Part 1: Background

Nature and scope of the Auditor-General's functions

The Controller and Auditor-General (the Auditor-General) is an Officer of Parliament and is independent of executive government and Parliament in discharging the functions of the statutory office, but answerable to Parliament for her stewardship of the public resources entrusted to her.

The Auditor-General is the auditor of all public entities in New Zealand – a total of about 4000 public entities. Public entities are accountable to Parliament for their use of the public resources and powers that Parliament has conferred on them. Parliament has also legislated to require independent assurance that public entities are operating, and accounting for their performance, in keeping with Parliament's intentions. This includes the need for independent assurance of local government. Local authorities are accountable to the public for the activities they fund through locally raised revenue. As an Officer of Parliament, the Auditor-General provides this independent assurance to both Parliament and the public.

The Public Audit Act 2001 sets out the mandate and responsibilities of the Auditor-General. It provides for the Auditor-General to examine and provide independent assurance to Parliament and the public on matters of authority, waste, probity, performance, and accountability. The Auditor-General's legislative mandate is confined to public entities, in respect of which the Auditor-General:

• must carry out requirements of the Public Audit Act 2001 and other statutes (such as the Public Finance Act 1989 and Local Government Act 2002, which set out accountability responsibilities of public entities);
• may carry out services of a kind that it is reasonable and appropriate for an auditor to perform; and
• must limit her examination to the extent to which activities are being carried out effectively and efficiently in a manner consistent with policy to which the public entity is required to adhere.

The output classes and outputs of the Auditor-General reflect her legislative audit mandate to provide independent advice and assurance. They are:

• audit and assurance services;
• supporting accountability to Parliament (services to Parliament and the Controller function); and
• performance audits and inquiries.

The audit work carried out and the resulting assurance helps public entities to improve their use of, and account to Parliament and the public for their use of, their public resources and powers.

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".

We summarise our outcomes, outputs, and strategy in Figure 1.

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

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 2009, New Zealand's score was 9.4, which was ranked first on the index.

We assessed progress towards our intermediate outcomes (see Figure 2) 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 Survey¹ and the Kiwis Count Survey.²

Figure 2
Main measures and standards for achieving our outcomes

* The 2009 survey results for experience of public services compared with non-government services were reported differently to those of the 2007 survey. In 2009, the results were reported as the mean score from responses collected on a five-point scale (0, 25, 50, 75, and 100).

** These are not the same results reported in our 2008/09 annual report because the comparative figures for State-owned enterprises and Crown Research Institutes have been amended to reflect the legal position applicable to reporting by subsidiaries in these two sectors. In previous years, we have assessed the timeliness of completion of subsidiaries based on the statutory deadline of their parent entities (that is, within three months of balance date). The assessment of timeliness of completion of subsidiaries is now correctly based on a statutory deadline of five months after balance date.

These results suggest that overall high levels of trust in, and satisfaction with, the public sector are being maintained.

Evaluating our service performance, its impact, and its cost-effectiveness

In the statement of service performance (Part 2 on pages 19-66), we set out our performance measures and standards and results, which we use to consider whether our work has had a positive effect on the public sector.

Our annual audit and other assurance work suggest that the quality of financial reporting and management in the public sector is being maintained, as the percentage of audit reports being issued on time improved to 88% (compared to 82% in 2008/09 and 79% in 2007/08). At 2.8%, the percentage of audit reports being qualified was also similar to previous years. We think the improving trend in the number of audit report being issued on time largely reflects the settling in of New Zealand equivalents to International Financial Reporting Standards (NZ IFRS) and the collective efforts of our auditors to better manage audit arrears.

We were encouraged to see last year's acceptance of Audit New Zealand's recommendations in annual audit management reports to public entities of 79% maintained in 2009/10.

Our assessments of central government entities' management control environment and financial information systems and control showed slight improvement against the previous year. We graded service performance information and associated systems and controls for the first time under our revised standard as part of the 2008/09 audits carried out in 2009/10. Performance measures and our audit work on these have been a focus for the Office.

We maintained or exceeded the majority of our Audit and assurance services performance expectations. We are particularly pleased to see a significant reduction in the overall level of audit arrears compared with the prior year's position (313 compared to 429). We are also seeing a slow decline in the arrears that are due to our inaction, and expect this trend to continue as we continue to reduce the overall level of arrears.

Our high level of timeliness in issuing management reports to entities – 93% – was maintained over the last three years while we continued to deliver quality audits. This was confirmed by our quality assurance reviews and the increase in levels of client satisfaction from 80% last year to 83% for 2009/10.

Reflecting the economic environment, changes in audit fees due to charge-out rate increases were largely held in 2009/10. The annual independent review of our processes again confirmed the probity and objectivity of the methods and systems that we use to allocate and tender audits, and monitor the reasonableness of audit fees. We have initiated a review of our audit allocation model to ensure that the principles used encourage audit quality while ensuring that audits are cost-effective.

Audit fee revenue and other income was higher than forecast, due to our higher level of completion of audit arrears and increases to fee and overhead contribution revenue being higher than budgeted because of changes in audit hours.

Our Supporting accountability to Parliament and Performance audits and inquiries results also suggest that our work is achieving its desired effect. We surveyed select committee members, who said that our advice assists them in their Estimates examinations and financial reviews, with all select committee members surveyed agreeing that the Office's work helps build and maintain public trust in the effectiveness and efficiency of the public sector.

We also followed up on recommendations we made in our reports on performance audits and inquiries, to understand and confirm that public entities had taken action in response to those recommendations.

Ratings by select committee members for the quality and usefulness of advice remained at 86%, with all members agreeing that the Office was proactive in alerting their committee to significant issues. 90% of our stakeholders agreed that our staff have an excellent understanding of their sectors. The results of the stakeholder feedback interviews are pleasing, as they show the Office continuing to play an important part in supporting accountability to Parliament, while increasing the number of advisory reports we provide to Parliament.

For our performance audits, our indicators suggest that we maintained the number produced as well as the quality of reports and the underlying methodology for their preparation. We received improved stakeholder ratings compared with the previous two years for the usefulness of our performance audits, while ratings for the quality of our performance audit reports dropped to 80% in 2009/10 from 100% the year before, falling just below our target of 85%.

We again observed a trend of increasing numbers of inquiries and, within this, the complexity and profile of inquiries. Given that major inquiries require senior staff involvement, it is pleasing that we have managed to maintain the flow of routine inquiry work.

For 2009/10, our revenue was higher than forecast, as we sought revenue for certain inquiries that were specifically requested by entities concerning matters related to their own decision-making and management practices.

Overall, our total expenditure was lower than budgeted. This was partly due to timing of professional development and reprioritisation of the performance audit programme. We also sought to make business improvement savings in general administrative costs, including through less recruitment due to lower staff turnover, lower IT costs arising from contract reviews, and travel savings.

We conclude that the Office has generally achieved its performance intentions, and that our work has had a positive impact for the public sector.

1: The Integrity and Conduct Survey is an independent survey on how State servants observe standards of integrity and conduct across the State services.

2: The 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 involves a postal survey of a random sample of 6500 New Zealanders.