Part 1: Background

Nature and scope of the Auditor-General’s functions and operations

The Controller and Auditor-General (the Auditor-General) is an Officer of Parliament. This means that the Auditor-General is answerable to Parliament, and is independent of Government. The Auditor-General is responsible for auditing all public entities in New Zealand – a total of about 4000 public entities – and for reporting to Parliament about the performance of the public sector.

The work of the Auditor-General is carried out by staff in two business units – the Office of the Auditor-General (OAG) and Audit New Zealand, supported by a shared team of corporate services staff – and by contracted auditors from the private sector. We refer to these collective resources as “the Office”.

The Office’s purpose is to give independent assurance to Parliament, public entities, and the public about whether public entities are:

• carrying out their activities effectively, efficiently, and appropriately;
• using public funds wisely; and
• reporting their performance appropriately.

Our outcomes, impacts, and cost effectiveness

Our vision is that our audit and assurance work improves the performance of, and the public’s trust in, the public sector. The outcome that we work toward is building trust in the public sector.

We base our intermediate outcomes on the Auditor-General’s legislative audit mandate, set out in the Public Audit Act 2001. Our intermediate outcomes can be described as:

Authority – Have activities been carried out and accountability requirements observed within the authority granted by Parliament?

Waste – Are taxpayers’ dollars and public resources wasted? Do governance and management arrangements ensure that public resources are obtained and applied efficiently and economically?

Probity – Are public entities meeting Parliament’s and the public’s expectations of an appropriate standard of behaviour?

Performance – Are services and activities effectively achieving their intended purpose and having the intended effect on outcomes or objectives?

Accountability – Have public entities given full and accurate accounts?

Our measure for the degree of trust in the public sector is that New Zealand’s score in the annual Transparency International Corruption Perception Index is maintained or improved during the next three years. In 2008, New Zealand’s score was 9.3, and we were ranked first equal on the index with Denmark and Sweden.

Relationship between our intermediate outcomes and our outputs

To achieve our intermediate outcomes, we primarily gather and analyse information to provide independent advice and assurance through our output classes, which reflect the reporting functions of the Auditor-General under the Public Audit Act 2001. Our output classes are:

• Audit and assurance services – We provide audit and related assurance services as required or authorised by statute. In addition, the Auditor-General is required to audit the long-term council community plans (LTCCPs) for all local authorities. The Auditor-General can provide other services that are reasonable and appropriate for an auditor to perform and can also audit other quasi-public entities.
• Supporting accountability to Parliament – We provide advice and assistance to select committees, Ministers, and individual members of Parliament, as well as to central agencies and other public sector representative groups, to help them in their work to improve the performance and accountability of public entities. This includes assisting select committees with their financial reviews of public entities and Estimates examinations, and reporting to Ministers on the results of annual financial audits. We also perform the Controller function, through which the OAG and appointed auditors provide independent assurance to Parliament that expenses and capital expenditure of departments and Officers of Parliament have been incurred for purposes that are lawful, and within the scope, amount, and period of the appropriation or other authority.
• Performance audits and inquiries – We carry out, and report on, performance audits and inquiries of public entities under the Public Audit Act 2001, and respond to requests for approvals of pecuniary interest questions regulated by the Local Authorities (Members’ Interests) Act 1968.

The outputs of the Auditor-General are highly interrelated and complementary.

Annual audits are our major output and account for about 87% of our expenditure. The main purpose of an annual audit is to provide independent assurance about the fair disclosure of the financial information – and, in many instances, service performance information – within annual reports. An annual audit involves a range of procedures, tests, and management and governance enquiries to support our audit opinion. Our annual audit work contributes to the accountability and authority aspects of our legislative audit mandate.

In carrying out annual audits, we look to varying degrees at the other aspects of our legislative audit mandate, and recommendations on these matters may appear in our management reports to the governors and managers of public entities. However, we also use our annual audits to gather information and knowledge about public entities. This knowledge helps determine the work we do in our performance audits, inquiries, and good practice guides. Through this discretionary work, the Office considers issues of performance, waste, probity, and authority in greater depth than is appropriate within the scope of an annual audit.

The major focus of our output class for Supporting accountability to Parliament is reporting to and providing advice to Parliament and others. This involves using what we have found in all aspects of our audit work. The support we provide promotes accountability to Parliament and the public, and promotes improvement within the public sector.

Figure 1 summarises our outcomes, our outputs, and our strategy.

In our Statement of service performance, for each output class, we report against our impact and output measures and their associated standards. Two sets of tables are presented, reporting on the impact measures and the output measures associated with each output. Our Statement of service performance comprises pages 25–39 and 43–65.

The impact measures help us understand whether our outputs are having the effect we want (as required by section 40(d)(i) of the Public Finance Act 1989). As these measures focus on impacts, we can seek only to influence, rather than to control, performance against the measures. The output performance measures and standards help us understand whether we are producing quality outputs within time and resource constraints (as required by section 41(1)(e)(ii) of the Public Finance Act).

Our annual audit and other assurance work suggest that the quality of financial reporting and management in the public sector was broadly maintained:

• The number of audit reports being issued on time improved to 81%, compared to 78% in 2007/08 and closer to the 83% result in 2006/07, which we think largely reflects the passing of the effect of the transition to NZ IFRS.
• The number of audit reports being qualified remained similar to previous years. In 2008/09, 2.4% of audit reports we issued were qualified, compared to 2.3% in 2007/08 and 2.4% of reports in the two previous years.
• There was increased acceptance of Audit New Zealand’s recommendations in annual audit management reports to public entities in 2008/09 (79%) compared to the previous two years (72% and 64% respectively). The trend of increasing acceptance has resulted from lower levels of recommendations not being responded to, although the number of recommendations that were rejected has also been increasing, with 11% of our recommendations being rejected this year compared to the previous two years (4% and 1% respectively).
• Our assessments of central government entities’ management control environment and financial information systems and control improved against the previous year, with most of this improvement resulting from entities we assessed as “Good” in 2007/08 being assessed as “Very Good” in 2008/09. The number of “Needs Improvement” gradings remained essentially the same.

Our output service performance for our Audit and assurance services output class was maintained or exceeded, except for:

• completing annual audits on time, which improved on last year’s result but remains below our target; and
• our three-yearly LTCCP audits, where all audit opinions were issued on time (with none assessed as being due to inaction on our part) and management reports were issued on time. However, these results were on a par with our general annual audit reporting trends.

These results were achieved within our appropriation for audit and assurance services. This appropriation has been increasing in recent years because of factors such as the introduction of international financial reporting and auditing standards, labour market supply shortages for accounting and auditing expertise, and because in 2008/09 we carried out the three-yearly LTCCP audits.

For our Supporting accountability to Parliament and Performance audits and inquiries output classes, our impact measures suggest that our work is achieving its desired effect, with:

• select committees advising (through our stakeholder feedback interviews) that our advice assists them in their Estimates examinations and financial reviews;
• reviews of a sample of performance audits and inquiries showing that public entities have responded to our recommendations for improvement;
• the Controller process and appropriation audit being carried out, and an internal review confirming there had been improvement in the appropriation audit approach and documentation to demonstrate compliance with the auditing standard; and
• our follow up of the response by public entities to recommendations made from sensitive and major inquiries showing that satisfactory action had been taken.

Our output service performance for Supporting accountability to Parliament and Performance audits and inquiries output classes was maintained or exceeded, except for the following.

• Our stakeholder feedback interviews assessed the usefulness of our performance audits at a similar level to that of the previous year and lower than our target. We do make extensive effort to ensure that our performance audits and other studies will be useful by consulting on our draft work programme and draft annual plan. Our stakeholder feedback interviews provide us with important feedback, and we are taking steps to respond. A range of other indicators of our performance audits showed that we maintained both the quality of our reports and the underlying methodology for their preparation.
• Our timeliness in dealing with routine and sensitive inquiries, as discussed within the Inquiries output section, was affected by the larger number of unusually sensitive and major inquiries during the year.

These results were achieved within our appropriation for Audit and assurance services, which has been adjusted in recent years only for remuneration costs.

We therefore conclude that the Office has generally achieved its service performance intentions and that its services do appear to have had a positive influence on the impacts and outcomes sought.

Figure 1
Summary of our outcomes, our outputs, and our strategy