outcomes, and intentions, and the services it provides to achieve them. This sort of information provides the necessary context for my staff to judge the quality (and therefore the appropriateness) of non-financial performance information, as well as verify the information reported.

1.15
Gaining insight into the medium- and longer-term contextual and strategic information is critical to the audit process of making judgements about the risks an entity faces in achieving its purpose and intentions. It also forms the basis of, and sets the direction for, audit work, and in particular SSP audit work. My staff have therefore been placing more emphasis on the appropriateness (relevance, understandability, reliability, and comparability) of forecast and actual performance reports in the SSP audit work.

Scope of this discussion paper

1.16
My observations in this discussion paper are based on work during the past two years involving:

• in-depth reviews of most government department and Crown entity 2007-2010 Statements of Intent (SOIs) – see Part 3;
• audits of the 2006-16 Long-Term Council Community Plans (LTCCPs) of local authorities – see Part 4; and
• a performance audit looking at the Statements of Corporate Intent (SCIs) prepared by port and energy companies, State-owned enterprises, and Crown research institutes, as well as the SOIs prepared by council-controlled organisations and council-controlled trading organisations – see Part 5.

1.17
The audit work my observations are based on did not include performance reporting by tertiary education institutions or schools.

1.18
This discussion paper, and the audit work underlying it, focuses on outcome and output reporting. There are other elements of performance reporting (such as measuring the cost-effectiveness of interventions, organisational health and capability, and current and future asset needs) that I do not discuss.

1.19
I do not explore the extent to which the legislative requirements for outcome and output reporting are relevant to different entities. Some entities, because of their nature or role, might find it difficult to frame their contribution in terms of outputs (that is, service delivery) and measure their performance in these terms. For these entities, other parts of a performance report may be more important to the reader than output information. Because of this, my Office and others − such as central agencies, entities with monitoring responsibilities, and others interested in public sector management – might need to consider these issues separately.

1: For ease of reading, we use the term "performance reporting" and “performance reports” when referring to non-financial performance reporting and reports in the rest of this discussion paper.