Part 5: Reforming local government in Auckland

Local government: Results of the 2008/09 audits.

The reform of local government in Auckland began in 2009, after the report of the Royal Commission on Auckland Governance (the Royal Commission) and the Government's decision to initiate the reform process. The reforms are currently in progress, with the new Auckland Council due to be operational from 1 November 2010.

In this Part, we:

  • provide an overview of some aspects of the reforms; and
  • describe the effect of the reform on the role and work of the Auditor-General.

Background to the reforms

The Royal Commission was established in October 2007. It completed its work and reported its findings and recommendations in March 2009.

The Government moved quickly to begin the reform process, and made certain decisions about its direction and the course it would follow. Legislation initiating the reforms was introduced into Parliament and was enacted as the Local Government (Tamaki Makaurau Reorganisation) Act 2009 on 23 May 2009. Further legislation was introduced and enacted as the Local Government (Auckland Council) Act 2009 on 22 September 2009. A third bill, the Local Government (Auckland Law Reform) Bill, was introduced into Parliament on 10 December 2009 and passed on 3 June 2010.

The reform legislation makes special provision for local government in Auckland in addition to the statutory provisions – including the Local Government Act 2002 (the Act) – that apply generally to the local government sector. The legislation provides for the transition from the current structure to the new structure. It also provides for some unique features of the new structure that will distinguish the Auckland local government arrangements from arrangements elsewhere in New Zealand.

The legislation provides for the dissolution of existing local authorities in Auckland56 and for the creation of a new Auckland Council, as a unitary local authority, from 1 November 2010, together with a new group structure that includes substantial council-controlled organisations. Some of these organisations will deliver public services to ratepayers that many other local authorities deliver directly.

The legislation also provides for the establishment of the Auckland Transition Agency to prepare for and oversee the transition to the new Auckland Council, including approving certain decisions by existing local government organisations in Auckland.

In addition, the reform legislation requires the Local Government Commission to determine the relevant boundaries for local boards within the region covered by Auckland Council, and to determine a new southern regional boundary that will also affect the neighbouring local authorities.57

The role of the Auditor-General and the effect of the reforms

The overall approach of the Auditor-General

The Auditor-General's mandate

The Auditor-General is the auditor of all public entities in New Zealand, in accordance with the Public Audit Act 2001. The Auditor-General has a number of areas of interest, including matters of waste, performance, and probity.

Under the Public Audit Act, the Auditor-General is required to audit certain accountability documents. We refer to these audits, which are conducted on behalf of the Auditor-General by our appointed auditors, as our non-discretionary work. Generally, this work relates to the audit of financial statements (including statements of service performance) within annual reports and, for local authorities, the audit of their long-term council community plans (LTCCPs).

In addition, the Public Audit Act allows the Auditor-General to perform other work, which we refer to as discretionary work. The Auditor-General chooses to carry out performance audits and inquiries (either at the Auditor-General's own initiative or in response to requests) under these provisions.

The general effect of the reforms on the Auditor-General's mandate

The broad responsibilities of the Auditor-General set out in the Public Audit Act are not changing with the reforms in Auckland. However, the reforms do affect how the Auditor-General carries out those responsibilities.

The transition between old and new arrangements brings a number of risks, and the Auditor-General wants to be assured and to provide assurance that these risks are being managed well. For example, significant change programmes can create tensions between achieving change and its objectives on the one hand, and maintaining necessary due process (such as appropriate procurement practice) on the other hand. Those charged with implementing the reforms need to carefully manage these tensions.

Once established, the new local government arrangements in Auckland will be significantly different from the previous arrangements, both in their nature and scale. They will significantly affect the delivery of important public services. The new arrangements differ from arrangements elsewhere in the local government sector, and could change the relationship between local and central government.

Together, these factors mean that the reforms in Auckland have a significant effect on the way that the Auditor-General's role is carried out.

The Auditor-General is monitoring the reforms with a view to identifying the short-term and longer-term effects, and planning the appropriate responses to them.

The effect on the Auditor-General's non-discretionary audits

The reforms change the incidence, timing, and content of the accountability documents that Auckland's local government entities are required to prepare. Accordingly, the reforms have a significant effect on the approach that the Auditor-General's appointed auditors need to take in carrying out non-discretionary audits during the transition.

Audit of the Auckland Transition Agency

The Auditor-General must audit the Auckland Transition Agency. This entity will exist until the transition date of 1 November 2010, and will then be dissolved. It is required to prepare one annual report covering the whole of its period of existence, from May 2009.

Audit of local government entities in Auckland

The reforms involve the dissolution of some existing local government entities in Auckland and the creation of others. Some entities' scale and operations will be significantly different. For example:

  • from 1 November 2010, eight local authorities will be replaced by the new Auckland Council;
  • the Auckland Regional Transport Authority will be replaced by Auckland Transport, which will be a larger and more integrated regional operation; and
  • Watercare Services Limited will become a fully integrated regional water company.

Figure 6 summarises the effect of the reforms on the incidence and timing of our audits of local government entities in Auckland during the transition period.

Figure 6
Non-discretionary audits during the transition period

Figure 6: Non-discretionary audits during the transition period.

Non-standard audit opinions already issued

Where entities are expected to continue operating, the "going concern" assumption is applied when the financial statements are prepared. Where legislation provides for dissolution, the going concern assumption is not appropriate and the accountability documents must reflect this.

The Auckland reform process was begun before local authorities' 2009-19 LTCCPs were completed, and before the 2008/09 annual reports for local authorities and related council organisations were finalised.

Accordingly, local authorities could not prepare accountability documents for 2008/09 (LTCCPs and annual reports) using the going concern assumption, and had to disclose this fact. These accountability documents also had to disclose the uncertainty about the reforms and their potential effect.

The 2008/09 accountability documents (annual reports) for related council organisations could appropriately be prepared using the going concern assumption because their dissolution was not provided for in legislation at the time they were finalised. They did, however, have to reflect uncertainty about the reforms and their potential effect.

Furthermore, the local authorities neighbouring Auckland to the south had to consider disclosing uncertainty about the effect of the likely boundary changes for the Auckland region, because they could be materially affected by these changes.

As a result of the above factors, we issued non-standard 2008/09 audit opinions for Auckland local authorities and related council organisations, and for two of the three local authorities on the southern Auckland border (for the third local authority, the matter was considered immaterial at the time). These opinions were unqualified, but were non-standard because they drew attention to the disclosures made by the entities of uncertainties about the reforms, and, in the case of existing Auckland local authorities, to the inapplicability of the going concern assumption.

For 2008/09, our appointed auditors issued non-standard audit opinions for 38 affected Auckland entities and for two local authorities neighbouring the Auckland region. Figure 7 sets out a summary of these opinions.

Figure 7
Non-standard 2008/09 audit opinions arising from the Auckland reforms

Going concern assumption applied? Uncertainty about reform and its effect?
Existing Auckland local authorities (8)
2009-19 LTCCP No, highlighting basis used Yes, highlighting disclosure of uncertainty
2008/09 annual report No, highlighting basis used Yes, highlighting disclosure of uncertainty
Neighbouring local authorities to the south of Auckland region (3)
2009-19 LTCCP

  Hauraki District Council Yes Not considered material for audit purposes
  Waikato District Council and Environment Waikato Yes Yes, highlighting disclosure of uncertainty
2008/09 annual report Yes Not considered material
Other related Auckland organisations (30)
Annual reports Yes Yes, highlighting disclosure of uncertainty

We discussed non-standard audit opinions issued in the local government sector in Part 3.

Effect on Auckland local government entities' public accountability documents in 2010

We expect that local government entities in Auckland will need to take a similar approach to their 2010 accountability documents to that taken in 2009. For some entities, this is because of dissolution, and, for others, because there will continue to be uncertainty about the reforms and their potential effect. For these reasons, we also expect our appointed auditors to issue non-standard audit opinions for audits that will be completed in 2010.

Existing local authorities in Auckland are dissolved by legislation from 1 November 2010, together with some related council organisations. Legislation requires that final annual reports for these entities must be prepared up to the date of dissolution. For 2009/10, their historical financial year-end of 30 June is changed to 31 October in 2010 to accommodate a final 16-month reporting period. The dissolving local authorities are also required to prepare plans for the final four months of their existence to supplement the annual plans that were already in place up to 30 June 2010 before the reform process began. In reporting for the 16-month period up to dissolution, local authorities will need to report against the combination of the annual plan up to 30 June 2010 and the additional four-month plan up to 31 October 2010 required by the Auckland reform legislation.

Although the reforms dissolve some related council organisations, others will continue but will be affected by the reorganisation of the Auckland Council's group structure. These council organisations retain a 30 June financial year-end in 2010.

Special arrangements required for consolidation information in some cases

The annual reports of dissolving entities that are required to be prepared up to 31 October 2010 and that are required to include consolidated financial statements will need to reflect information about subsidiaries and other related council organisations that is prepared up to 31 October 2010. Where those subsidiaries and other related council organisations are not dissolving, and therefore retain the usual 30 June financial year-end, parent entities will need to make special arrangements with those entities for the relevant information to be provided to them for consolidation purposes.

Responsibility for finalising accountability reports after dissolution

Entities remain fully responsible under their respective legislative frameworks for activities up to the date of dissolution. In practice, the final annual reports for those entities can be finalised only after the dissolution date. It is crucial in reforms of this nature that appropriate practical arrangements are put in place to ensure that this can be achieved.

The Auckland reform legislation sets out the responsibility for completing these final annual reports, as shown in Figure 8.

Figure 8
Responsibility for completing the final annual reports of entities that will be dissolved

Entities that will be dissolved Responsible entities
Local authorities Auckland Council
Council organisations Receiving organisations – those organisations that assume the dissolving entities' assets and operations
Auckland Transition Authority Under the Public Finance Act 1989, the Minister of Finance can allocate responsibility

We expect that dissolving entities will:

  • continue to fulfil current legislative responsibilities; and
  • where necessary, take steps to complete the work in the period before dissolution that is required to help with the eventual completion of accountability documents after dissolution.

We expect that those charged with overseeing the reforms will ensure appropriate continuity and handover of relevant information and knowledge in the lead up to, and beyond, the dissolution date. We also expect that enough priority will be given to completing the historical accountability documents of dissolving entities by those new and surviving entities charged with responsibility for finalising them.

2011 and beyond

In 2011, Auckland public entities revert to a 30 June financial year-end, and planning and reporting requirements (and our audit of the latter) will be based on this date. Accordingly, new entities established by the reform have a shortened first reporting period of eight months starting on 1 November 2010 and ending on 30 June 2011.

In 2012, these entities will revert to a normal 12-month reporting period ending on 30 June.

Auckland Council's planning document

LTCCPs of existing local authorities (which are audited) continue to be operative until dissolution on 1 November 2010.

The new Auckland Council is required by the reform legislation to prepare a planning document that is operative from 1 November 2010. The planning document will provide a basis for planning and reporting from the first day of Auckland Council's existence. For Auckland Council's first eight months, the planning document will stand in place of the annual plan required under the Act and in place of the LTCCP required under the Act. The legislation makes special provisions for the planning document, including a requirement that it be audited.

In 2012, Auckland Council will be required to prepare its first LTCCP in keeping with the Act's requirements, and on the same basis as all other New Zealand local authorities.

The effect on the Auditor-General's discretionary work

Since the start of the reform process, we have seen an increase in the volume of requests for us to carry out inquiries, and a change in the nature of some of these requests.

As a result of the reforms, we have put plans in place for how we monitor the reforms and how we use our discretionary resource in appropriate ways.

Our annual plan for 2010/11 includes a number of projects that address issues directly and indirectly relevant to the Auckland reforms. For example, we plan to carry out specific projects that cover:

  • a performance audit and report to Parliament that considers the demand for water in the Auckland region; and
  • reports to Parliament about matters arising, and lessons learned, from our audit of Auckland Council's planning document and from our final audits of the dissolving entities.

56: Auckland City Council, Auckland Regional Council, Franklin District Council, Manukau City Council, North Shore City Council, Papakura District Council, Rodney District Council, and Waitakere City Council.

57: Waikato District Council, Hauraki District Council, and Environment Waikato.

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