Part 2: Reporting on activities in the annual report

Local government: Results of the 2007/08 audits.

2.1
In this Part, we review how local authorities have met requirements in the Local Government Act 2002 (the Act) to include, in their annual reports, certain information in relation to groups of local authority activities. These reporting requirements are some of those in clause 15 of Schedule 10 of the Act.

2.2
These reporting requirements are integral to the effective operation of the performance management framework of every local authority.

Summary

2.3
This is the fifth year we have monitored and reported to Parliament on how local authorities are approaching aspects of these reporting requirements. Each year that we have been monitoring and reporting we have observed a range of disclosures in annual reports, from information being clearly available to no relevant disclosures being made at all.

2.4
Although we have observed some improvement during this time, including some marginal improvement in 2007/08 relative to the previous year, reporting by local authorities in these areas is still below the standard we expect.

2.5
In 2007/08 we focused on three areas. These areas, and our overall findings in relation to each, are as follows:

  • Measuring progress towards achieving community outcomes - we generally found more reporting of measurement in 2007/08, as a number of local authorities had finalised the three-yearly report required by section 92 of the Act in time to disclose information about it in the annual report. We generally believe that local authorities should seek to finalise measurement reports at a time that enables them to use the information when preparing the next Long-Term Council Community Plan (LTCCP). If local authorities do not finalise the measurement reports in a timely fashion, there is a risk that LTCCPs will need to be amended when the measurement reports do become available.
  • Identified effects of activities on community well-being - we found only marginal change in disclosure for 2007/08, in relation to the previous year, and the disclosure for a significant number of local authorities was still insufficient to meet the requirements of the Act.
  • Acquiring and replacing assets - we again found only marginal change in 2007/08 disclosures relative to the previous year, with a significant number of local authorities failing to meet the requirements of the Act.

2.6
In future years, we will be taking a much stronger stand on failures to meet the agreed standard of disclosure for this reporting.1

The requirements in the Act

2.7
The Act contains a comprehensive planning and reporting framework to assist each local authority to engage with its community on its intended actions (the planning phase), and to account for its actual performance against those intentions in the annual report (the reporting phase).

2.8
The Act requires the Auditor-General to audit aspects of local authorities' planning and reporting phases, through his work auditing LTCCPs (which reflect local authorities' intentions) and auditing local authorities' annual reports (including reports of local authorities' actual performance).

2.9
The Act contains disclosure requirements for groups of activities relating to the planning phase. This is to establish a framework for reporting actual performance in the annual report. These planning requirements are those set out in clauses 1 and 2 of Schedule 10 of the Act.

2.10
This Part focuses on the reporting phase, and the requirements that relate to it set out in clause 15 of Schedule 10 of the Act. These requirements relate to local authorities' disclosure of information about groups of activities in annual reports, and include disclosure of:

  • any measurement of progress in achieving community outcomes;
  • identified effects of local authority activities on environmental, economic, social and cultural well-being in their communities; and
  • details about significant assets acquired or replaced.

2.11
The reporting requirements relating to groups of activities2 apply whether the activities are provided by the local authority itself, by a council-controlled organisation or through any other delivery method.

2.12
Local authorities can group activities, as they consider appropriate, for the purposes of delivery, planning and reporting.

2.13
The Act requires the annual report to be structured on a "group of activities" basis.3 For each group of activities of the local authority, the annual report must:

  • identify the activities within the group of activities;4 and
  • identify the community outcomes to which the group of activities primarily contributes.5

2.14
For each group of activities of the local authority, the annual report must also:

  • report the results of any measurement of progress in achieving community outcomes;6 and
  • describe any identified effects that any activity within the group of activities has had on the social, economic, environmental, or cultural well-being of the community.7

2.15
In addition to information about any measurement by a local authority of progress in achieving community outcomes and any identified effects of activities, the annual report must include an audited statement of service performance:

  • comparing actual levels of service for each group of activities against the intended levels of service (as set out in the LTCCP for that year); and
  • giving the reasons for any significant variation between actual and expected levels of service provision.8

2.16
The annual report must also include one further audited statement that:

  • describes any significant acquisitions or replacements of assets in the year and giving reasons for them; and
  • gives the reasons for any significant variation between the acquisitions and replacements projected in the LTCCP and those actually made.9

What local authorities need to do to meet these requirements

2.17
As a result of the above requirements, the annual report must include information about community outcomes, community well-being, levels of service provision and the acquisition and replacement of assets, to enable the community to evaluate the local authority's performance in these important areas.

2.18
Figure 4 summarises the related legislative requirements concerning disclosure of information in these areas, in both the LTCCP (the planning phase) and the annual report (the reporting phase).

2.19
The darker shaded boxes show the areas within the reporting phase that we focused on in our review and assessment of the 2007/08 annual reports. The reasons we focused on these areas are explained in paragraph 2.20.

Figure 4
Summary of related requirements in the LTCCP and annual report for each group of activities

LTCCP (clauses 1 and 2 of Schedule 10 of the Act) (planning phase) Annual report (clause 15 of Schedule 10 of the Act) (reporting phase)
Describe the community outcomes, how they have been identified, how the local authority will contribute to their achievement and work with others to further them, and how they fit with other local authority strategies and processes.
State the measures that will be used to assess progress in achieving community outcomes.*

State how the local authority will monitor and report on the community's progress in achieving community outcomes (which must not be less than once every three years).**		 In relation to each group of activities, report the results of any measurement carried out during the year, of progress in achieving community outcomes.
For each group of activities, identify the activities within them. For each group of activities, identify the activities within them.
Identify the rationale for delivery of the group of activities (including the community outcomes to which the group of activities primarily contributes). Identify the community outcomes to which the group of activities primarily contributes.
Outline any significant negative effects that any activity (within the group of activities) may have on environmental, economic, social, or cultural well-being. Describe any identified effects that any activity within the group of activities has had on environmental, economic, social, or cultural well-being.
State intended levels of service provision for each group of activities. Contain an audited statement of levels of service provision.
Identify detailed information about assets required for each group of activities, including information about forecast acquisition and replacement. Contain an audited statement about acquisition and replacement of assets.

* Clause 1(f) of Schedule 10 of the Act.

** Clause 1(g) of Schedule 10 and section 92(1) of the Act.

2.20
In reviewing the 2007/08 annual reports, we focused on the three areas shaded in Figure 4 for the following reasons:

  • For reporting of any measurement of progress in achieving community outcomes, we felt that some local authorities would have finalised the three-yearly progress report required by section 92 of the Act, and we therefore expected those local authorities to have reported this in the annual report, along with any other measurement that was done during the year.
  • For the description of identified effects on environmental, economic, social, or cultural well-being, and for the asset acquisition and replacement information, we have found from our previous reviews that these are the least well addressed of the annual report requirements specified in the Act. (This was also why we focused on these two areas in our review of 2006/07 annual reports.)

Measuring progress in achieving community outcomes

2.21
Community outcomes are a core part of the community involvement and accountability framework in the Act. Local authorities must carry out a process to identify community outcomes at least every six years.10

2.22
A local authority needs to decide, and state in the LTCCP, how it will measure and monitor progress in achieving community outcomes so that it can report on that progress in the three-yearly report required by the Act.11

2.23
Having consulted with other organisations and the community on desired outcomes, local authorities must work with relevant organisations and groups to agree on monitoring and reporting procedures, including the use by the local authority of any monitoring done by those other organisations or groups.12

2.24
The reporting requirement for the annual report is for a local authority to include the results of any measurement carried out that year that shows progress in achieving community outcomes.

2.25
This may include three-yearly reports completed in the year, but should also include any other measurement that has been done.

2.26
If there are no measurements in the year, we would generally expect a statement confirming this in the annual report.

2.27
In our view, the three-yearly report on progress in achieving community outcomes should be finalised in time for the local authority and its community to use it when they are preparing the next LTCCP. This means that the report should be prepared sooner than the latest possible date allowed by the Act.

2.28
We expected that some of the 2007/08 annual reports we reviewed would contain information about three-yearly reports, given the lead time involved in drafting and consulting on the next LTCCP (the final version of which has a statutory deadline of 30 June 2009) and the desirability of having the progress report available for the preparation of the LTCCP.

2.29
Where local authorities fail to finalise the three-yearly report in time for it to be used in preparing the next LTCCP, there is a risk that the finalised LTCCP will need to be amended because of new information in the three-yearly report.

What we found

2.30
A few local authorities had completed three-yearly reports on progress in 2007/08 on progress in achieving community outcomes, and disclosed this in the 2007/08 annual reports. Some of these local authorities had provided a summary of the three-yearly report findings in the annual reports.

2.31
Some, however, had merely stated the fact they had completed the three-yearly report, without providing any useful information about the findings. We do not consider this latter treatment meets the requirements of the Act.

2.32
A number of local authorities usefully stated in the annual report that three-yearly reports had not been completed during 2007/08, and some of these gave an indication of when they were expected to be finalised.

2.33
Many local authorities had disclosed information in the 2007/08 annual report about other measurements of progress in meeting community outcomes.

2.34
Some of these local authorities had provided comprehensive disclosure, and had integrated this reporting with their other annual reporting and their performance management frameworks. Others had not.

2.35
From our review of local authority self-assessments, used in the audit of the 2009-19 LTCCP, we are aware that many local authorities were finalising, or planning to finalise, the three-yearly reports after the end of the 2007/08 financial year end (and therefore too late to report in 2007/08), but still in time to inform the preparation of the next LTCCP (and to be disclosed in the annual report for 2008/09).

2.36
Some local authorities are still developing their performance management frameworks, and therefore they will continue to have problems reporting effectively on the achievement of community outcomes. We expect a local authority to ensure that its performance management framework is an integrated package that links community outcomes with performance measures, targets, and levels of service. With such a linked framework, it is easier for local authorities to report on progress in achieving community outcomes13 and the identified effects of activities.

2.37
We will continue to monitor this area in future years.

Identified effects of activities on community well-being

2.38
Another core part of the framework in the Act is the promotion of environmental, social, economic and cultural well-being in the local authority region or district.

2.39
Local authorities must involve the community on how to promote these four aspects of community well-being.

2.40
They are also required to report in their annual report on “any identified effects” (positive and negative) that any activity has had on social, economic, environmental or cultural well-being of the community.

2.41
The fact that an effect must be “identified” means that it must be a measured or observed effect. A local authority therefore needs a system for measuring the effects of its activities so that it can report on them.

2.42
We appreciate that this is not easy. It can be challenging for a local authority to identify and report on the full range of effects that an activity may have on environmental, social, cultural or economic well-being. Some effects are more easily identified than others. For example, the positive environmental and social effects of a local authority's activities to improve recreational water quality in its district may be more easily measured and identified than the effect of providing museums, art galleries and community centres on social and cultural well-being.

What we found

2.43
Overall, we observed some marginal improvements in the information presented in the 2007/08 annual reports compared with the previous year. A significant proportion of local authorities still did not meet the requirements of clause 15(d) of Schedule 10 of the Act in 2007/08 - that is, these authorities did not effectively identify the effects of activities on the well-being of the community. These requirements have now been in place for four years, and we had expected a better performance.

2.44
Many local authorities discussed the effects of their activities. However, many of the effects identified appear to repeat a local authority's aim or objective for that activity rather than report an identified effect. Local authorities need to distinguish between intended and identified effects. For example, the general statement that “this activity contributes to economic and social well-being through protecting the safety of residents” is describing an intended effect rather than an identified effect.

2.45
Many local authorities failed to explicitly link any discussion of effects of activities to community well-being. Some of these links could be inferred but this depended on the quality of a local authority's performance management framework, and in many cases these links were not clearly made.

2.46
Under the Act, an annual report is required to report all identified effects of its activities, negative and positive, but a number of local authorities continue to identify only negative effects in their annual report.

2.47
A number of local authorities usefully discussed the risks associated with the effects of their activities and how these were being managed.

2.48
Several local authorities included extensive sustainability information in their annual reports. Some of these included useful information about the effects of local authority activities on community well-being. However this information was not always provided within, or linked well to, the disclosed information in the sections in the annual report on groups of activities. Given that the requirements of the Act are requirements relating to groups of activities, such disclosure does not in all cases clearly address the requirements of the Act.

2.49
Overall, we conclude that the sector is still a long way from meeting the requirements of clause 15(d) of Schedule 10 of the Act for clear reporting on the identified effects of activities on the four aspects of community well-being. We are disappointed that there was only marginal improvement in this area in the 2007/08 annual reports.

2.50
To better meet the requirements of clause 15(d), local authorities could in particular:

  • move away from making generalised statements (for example, from restating local authority aims) to identifying actual effects;
  • address all effects and not just negative ones; and
  • more strongly link activities and their effects through the performance framework - because a linked framework would make it easier for local authorities to report on progress with community outcomes14 and on the identified effects of activities.

Acquiring and replacing assets

2.51
The Act, through the LTCCP and the annual plan, creates the framework against which the annual report discloses actual results. This includes how assets will be maintained, replaced, and renewed, and how costs will be met.15

2.52
Significant asset acquisitions and replacements are noted in planning financial forecasts, and are disclosed in the budget sections of the LTCCP.

2.53
The annual report must contain a statement describing any significant acquisitions or replacements of assets, and giving the reasons for those acquisitions or replacements, and the reasons for any significant variation between acquisitions and replacements projected in the LTCCP and those actually made.

2.54
The Act requires us to audit the statement of asset acquisitions and replacements.

What we found

2.55
We saw only marginal changes in the information presented in the 2007/08 annual reports compared with the previous years. A significant number of local authorities still did not comply with the requirements of clause 15(f) of Schedule 10 of the Act in 2007/08.

2.56
Some local authorities reported significant variations between the LTCCP and the actual asset programme. Few provided information of any depth on the reasons for these variations.

2.57
A small number of local authorities provided a list of all assets acquired and disposed of as a separate section in the annual report. They included the reasons for the acquisition or disposal of those assets. Where the information and explanations were clear and thorough, they provided a snapshot of all local authority acquisitions and replacement of assets.

2.58
Of the local authorities that provided information on, and reasons for, the variations, different authorities reported it in different places in the annual report, and some of the local authorities reported it in several places - the report by the mayor, chairperson, or chief executive; in the financial statements; or in the groups of activities. However, unless the variation and its reasons are clearly identified and explained in the same section, it is not easy to determine the difference between the LTCCP or annual plan projections and the actual expenditure or acquisitions carried out during the year.

2.59
Providing high-level information on significant asset decisions (for example, advising of delays to, or bringing forward of, major asset acquisitions) in the mayor's or chairperson's foreword is useful for the public. However, the information is subject to audit and is best included within the audited section of the annual report, rather than only in the mayor's or chairperson's foreword.

2.60
Where variations were reported in the financial statements section, they were often aggregated and not linked to the groups of activities to which the particular assets related. Information presented in this way does not provide the community with accessible information on specific actions carried out by the local authority for significant assets, and does not provide the link to activities required by the Act.

2.61
Putting asset information in the groups of activities, together with other required disclosure of financial information and levels of service provision, keeps this information in one place within the group of activities to which it relates.

2.62
Overall, we conclude that a significant number of local authorities still do not clearly address the requirements of clause 15(f) of Schedule 10 of the Act. This is usually because there is no explanation of the reasons for the acquisition, replacement, or variation. In some cases, the local authority completely failed to address the requirements.

2.63
We remain concerned about this finding. Asset acquisition and replacement are important to sustaining and developing services. Most local authority plans - including the LTCCP - centre on the sustainable delivery of desired levels of service. Identifying an appropriate asset development programme that incorporates acquisition and replacement is central to demonstrating sustainability of services. Without this information, an important aspect of accountability is missing, and information useful to the reader is not available.

Concluding comments

2.64
It is clear from our previous reviews of reporting by the sector in this area,16 and from our review of annual reports for 2007/08, that the requirements of clause 15 of Schedule 10 of the Act relating to annual reports continue to challenge local authorities. This is an area in which substantial improvement is still needed.

2.65
To be able to effectively meet the reporting requirements, and to meet the corresponding requirements of clauses 1 and 2 relating to LTCCPs, local authorities need to have a comprehensive performance management framework that links their monitoring of community outcomes, decision-making and performance to their reporting. Annual reports need to include the identified effects of activities on the four aspects of community well-being.

2.66
In future years, we expect to see better reporting of activities in annual reports, particularly against the second-generation LTCCP for 2009-19.

1: See Part 11 of this report, which sets out our intended work on auditing service performance information.

2: An “activity” is defined in the Act as a good or service provided by, or on behalf of, a local authority or a council-controlled organisation, and a “group of activities” includes one or more related activities.

3: Clause 15 of Schedule 10 of the Act.

4: Clause 15(a) of Schedule 10 of the Act.

5: Clause 15(b) of Schedule 10 of the Act.

6: Clause 15(c) of Schedule 10 of the Act.

7: Clause 15(d) of Schedule 10 of the Act.

8: Clause 15(e) of Schedule 10 of the Act.

9: Clause 15(f) of Schedule 10 of the Act.

10: Section 91 of the Act.

11: Section 92(1) and clause 1(g) of Schedule 10 of the Act.

12: Section 92(2) of the Act.

13: Clause 1(g) of Schedule 10 of the Act.

14: Clause 1(g) of Schedule 10 of the Act.

15: Clause 2(1)(d) of Schedule 10 of the Act.

16: Local Government: Results of the 2003-04 Audits (2005); Local government: Results of the 2004-05 audits (2006); Local government: Results of the 2005-06 audits (2007); and Local government: Results of the 2006-07 audits (2008). These reports are available on our website at www.oag.govt.nz.

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