Part 11: Timeliness of LTCCPs and audit fees

11.1
In this Part, we discuss

• the timeliness with which local authorities adopted their LTCCPs; and
• audit fees.

Summary of our findings

11.2
Improved project planning meant that local authorities improved the timeliness of delivering for audit, and adopting, their LTCCPs.

11.3
Nearly half of the local authorities in the sector were charged audit fees in line with what had been estimated and agreed. However, the additional fees charged and hours incurred during the 2009-19 LTCCP audit demonstrate the complexity of preparing and auditing LTCCPs. Although the 2006-16 LTCCP audits provided a baseline, and despite significant improvements to planning and preparing LTCCPs, estimating the time and cost of the audits still proved very difficult. There are many variables to consider and the possibility of unanticipated events adds to the complexity.

11.4
Our comparison of the fees charged for the audits of the 2006-16 LTCCPs with the audits of the 2009-19 LTCCPs shows that good planning by local authorities has a significant effect on the cost of the auditing.

Timeliness of adopting LTCCPs

11.5
Preparing an LTCCP is a major task – arguably one of the largest corporate tasks that a local authority will carry out. Local authorities need to co-ordinate efforts and resources from throughout the local authority and link major information sources.

Improved project planning

11.6
As discussed in Part 10, our review of the 2006-16 LTCCPs led us to conclude that project planning and sequencing of the information needed for the LTCCP were weaknesses in the 2006-16 LTCCP process.

11.7
Most local authorities improved their project management of the 2009-19 LTCCP process. Most local authorities applied project management disciplines to the overall project, including appointing a project manager, establishing a detailed timetable, and implementing an internal quality assurance process. This was evident from an early stage in the LTCCP process, as documented by local authorities in the self-assessments they completed and provided to their appointed auditors.

11.8
Some local authorities were better than others at adhering to project plans, but, overall, project planning improved substantially compared with the project planning for the 2006-16 LTCCPs.

11.9
To analyse how well local authorities adhered to project timelines, we considered the date on which appointed auditors originally indicated that they could provide a summary of their audit work to our local government team for a consistency review. This review is carried out before the audit opinion on the Statement of Proposal is issued.

11.10
We found that 56% of local authorities adhered to their project timelines well enough that the variance between the date that the auditors had indicated and the actual date on which the audit summary was provided was seven days or less.⁷²

11.11
Given the complexity of the LTCCP project and the large number of people involved, we consider it to be very positive that more than half of the audit summaries were delivered within seven days of the indicated date.

11.12
However, there were a number of occasions when a local authority shortened its planned internal quality assurance review process so that it could provide draft documentation to the appointed auditor within the established timeline.

11.13
We consider that this places unacceptable pressures on the appointed auditor and can lead to unnecessary increases in the time (and cost) of the audit, particularly if there are inconsistencies and errors in the LTCCP that have not been identified by the local authority.

11.14
This is a matter that requires further attention by local authorities as they prepare for future LTCCPs.

Adopting the Statement of Proposal

11.15
For the 2009-19 LTCCP process, there was a long period between the date that the first local authority adopted its Statement of Proposal for consultation and when the last local authority adopted its Statement of Proposal. The first Statement of Proposal was adopted on 16 December 2008 and the last was adopted on 17 July 2009. The last local authority to adopt a Statement of Proposal for consultation was Waimate District Council.

11.16
The adoption date for the Statement of Proposal is not specified in legislation. However, we considered that the end of the third week in April 2009 was the latest credible date for its adoption. This allows for the 30 June statutory deadline to be met and yet allows for only the minimum statutory consultation period (of one month) and a short period for considering submissions and completing and adopting the final LTCCP. In 2009, 15 local authorities adopted their Statement of Proposal later than 20 April 2009, with six of these local authorities adopting their Statement of Proposal in May 2009 or later.

Adopting the final LTCCP

11.17
Sixty-eight of the 85 local authorities adopted their final LTCCP in the week before the statutory deadline of 30 June. The first final LTCCP was adopted on 9 June 2009 and the last was adopted on 25 September 2009. Seven local authorities adopted their final LTCCPs after the statutory deadline of 30 June 2009.⁷³ Six of these were adopted in July 2009, most of which were in the first two weeks of July. This was a slight improvement on the performance in 2006.

11.18
Although these late adoptions breached the statutory requirement, as in 2006, we generally supported these local authorities taking their time to get their documents "right" rather than rushing them through to meet the statutory deadline. This view was based on the importance of the LTCCP in setting direction rather than a disregard of the statutory provision. In all instances, the local authorities acknowledged in their LTCCP that they had breached the statutory deadline.

11.19
The primary cause of late adoption of the final LTCCP was under-resourcing, often combined with weak project planning. This situation was compounded in several local authorities by the emergence of significant issues through the consultation process.

Our conclusions

11.20
Preparing an LTCCP is a significant task. It requires a local authority to sequentially gather information from various sources and from different parts of the local authority. In comparison with 2006, local authorities improved the timeliness of delivering their LTCCP for the audit and adopting the LTCCP. These achievements were related to improved project planning. However, there remains scope for further improvement in preparing and adopting future LTCCPs.

11.21
Local authorities need to continue focusing on thoroughly planning the LTCCP project. Good project management is important because it allows the community to be effectively consulted. People need enough time to deliberate on the issues, choices, and implications contained in the local authority's LTCCP.

Audit fees

11.22
In keeping with professional audit practice, we sought to advise local authorities of our estimated audit fees before auditing the LTCCP. The appointed auditors started negotiating audit fees in mid-2008.

11.23
After the 2006-16 LTCCPs, we told the sector that we would need to significantly increase the estimated audit fees for the 2009-19 LTCCPs. For the 2006-16 LTCCPs, we were faced with the unique situation of establishing an audit fee. There was no precedent, locally or internationally, for estimating fees for auditing 10 years of prospective information.

11.24
After we completed the 2006-16 LTCCP audits, it became clear that we had underestimated our auditing time – actual hours for completing the 2006-16 audits were 48% above the estimate. However, we did not seek to recover the additional costs of the 2006-16 LTCCP audits because we considered our audit work was helping to develop local authorities' strategic planning approaches. In return, we expected local authorities to learn from the 2006-16 LTCCP audits. We clearly signalled this to the sector, along with advising that full costs would be charged for future LTCCP audits.

11.25
Recognising that a substantial fee increase was necessary for the 2009-19 LTCCP audit, we were very transparent about the LTCCP audit methodology.⁷⁴ We strongly encouraged appointed auditors and local authorities to work closely together in planning for preparing and auditing LTCCPs and to do as much as possible to limit the level of audit input required. Our approach recognised that the size of the audit fee is significantly affected by the quality of the work that the local authority provides to the auditor.

11.26
We established the 2009-19 LTCCP audit fee estimates in conjunction with a consultation process. Audit service providers and the Office of the Auditor-General provided estimated audit fees. The estimated fee was based on the 2006-16 LTCCP audits, adjusted for the improvements that were expected to be evident in the second round of preparing LTCCPs and for a sizing of the 2009-19 LTCCP audit methodology. We provided representatives from the sector with details of the cost drivers affecting the fee estimates. After this consultation process, appointed auditors started negotiating fees with each local authority.

11.27
Auditors were given some discretion to vary the estimated fee for known client-specific matters. This allowed them to consider their confidence in how the local authority planned and prepared their LTCCP, and in other factors (such as past performance and staff competence). This assessment was based on information obtained through direct discussions with local authorities and information gained through the self-assessment completed by local authorities in mid-2008.

11.28
Figure 2 shows the range of estimated audit fees for the audits of the 2009-19 and 2006-16 LTCCPs.

Figure 2
Estimated audit fees for the audits of the 2009-19 and 2006-16 LTCCPs, by fee band

11.29
The combined estimated fees for all local authorities, based on agreed letters of undertaking, was nearly $6,770,000.

11.30
The estimated fee schedule that formed the basis of individual fee negotiations also showed that it would take the three audit service providers about 33,000 hours to carry out all 85 audits.⁷⁵

11.31
After the 2009-19 LTCCP audits were completed, 37 local authorities were charged audit fees at the level agreed in the letter of undertaking. For these local authorities, their performance was in line with the estimated audit fee. Two local authorities performed ahead of expectations and, as a result, the actual fee charged was reduced to reflect the actual costs incurred by the auditor.

11.32
The rest of the local authorities incurred additional audit time and costs. As signalled since the 2006-16 LTCCP round, it was necessary to seek additional audit fees to either fully or partially recover these costs.

11.33
Figure 3 shows the range of actual audit fees charged.

Figure 3
Actual audit fees charged for the 2009-19 LTCCPs, by fee band

11.34
Figures 2 and 3 show that there is a variance of $11,150 in the median between the estimated audit fee and the actual audit fee charged ($71,850 in estimated fees to $83,000 in actual fees). The additional fees charged ranged from $1,500 to $83,690. This reflects the extent and complexity of unanticipated issues that arose and/or the severity of some local authorities' non-performance.

11.35
The actual total audit hours were about 50% above the estimated audit hours. About 30% of the additional hours incurred by auditors were on-charged to local authorities. The remainder of the additional hours were absorbed by the auditors, acknowledging some on-the-job learning by the audit teams, particularly for the Statement of Proposal audits completed in late 2008 and early 2009. On average, for all local authorities, about 75% of LTCCP audit work was completed by Chartered Accountants.⁷⁶ Staff input at this level was indicated as appropriate to the sector before the 2009-19 LTCCP audits started, and the estimated audit fees were based on this level of input from experienced auditors.

Preparing for 2012

11.36
For the future, it is clear that there is scope for local authorities to better plan and manage preparing their LTCCP. The experience of the 2006-16 and 2009-19 LTCCPs has confirmed that audit efficiencies can be achieved when local authorities plan effectively and early. The application of good internal quality assurance processes also has a significant effect on audit cost. In addition, maintaining good communication between the auditor and the local authority – particularly when unanticipated events affect the planning and preparation process – can also reduce the cost effect of changes to initial plans.

11.37
Our comparison of the fees charged for the audits of the 2006-16 LTCCPs with the audits of the 2009-19 LTCCPs shows that good planning by local authorities has a significant effect on audit cost. We encourage the sector to continue to focus on planning for the 2012-22 LTCCP.

72: Sixteen percent of local authorities adhered to the original date agreed, 39% varied by one to seven days later than planned, and 1% varied by one to seven days earlier than planned.

73: In 2006, seven local authorities adopted their final LTCCP after 30 June 2006. The latest was adopted on 14 September 2006, four were adopted in July 2006, and two were adopted in August 2006.

74: The 2009-19 LTCCP audit methodology was summarised in newsletters to the sector, which we released in December 2007 and in May and June 2008. It was also covered during a number of speaking engagements by members of our local government team throughout 2007 and 2008. We also published a summarised version of the 2009-19 audit methodology (for non-auditors) on our website, www.oag.govt.nz.

75: For the 2006-16 LTCCPs, audit hours were estimated to be 23,000. However, the actual time taken to complete the 2006-16 LTCCP audit work was more than 34,000 hours.

76: In general, 50% to 60% of an annual audit is completed by staff who are Chartered Accountants or other specialist staff.