Introduction

This is our report on the 2008/09 audits of the local government sector. Most of these audits were of regional and territorial local authorities and their subsidiary entities. This report also covers aspects of the energy sector, with a continued focus on electricity line businesses, and the airport sector.

The local government sector is now well used to reporting under the requirements of the Local Government Act 2002 (the Act).

In keeping with the Act, local authorities prepared their annual reports for 2008/09 in the context of the 2006-16 long-term council community plans (LTCCPs). During 2008/09, local authorities prepared and adopted new LTCCPs, covering the 10-year period 2009-19. The 2009-19 LTCCPs became operative from 1 July 2009 and are now the basis of local authorities' annual financial and performance accountability to their communities.

This was the third year after the sector's adoption of the New Zealand equivalents to International Financial Reporting Standards (NZ IFRS). As a requirement of the Act, local authorities have to prepare annual reports on a basis consistent with NZ IFRS.

Purpose of this report

The purpose of this report is to:

• tell Parliament and the local government sector about matters arising from carrying out our role as auditor of the sector;
• describe some of the inquiries we carried out in the sector since our last report;
• highlight some matters and make some observations on other sectors; and
• summarise the findings from our performance audits and other work carried out during the year that relate to local government and other sectors covered in this report.

Review of 2008/09

The local government sector has come through the 2008/09 financial year in reasonably good shape. The sector as a whole faces some significant challenges in 2009/10 and beyond – for example, the reforms of local government in Auckland, and making further improvements in the reporting of performance information.

Annual reporting

We comment on four key aspects of local authorities' annual reporting. We discuss:

• the timeliness of local authorities in reporting audited results to their communities;
• the approach taken by local authorities to report on achieving community outcomes, the difference they are making to community well-being, and the details of significant assets that they acquired or replaced;
• those entities within the sector that received a non-standard audit opinion; and
• how those local authorities most significantly affected by leaky homes account for their liabilities.

Overall, the results were mixed. Local authorities have improved the timeliness of their reporting. However, there is still scope for local authorities to improve how they report on their performance. Performance reporting remains a key focus for this Office, and the local government sector is not the only sector that needs to improve.

When we report on the results of our 2009/10 audits, we intend to focus on how local authorities report their actual results of performance rather than merely reporting against intended achievements.

Non-standard audit opinions

Some entities, or types of entity, receive a non-standard audit opinion year after year. The most obvious examples are public entities that hold heritage assets, such as museums. Accounting standards require most heritage assets to be valued and depreciated. Most museums do not value their heritage assets and, because we have to express an opinion based on accounting standards, we have continued to issue non-standard audit opinions in many cases.

Because of the Auckland reforms and the change to one Auckland council on 1 November 2010, we had to issue non-standard audit opinions in 2008/09 for public entities that will be dissolved on 31 October 2010. Our audit opinion needed to recognise that the annual reports of those entities are prepared on a dissolution basis rather than the normal "going concern" basis.

Leaky homes

In May 2010, the Government announced a proposed financial assistance package for homeowners with leaky homes. If a homeowner opts to take up the financial assistance package, the proposal would see the Government providing funds to meet 25% of an eligible homeowner's repair costs. Local authorities would be required to contribute 25% of the repair costs, and the homeowner would pay the remaining 50%.

Regardless of whether homeowners make claims under the new package or through the systems currently in place, local authorities can still expect to pay a significant proportion of the bill for repairs to leaky homes. As a result, how local authorities account for leaky home liabilities is increasingly important.

As in previous reports, we describe the varying accounting treatments used by the local authorities that are most heavily affected by leaky home liabilities. The uncertainties involved make it difficult for local authorities to accurately recognise their liabilities. Leaky home liabilities could significantly stretch the resources of the affected local authorities (and their communities).

Inquiries

This report also outlines the major inquiries that we have carried out since our last report. For example, in December 2009, we published our findings on the conflicts of interest of four elected members of Environment Canterbury. This inquiry highlighted the issue of personal financial conflicts, which continues to be debated extensively within the sector.

Beyond 2008/09

Auckland "super city"

The change to one Auckland council is dominating the local government sector. The change, including the process of change, is massive, and most local government entities (councils and subsidiaries alike) are watching the change with close interest.

The change will create new mechanisms within local government – including a mayor with some new executive powers, and local boards that are responsible for more than the population of many other local authorities.

The change to one Auckland council also significantly affects this Office. We outline some of those challenges in Part 5. For example, the transition will change the nature, incidence, and timing of a number of substantial audits. Auditing the closing position of dissolving entities will be complex, but is important because it will provide the basis for the opening position for Auckland Council and its new group structure.

Auditing performance information

We have updated our approach to the audit of 2009/10 annual reports and, in particular, the audit of the performance information included in these annual reports. Part 6 describes the work that we have been doing.

Through our wide contact with the sector, we have outlined our concerns about the quality of performance information and our intention to apply more scrutiny to it in 2009/10. This will be one of the significant outcomes from our work in 2009/10 and will feature more in next year's report.

Managing water demand and assets

We conclude with brief comments about our recent report on how local authorities were managing future demand for drinking water and the associated water reticulation assets.

Water is increasingly recognised as a significant and finite resource. Water-related assets are expensive for communities to develop and maintain. The management of freshwater increasingly demands public attention. In our view, the management of freshwater by local authorities will also increasingly demand the attention of this Office.