Overview

I acknowledge and thank the outgoing Auditor-General, Kevin Brady, for his contribution as Auditor-General during the last seven years and throughout his 38-year career with the Office. Kevin’s legacy is to leave the Office in good heart and widely respected for its work with the public sector.

This standing was confirmed by an International Peer Review of the Office carried out in 2007/08, which reported that “the Office would rate highly both absolutely and relatively in any international comparison.” We also got feedback from Parliamentary select committees and other stakeholders that they all continue to assess the Office as performing at a high level and that they value the professional and impartial advice and guidance they receive from us. We again received improved satisfaction ratings from our annual audit clients.

We were also pleased with the results of a practice review of Audit New Zealand by the New Zealand Institute of Chartered Accountants (NZICA) in 2008. The result of this review was “Satisfactory” – the highest possible grading. Participation in the review was voluntary for Audit New Zealand because it does not offer accounting services to the public. Nevertheless, as an Office, we are committed to testing ourselves against external benchmarks and appraisals, as well as against our own expectation that we practise what we preach.

During 2008/09, we developed a strategic plan for the period 2009–12 to ensure that our strategies, intentions, and risks were clearly laid out as a basis for the incoming Auditor-General to determine the direction of the Office during her term. This strategy is aimed at better using the wealth of information and knowledge that we have about the public sector to add value through reporting the performance of public entities, both individually and collectively. This will give Parliament, public entities, and the public the maximum assurance and potential for improvement arising from our work. A number of the key areas of this strategic plan are already being implemented and are showing encouraging early results.

The year in review

Overview of our service performance results

The 2008/09 year was demanding, but we achieved most of our output and impact measures, and our staff and contracted auditors can be proud of their efforts throughout the year.

There were a number of significant events and achievements in 2008/09.

We performed our three-yearly audits of long-term council community plans (LTCCPs). In our view, the effort we put into revising the methodology, planning the workload, and training our auditors has paid off, as the LTCCP audits went more smoothly than in 2005/06. However, the effort required once every three years puts a heavy demand on the Office’s resources.

We note increasing complexity in many of the inquiries we carry out. In particular, our work on the Immigration service was more demanding than our usual inquiries. Given the demands of the LTCCP audits and more inquiries than usual, we were not surprised that our timeliness for other work (such as completing local government annual audit opinions and management reports) fell compared with past years.

However, we completed 19 performance audits, other studies, and inquiry reports. We also increased our effort to support newly formed select committees taking up their review and scrutiny work after the 2008 General Election. While 19 reports is fewer than the number we achieved for 2007/08, it falls within our target range. We also completed the bulk of work on several other performance audits and inquiries during 2008/09 that we will report on in the first part of 2009/10. Our target range for performance audits, other studies, and inquiry reports reflects the fact that the number of reports we prepare can fluctuate according to their nature and complexity, and the wider demands on the Office.

We prepared for two significant internal changes that occurred in early July 2009 – the relocation of the Office of the Auditor-General and the shared Corporate Services team into new premises, and the launch of our new financial management information system. Throughout our preparation for these changes, and through the leadership transition to a new Executive Director for Audit New Zealand and the impending departure of the Auditor-General, we continued to deliver our audit and other services, generally maintaining our quality and levels of output.

In the previous year, an issue of concern was the increasing number of audits in arrears of their statutory reporting time frame (a peak of 453 at 30 June 2008) and, within that, the proportion of arrears that were due to inaction on our part. We are pleased to have reduced the number of audits in arrears to 429 at 30 June 2009. This probably reflects the stabilising of financial reporting requirements, with the New Zealand equivalents to International Financial Reporting Standards (NZ IFRS) now implemented, although we continue to be concerned about the cost and appropriateness of NZ IFRS for the public sector.

More than half of the 429 audits in arrears are for small entities – schools, reserve boards, and cemetery trusts. That weighting is likely to reflect both the difficulties small entities have in meeting their accountability obligations, and our need to prioritise our work on larger and more significant audits.

We were also pleased to see some reduction in the percentage of arrears that were caused by inaction on our part, from 55% at the end of the previous year to 49% of the arrears at 30 June 2009. We intend to continue to focus on further reducing this proportion in future years. However, achieving our target (less than 10% of outstanding audit reports at 30 June being caused by inaction on our part) is particularly challenging, and is unlikely to be achieved until we bring total arrears down from the current level.

Ensuring that Parliament and the public receive timely and relevant reports is something we are committed to, because accountability is not served until audited information is available to users. We will continue to work with our audit service providers to remove the main obstacles to prompt completion of audits, and to reduce both the total number of arrears and the percentage that are our responsibility.

Main risks and issues

During 2008/09, we continued to manage our key strategic risks of loss of our independence, audit failure, loss of capability, and loss of reputation.

We set high standards for the independence of our employees and the auditors appointed from chartered accounting firms. The Auditor-General’s independence standard is based on the NZICA Code of Ethics. Compliance with the standard, by statutory officers, employees, and all appointed auditors, is monitored through a range of measures. These measures are designed to identify any threat to auditor independence and to ensure that appropriate mitigation actions are taken to either eliminate or reduce the threat to an acceptable level.

The Auditor-General’s independent Audit and Risk Committee, comprising three external members and the Deputy Auditor-General, continued to meet every three months. The report from the Chairman of the Audit and Risk Committee is included at pages 81–82.

Follow up of International peer review

We sought independent assurance from our own auditor, CST Nexia,¹ on the extent to which we were implementing the recommendations of the International Peer Review carried out in 2007/08. CST Nexia reported that:

… the majority of the suggestions have been effectively implemented in line with the rationale or spirit behind those suggestions. Most were rapidly accepted in that they either were already in the process of being implemented by management, or made immediate sense and were readily adopted.

We also identified that a small number [of the recommendations] were either impractical or inappropriate within the OAG operational environment, but do have potential impacts for the independence and the objectivity of the Office. Accordingly, we suggested that these warrant some form of ongoing risk review (if they are not already subject to review).

The year ahead

In the current economic environment, the country as a whole, and therefore the public sector and the Office, face perhaps the most significant and fundamental challenges we have experienced in many years. As the public sector seeks to deliver services in increasingly cost-effective ways, a growing range of funding and delivery arrangements between public entities, the private sector, and the non-government sector are likely to emerge. Issues concerning procurement, governance, conflicts of interest, and misuse of resources need to be worked through and understood in the context of the wider purposes of these arrangements. Deciding whether funds have been spent wisely and with due probity is more challenging in this environment.

A significant concern is to get better value from our audit work while managing the cost of audits for public entities. At a time when the public sector as a whole must be working toward greater cost-effectiveness, we need to continue to ensure that our audit fees are reasonable and that our audit effort is appropriately directed.

Managing audit costs in the current environment

We know that accountability requirements – including those for an audit – are often a burden for smaller public entities and subsidiaries of larger public entities. However, much of our annual audit work is carried out under statute and professional standards, and is largely beyond our control. To the extent that annual audit work is within our control, we aim to perform effective and efficient audits, so that we can gather the maximum amount of information from each audit while keeping the level of audit work in proportion to the level of public risk for each public entity.

During the last few years, auditors have been required by changing professional standards to do more work. The cost of employing auditors has also been steadily increasing, largely as a result of the adoption of international accounting and auditing standards. The changing economic conditions, combined with changing immigration rules by countries such as the United Kingdom, are influencing many newly qualified accountants to remain longer in New Zealand. As a result, our staff turnover is starting to reduce. However, we are not yet certain how the current economic conditions will affect audit fees.

Public entities experiencing revenue and expenditure changes sometimes expect that our audit fees can be adjusted to reflect such changes. While the level of revenue and expenditure has some effect on the cost of an audit, there is certain work that must always be carried out to perform a professional audit in accordance with the Auditor-General’s standards. There is, therefore, a point at which factors such as revenue and expenditure have only a small effect on audit costs. The best way for public entities to manage their audit costs is to ensure that their management systems and processes are working effectively, so that audits can be carried out seamlessly and limit the need for specific audit inquiry work.

Parliament provides some money to compensate us for auditing entities (such as reserve boards and cemeteries) that are required to have an annual audit but have little or no revenue to pay audit fees. The cost of these audits exceeds the level of Crown funding, which has not been adjusted since it was first made in 2004. The size of audits has generally increased because of changes in auditing and financial reporting standards, and labour market supply shortages have driven up the cost of auditing staff. We have raised our concern with the Treasury and the Officers of Parliament Committee, because these costs are increasingly met from audit fees charged to other entities, which themselves are under pressure. We consider this situation unsatisfactory, and will be looking to discuss this cross-subsidisation further with the Committee in 2009/10.

We again sought independent assurance that our audit appointments and fee monitoring processes are working effectively. The report from the independent reviewer, Sir David Gascoigne, is on pages 40–42.

Adding value through audit in the current environment

In the last two years of his term as Auditor-General, Kevin Brady published his observations on the quality of performance reporting (in June 2008) and on setting financial reporting standards for the public sector (in June 2009). These areas are of core interest to us, because they directly affect the accountability information on which we report when carrying out annual audits.

Our annual audits encompass this reported accountability information, attesting whether it is a fair reflection of the actual financial achievements. We are keen to play our part in ensuring that improvements are made, so that external reports are more meaningful and useful to their readers. We report whether that information fairly reflects the achievements of public entities, thus providing a basis for assessing the cost-effectiveness of public services.

We have increasingly questioned whether statutory compliance and audit requirements for smaller public entities are too onerous. These requirements include the adoption of NZ IFRS, standards that were originally designed for large companies in the private sector. There have been several developments since the two “observations” reports were presented to Parliament, such as the discussion papers issued recently by the Ministry of Economic Development and the Accounting Standards Review Board. We hope these will lead to improvements in public sector reporting.

We have been concerned that the demands created by changes to accounting and auditing standards have meant that our audit work has to focus more heavily on public entities’ financial statements. This has been at the expense of public-interest audit work based on fuller consideration of the risks and challenges that public entities face in their strategic, governance, and operational contexts.

We are therefore working to shape our audit work to generate greater insight through taking a stronger focus on issues and risks as they relate to the business of public entities. In July 2009, the Auditor-General issued his revised auditing standard for the audit of service performance reports. This revised standard will take effect for local authorities for the year ending 30 June 2010, and for government departments and Crown entities for the year ending 30 June 2011. There will be some cost implications from applying the standard, which we are working to manage and plan to provide advice about later this year. Nevertheless, we have a professional duty to carry out robust audits that meet their statutory purposes in relation to both financial and non-financial information.

This standard is a key element in our wider effort to ensure that our audit work is focused on issues with, and risks to, the business of public entities, and on assessing the outcomes, impacts, and cost-effectiveness of public services. We are carrying out extensive internal preparation work to audit under our revised standard and to improve our own reporting to entities and Parliament as the revised standard is implemented. We are also working with the Treasury and State Services Commission to support improved performance reporting by public entities that, as intended by legislation, will allow readers to understand and assess the outcomes, impacts, and cost-effectiveness of public services.

Parliamentary feedback on our work programme for 2009/10

We appreciate the opportunity to operate transparently in setting out the Office’s annual work programme, including seeking feedback from members of Parliament as part of our annual plan preparation.

Members of Parliament mainly supported the approach we have taken to determining the Office’s work programme, and neither the Speaker nor any select committee requested any change to our work programme priorities. The feedback included:

• guidance on the scope and relative emphasis we should place on some areas of concern; and
• suggestions of potential areas of exploration for studies in future years.

I thank Parliament for this feedback, and will ensure that it is incorporated as we carry out our 2009/10 annual plan and as we scope and prepare our 2010/11 work programme. As a result of this feedback, we are confident that the performance audits we intend to carry out in 2009/10 will be relevant and useful to Parliament, public entities, and the public.

Concluding remarks

Again, I extend my thanks to the outgoing Auditor-General, Kevin Brady, and welcome our incoming Auditor-General, Lyn Provost, who starts her term in October 2009. I thank our Audit and Risk Committee and our staff and appointed auditors for their efforts and achievements and for their commitment to integrity, honesty, and independence.

The Office, as part of the public sector, faces a challenging year in which the wider economic environment means that we must focus on being more effective and more transparent about that effectiveness. I am proud of the contribution the Office has made in 2008/09, and am confident that we have a strong basis for continuing to make that contribution.

Phillippa Smith
Deputy Controller and Auditor-General

30 September 2009

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1: The Office’s auditor is appointed by the Officers of Parliament Committee.

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