Statements of corporate intent: Legislative compliance and performance reporting

Statements of corporate intent are important public accountability documents required by law to be produced by a range of public entities each year. The statements should set out an entity’s planned objectives and activities for the next three years, as well as performance targets the entity must report against in its annual report. Commenting on draft statements give shareholders an opportunity to influence the entity’s direction.

Given how important statements of corporate intent are for public accountability, we were interested to find out how well public entities were complying with their legislative requirements.

The scope of our audit

Fifty-four public entities were audited for their compliance in producing and reporting against a statement of corporate intent. These entities included Crown Research Institutes, energy companies, port companies, and State-owned enterprises. We also looked at council-controlled organisations and council-controlled trading organisations required to produce a statement of intent. This is because the legislative requirements for statements of intent are very similar to the legislative requirements for statements of corporate intent (for ease, we refer only to “statements of corporate intent”).

We did not include government departments or “statutory” Crown entities in this performance audit.

We expected public entities to comply with all applicable legislative requirements for the content of their statements of corporate intent, and how they report on that content in their annual reports.

We also expected the performance targets and other measures used in the statements of corporate intent to:

• cover a range of financial and non-financial targets;
• be measurable;
• be easy to understand; and
• be clearly linked to the entity’s stated objectives.

Likewise, we expected entities’ annual reports to contain:

• relevant information to enable an informed operational assessment of the entity and its subsidiaries;
• comparisons between planned and actual performance; and
• reasons why an entity’s actual and planned performance varied.

Our findings

Although our performance audit found broad compliance with legislative requirements for the statements, there were disappointing exceptions.

Compliance with legislative requirements

All the types of entity we looked at were required to include information about the next three financial years in the statements of corporate intent. This is a way for shareholders and the wider public to find out about the medium-term intentions and direction of a public entity. However, some public entities, especially several smaller council-controlled organisations and council-controlled trading organisations, looked forward only one year. This made their statements of corporate intent less useful.

Coverage of subsidiaries in the statements of corporate intent we examined was somewhat mixed, even though the statements are required by legislation to include the activities of the parent entity and any subsidiaries. Sometimes, the statement of corporate intent did not show that the public entity had any subsidiaries.

Even though the governing legislation is very specific about the content that must be included in statements of corporate intent, the required content was sometimes missing.

The use and quality of performance targets

Performance targets are very important for public accountability because they enable a public entity to state how it will measure its success against its stated objectives. However, the quality of performance targets used by some public entities varies when it comes to measuring their performance, and later reporting on that performance to shareholders and the public in annual reports.

Although most entities provided a wide range of measurable targets (including non-financial measures), only two-thirds of the statements of corporate intent we examined had performance targets that could all be measured. Sometimes, the performance targets were so vague that we could not meaningfully assess whether the targets had been met.

Performance reporting in annual reports

Most annual reports reported actual performance against targets set in their corresponding statements of corporate intent. Often, however, the entity gave this type of reporting a low profile (by, for example, providing a comparison table at the back of the financial statements). Sometimes, performance targets were only selectively reported on. Finally, entities seldom explained any significant variance between their actual and intended performance.

Our eight recommendations included six about an entity’s statement of corporate intent, concerning the need to:

• comply with the statutory obligation to include the next three financial years in its content;
• include subsidiaries within the accounting policies and within the summary of the nature and scope of their activities;
• include a range of financial and non-financial performance targets or other measures;
• ensure that performance targets and other measures used are quantifiable;
• ensure that performance targets and other measures used are easy to understand and that any technical terms are defined clearly; and
• ensure that all the performance targets and other measures used link clearly to the objectives.

Two recommendations about annual reports were to:

• clearly report actual performance against all the targets and other measures set in their corresponding statement of corporate intent; and
• clearly explain any significant variance between actual performance and performance targets as set in their statement of corporate intent. Reasons should be provided if any targets are found to be no longer relevant.

The response to our findings and recommendations

When preparing for our 2007/08 annual financial audit, we identified specific issues related to statements of corporate intent relevant to each type of public entity, and asked our auditors to check how the public entity was managing these issues. Auditors were also asked to raise awareness of the Auditor-General’s desire to see improvements in performance reporting within the public entities.

Our planned follow-up work will show whether quality improvements have occurred in statements of corporate intent, and whether the framework under which they are produced remains relevant – given other accountability methods being used by public entities and their shareholders.

After we released our report, we briefed staff from the Crown Company Monitoring Advisory Unit (CCMAU).¹ CCMAU reviews the statements of corporate intent of entities that fall within its jurisdiction. Although statements of corporate intent of those entities that CCMAU monitor were generally of the highest standard of those we reviewed, CCMAU will, in future, bear in mind our findings when reviewing statements of corporate intent.

Overall, however, we cannot confirm that our recommendations have been acted on, and continue to view the current state of performance reporting as a concern.

Results from our 2007 performance audit were also referred to in our 2008 discussion paper – The Auditor-General’s observations on the quality of performance reporting. This publication discusses the quality of non-financial performance information reported by public entities, with a focus on outcome and output reporting. The discussion paper is also available on our website.

1: CCMAU monitors the Government’s investment in companies owned by the Crown, assists with the appointment of directors to Crown company boards, and provides performance and governance advice to shareholding Ministers

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