Part 1: Achieving our outcomes
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
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 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?
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;
- Supporting accountability to Parliament; and
- Performance audits and inquiries.
Audit and assurance services
We provide audit and related assurance services as required or authorised by statute. For example, the Auditor-General is required to audit the Financial Statements of the Government, public entities’ financial statements, and other information that must be audited for about 4000 public entities, of which about 3500 are schools and other small public entities. In addition, the Auditor-General is required to audit the Long-Term Council Community Plans 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 Parliament’s select committees and other stakeholders, and perform the Controller function. Each year, we prepare 120 to 140 reports to assist select committees with their financial reviews of public entities and Estimates examinations, and 120 to 130 reports to Ministers on the results of annual financial audits. Through the Controller function, the OAG and appointed auditors also 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 50 to 100 requests each year for approvals of pecuniary interest questions regulated by the Local Authorities (Members’ Interests) Act 1968. We aim to carry out 19 to 21 performance audits, special studies, and major inquiries each year. We consider 200 to 300 requests for inquiries each year from taxpayers, ratepayers, and members of Parliament. A few of these requests lead to the Auditor-General carrying out a major inquiry.
How our outputs interrelate
The outputs of the Auditor-General are highly interrelated and complementary.
Annual audits are our major output, accounting 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 – and in many instances non-financial – information within annual reports. An audit involves a range of procedures, tests, and management and governance enquiries to support our 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 letters 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 statutory scope of an annual audit.
The major focus of our output class for supporting accountability to Parliament is reporting 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.
Our operating environment
The accounting and auditing profession
The Accounting Standards Review Board’s decision to adopt NZ IFRS has had a significant effect on the public sector and our work during the past four years. While the transition to NZ IFRS is now mostly complete, we expect an ongoing level of adjustment and review of the standards. Further, in our view some of the standards (which were written to be applied by large profit-oriented public entities) do not adequately acknowledge differences between the public and private sector.
The 4000 or so public entities that we audit range from large government departments, Crown entities, and State-owned enterprises to very small local bodies, such as cemetery trusts and reserves boards. All public entities, regardless of size and function, are required to prepare annual financial statements, usually in keeping with generally accepted accounting practice, and often to report other information about their performance. The Auditor-General is required to audit the information that a public entity is required to report. The specific reporting required for an annual audit is set by statute for the different types and categories of public entities.
The change to NZ IFRS has increased the complexity of preparing and auditing financial reports. This has put pressure on the financial management capability of the public sector, and has contributed to a high demand for financial and audit expertise in the public sector. The combination of complexity and shortage of expertise is affecting the overall performance of the public sector in meeting statutory requirements for public accountability.
New Zealand’s system of public sector accountability has long been an international model, and should be preserved. However, accountability requirements – including those for auditing – are often a burden for smaller public entities and have increased since the introduction of NZ IFRS. We are aware that not all countries share New Zealand’s universal requirement for annual audits of all public entities and that other jurisdictions have different accountability models for smaller public entities. We consider it is timely to ask whether there is justification for a more differentiated model of accountability for public entities.
Financial restraint and the operating environment for public entities
The Pre-Election Fiscal Economic Update in 2008 and other forecasts since have anticipated deficits in the Financial Statements of the Government for most of the next 10 years, and there is increased pressure on the public sector to be cost-effective and to explore alternative methods of service delivery. We expect continued evolution in, and questioning of, ways of providing services, with greater expectation of collaboration among public entities and finding other ways of delivering public services through non-government and private sector partners.
Financial pressure will also increase the importance of good quality internal performance management information and external performance reporting by public entities. They will be expected to demonstrate the effect and benefits of their outputs and chosen methods of service delivery.
For some time, there has been general public concern about asset development and management – particularly network utility assets, because of their critical importance to communities throughout New Zealand. It is vital for the public to have confidence that these assets and other important services, such as health and welfare services, will continue to be available and will meet changing community needs. Arrangements are becoming more complex for asset management and service delivery, and for associated information and reporting. This raises questions about risks to the public sector and the performance of public entities and to the integrity of decision-making, financial management, and governance in an era of changing demographic and employment dynamics. Arrangements need to take account of a range of factors such as inter-generational equity, short-term and long-term well-being, and value for money in terms of community outcomes.
Although we are currently experiencing financial constraints, there is also a need to focus on long-term asset and service needs and to address these needs in decision-making, financial management, and service performance.
In the current economic conditions, it is widely anticipated that there will be increasing attempts by individuals to fraudulently or corruptly use public resources for personal gain. While the more extreme forms of fraud or corruption do not appear prevalent in New Zealand, we are concerned that increasing pressure on public money for public services might be needlessly lost through fraud and corruption. New Zealand continues to have a high ranking as a “clean” country in recent Transparency International surveys, but we should not be complacent, given the wider economic conditions.
Parliament’s and public entities’ expectations of us
Feedback from public entities, select committees, and other stakeholders gives us insight about the opportunities for the Office’s reporting function to contribute to public sector accountability and performance, and the public’s trust in the public sector. Our stakeholder and client satisfaction surveys consistently show positive results but reinforce a need for us to continue to take a business focus in our audit work so that we can identify issues and help provide solutions, and share best practice and other beneficial information. Public entities tell us that to take this approach we will need to enhance our legislative, sector, and public entity knowledge, and maintain the skills of our auditors and the consistency of our audit teams to provide timely communication.
Our strategic direction – managing in our operating environment
The changes in the accounting and auditing profession and general public sector environment in recent years have meant that our annual audit work has had to focus more heavily on financial statements, and particularly on compliance with the new NZ IFRS requirements. The increased focus on financial statements has been at the expense of our attest on service performance information and the wider public-interest purposes of our audit work.
At the same time, public sector audit fees have been increasing to keep pace with the wider international pressure on assurance services. There have been two main factors driving audit fees in recent years – increased audit costs because audits under NZ IFRS take longer and, until recently, increased international demand for accounting and assurance expertise, which caused wage costs to increase.
While we continue to anticipate difficulty recruiting people with the public sector audit and assurance expertise that we require, we hope that wage pressure will ease and that staff retention will improve in 2009/10. Such a situation could enable us to do more to address feedback from public entities and other stakeholders.
While there has been general stability in statutory arrangements for public accountability since 2002-041, there have been considerable flow-on audit implications arising from these changes. The need for development work – in particular, to address our statutory responsibility to attest to service performance information for many public entities – is likely to be increased by the anticipated financial pressure during 2009-12. We have been telling government departments, Crown entities, and local authorities that, from 2009-11, we intend to phase in an adjustment to the scope of our audit attest and our supporting audit work in attesting to service performance reports.
Deciding whether funds have been spent wisely and with due probity will be more challenging in an environment of longer-term focus and governance, and of collaborative delivery and funding arrangements between public entities and with private sector and non-governmental sector entities. Issues about procurement, governance, conflicts of interest, and misuse of resources can be complex, so responses need to be developed and understood in the context of the wider purpose of each arrangement. This requires us to use careful judgement within our audit and inquiry work.
Consequently, our Strategy 2009-12 is to generate greater insight and value from our work. We will do this by:
- Better understanding the objectives and operating environments of public entities so that we can base annual audit work on a broader view of public entity risk (as well as financial statement risk). We intend to put in place a broader approach to risk assessment so that we can generate better information about the effectiveness, efficiency, and appropriateness of public entities’ activities. In particular, we aim to achieve this through annual audits, which are our major output and the basis for gathering information and building knowledge about all public entities.
- Better using the full range of our resources (including annual audits, performance audits, inquiries, and other assurance services) to identify and address issues and risks within public entities and the public sector. Through annual audits, we have contact every year with every public entity in New Zealand. This is a unique position for gaining insight about the state of the public sector. However, an annual audit is primarily to provide assurance about the fair disclosure of information by each public entity. We intend to use the Auditor-General’s discretionary reporting mandate to focus more on risks and issues that arise from annual audits that may relate to public entities, groups of public entities, or the public sector as a whole. We would then apply what we learn to our annual audit work and to specific entity-focused feedback to help public entities improve their performance. Public entities vary significantly in their purpose, size, and complexity, and the nature and public effect of their activities, so our efforts to identify risk and manage our information and knowledge within and across the public sector needs to be proportionate to these factors.
- Better customising our reporting to public entities, Parliament, and other stakeholders about our audit findings and opportunities for improvement. The Auditor-General’s discretionary reporting powers are broad so we want to ensure that our reporting is relevant and timely so that Parliament, the public, and public entities can get the maximum assurance and improvement benefit from our work. Our reporting will be informed by our efforts to better understand risks for public entities, and from better integrating and deploying the Auditor-General’s discretionary auditing and reporting powers around these risks. We envisage generating greater insight from our work by better customising our reporting to public entities, Parliament, and others about our audit findings and opportunities for improvement. This will involve changing the way we report, depending on the issue, the audience, and the most effective method of delivery.
Figure 1 summarises our outcomes, our outputs, and our Strategy 2009-12.
Figure 1
Our outcomes, outputs, and Strategy 2009-12
Main measures and standards for achieving our outcomes
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.
We assess progress towards our intermediate outcomes by using information that we gather:
- during the course of delivering our services; and
- through the results of research commissioned by the State Services Commission (SSC), specifically the Integrity and Conduct Survey2, the New Zealanders’ Experience Research Programme3, and the Kiwis Count Survey4.
Main measures and standards for 2009-12
| 2007/08 Actual |
2006/07 Actual |
|
|---|---|---|
| Waste | ||
| The biannual Kiwis Count Survey shows improved (or at least maintained) rates of respondents reporting that their most recent public service experience was an example of good value for tax dollars spent. | 55% agree 21% neutral 24% disagree |
The survey was not carried out in 2006/07. |
| Probity and Authority | ||
The biannual Integrity and Conduct Survey shows improved (or at least maintained) rates of State servants who reported that:
|
The survey was not carried out in 2007/08 | 50% Of the 33% who reported they observed misconduct, more than half reported it. |
| The biannual Kiwis Count Survey shows improved (or at least maintained) rates of public trust in public services. | 29% agree 49% neutral 22% disagree |
The survey was not carried out in 2006/07. |
| Performance | ||
The biannual Kiwis Count Survey shows improved (or at least maintained rates) of public satisfaction with:
|
68% 62% for public services compared to 58% for non-government services. |
The survey was not carried out in 2006/07. |
| Accountability | ||
| The number of audited financial reports for public entities issued within the statutory time frame improves (or is at least maintained), compared to each of the previous two years. | Total audits due for completion: 3946 | Total audits due for completion: 3949 |
| Percentage completed on time: 78% | Percentage completed on time: 83% | |
| The number of audited financial reports for public entities that contain qualified audit opinions is reduced (or at least maintained), compared to each of the previous two years. | 91 | 96 |
Evaluating our service performance
Under section 40(d)(ii) of the Public Finance Act 1989, our annual plan must set out and explain the main measures and standards that the Office intends to use to assess and report on matters of the Office’s future performance, including the cost-effectiveness of the interventions that the Office delivers or administers.
The SSC and the Treasury have issued guidance advising that, in general, measures of cost-effectiveness should seek to combine measures of impacts, outcomes, or objectives with the cost of producing these results. This guidance advises that for:
… actions which are sufficiently remote from the point of impact that… it is not reasonable to attempt attribution, it may be necessary to look at other measures to assess value received. In such cases, it may be possible, for example, to demonstrate cost-efficiency … and provide a robust intervention logic linking what is produced with particular desired outcomes or objectives. Where departments do not provide a measure of full cost effectiveness … our expectation is that the measures provided will be augmented by some measure of quality of the intervention delivered.
In Part 2 – Forecast statement of service performance, we set out our output classes and their associated impact and performance measures and standards. We describe:
- the impact measures we use to 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). They are measures that we can only seek to influence, rather than control; and
- the performance measures and standards we use to 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 1989).
For each output class, we report against our impact and output measures and their associated standards. We present two sets of tables, reporting on the impact measures and the output measures associated with each output.
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 1989).
If our output performance and our outcome and impact measures results match those projected in this plan, we will be contributing to an effective and efficient public sector that is trusted.
A failure to achieve satisfactory performance against an output standard or budget, a failure to maintain the situation, or a trend in the opposite direction to that desired in outcome measures could indicate a cost-effectiveness issue that we would explore and plan to improve.
From time to time, the Office also commissions independent international peer reviews (most recently in 2007/08) to assess the effectiveness and efficiency of the Office.
1: For example, the Local Government Act 2002, the Crown Entities Act 2004, and the 2004 amendments to the Public Finance Act 1989.
2: Integrity and Conduct Survey is an independent survey on how State servants observe standards of integrity and conduct across the State services. More than 4600 State servants from a range of State services agencies took part in the survey in 2007.
3: New Zealanders’ Experience Research Programme aims to explore New Zealanders’ levels of satisfaction with State services as well as what is important to New Zealanders when they use State services.
4: Kiwis Count Survey is an all-of-government national survey to ask New Zealanders about their perceptions and experiences of public services as a whole. It was first held in 2007, and the next survey is planned for 2009. It involves a postal survey of a random sample of 6500 New Zealanders.
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