Part 4: Our audit opinions on the LTCCPs

Matters arising from the 2009-19 long-term council community plans.

In this Part, we discuss our audit opinions on the 2009-19 LTCCPs, which included unqualified and non-standard audit opinions.

The Act requires the Auditor-General to audit all LTCCPs. In practice, these audits are carried out by audit service providers.17 The local government team of the Office of the Auditor-General co-ordinates aspects of these audits, including reviewing the auditors' work to confirm consistency and fairness.

Summary of our findings

For the 85 Statements of Proposal that we audited, we issued 72 unqualified audit opinions. The affect of the local government reforms in Auckland created uncertainties for 10 local authorities. Information was included on the uncertainty in the audit opinion on the final LTCCPs. That left 19 of the 85 final LTCCPs with a non-standard audit opinion. Four of those were adverse audit opinions.

Any non-standard audit opinion – but particularly an adverse audit opinion – should be of serious concern to the ratepayer. In our view, the LTCCPs that received an adverse audit opinion were not fit for purpose.

About our audit opinions

Our core reporting responsibility is to report on whether the Statement of Proposal and the final LTCCP are fit for purpose – that is, whether they meet the intended purposes of the Act and are of ongoing usefulness to the local authority's community.

In our overall audit opinion for the Statement of Proposal and for the final LTCCP, we express "being fit for purpose" as:

In our opinion the [LTCCP] … provides a reasonable basis for long term integrated decision-making by the [local authority] and for participation in decision-making by the public and subsequent accountability to the community about the activities of the [local authority].

The audit opinion also reflects the specific requirements that the auditor needs to report on, which are set out in sections 84(4) and 94(1) of the Act. These sections require the auditor to report on:

  • the extent to which the local authority has complied with the requirements of the Act in preparing its LTCCP;
  • the quality of the information and assumptions underlying the forecast information provided in the LTCCP; and
  • the extent to which the forecast information and performance measures provide an appropriate framework for the meaningful assessment of the actual levels of service provision.

We also set out in our audit opinion the main elements of the audit methodology that the auditors apply when auditing the Statement of Proposal and the final LTCCP. This detail is provided in the section headed "Basis of the opinion". It was designed to provide the reader of the audit opinion with a clear indication that the auditor has thoroughly examined the LTCCP, taking into account its breadth and integrated nature.

Our audit opinion also clearly states that:

  • it is not the auditor's responsibility to express an opinion on the merits of any policy content within the LTCCP – as provided for in sections 84(5) and 94(3) of the Act; and
  • anticipated events frequently do not occur as expected and the variation may be material from that forecast. Accordingly, the auditor expresses no opinion about whether the forecasts will be achieved.

Audit opinions on the 2009-19 LTCCPs

There were 85 local authorities in New Zealand when the 2009-19 LTCCPs were prepared. Therefore, we issued 85 separate audit opinions on the 2009-19 Statements of Proposal and then, after local authorities consulted with their communities and finalised their LTCCP, we issued a further 85 audit opinions on the final LTCCPs.

The bulk of our audit work was carried out in delivering the audit opinion on the Statement of Proposal. The audit opinion on the final LTCCP also required substantive work. However, in general, the amount of audit work on the final LTCCP was significantly less.

We were able to issue unqualified audit opinions for 72 of the 85 Statements of Proposal and for 66 of the final LTCCPs. We issued nine qualified audit opinions on the Statements of Proposal.18 We issued five qualified audit opinions on the final LTCCPs.19 The rest of the non-standard opinions issued contained emphasis of matter paragraphs.

The Appendix sets out a full list of the non-standard audit opinions issued on the Statements of Proposal and the final LTCCPs.

Qualified opinions

For our audit opinions on the 2006-16 LTCCPs, the qualifications were dominated by matters of non-compliance such as not including required information. Although this information is important for legislative compliance, not including this information can be considered a procedural matter with limited flow-on implications.

For the 2009-19 LTCCPs, five of the nine local authorities that received a qualified audit opinion on their Statement of Proposal were able to resolve the issue and obtained an unqualified audit opinion on their final LTCCP. No local authorities received a qualified audit opinion on their final LTCCP without first receiving a qualified audit opinion on their Statement of Proposal.

There was a slight increase in the total number of non-standard audit opinions issued for the 2009-19 LTCCPs compared with the 2006-16 round.20 However, overall, the 2009-19 LTCCPs showed a more mature approach to long-term planning and to clearly setting out the right issues for debate.

The overall increase in total non-standard opinions was significantly affected by our increased use of emphasis of matter paragraphs. These opinions do not represent an actual qualification of the forecast information, but draw the attention of the community about an aspect of the LTCCP.

The recurring issues in the qualified audit opinions for the 2009-19 Statements of Proposal were a failure to demonstrate a prudent financial strategy and weaknesses in the performance management framework. These issues are clearly much more significant than not including required information, as occurred in the 2006-16 LTCCPs.

Also, the following two issues led to qualifications in the 2009-19 LTCCPs, but each occurred in only one local authority's LTCCP:

  • non-compliance with generally accepted accounting practice (GAAP) because the local authority failed to include asset revaluations in financial forecasts; and
  • non-compliance with GAAP because the local authority failed to adjust financial forecasts for estimated future price changes and had inadequate underlying information.

Emphasis of matter paragraphs – Statement of Proposal

An emphasis of matter is a non-standard audit opinion, but does not represent an actual qualification of the forecast information. Rather, it draws the reader's attention to a matter of significance in reading and assessing the information provided by the local authority. Where circumstances warranted it, we were prepared to use this reporting tool more for the 2009-19 LTCCPs than we did for the 2006-16 LTCCPs.

The use of an emphasis of matter paragraph enabled us to draw attention to a significant issue that, from our independent perspective, warranted us to say that there was an important matter to be considered when reading and using that LTCCP. This meant that, for the 2009-19 LTCCPs, in addition to the qualified audit opinions noted above, we issued five audit opinions containing an emphasis of matter paragraph on the Statements of Proposal and 14 on the final LTCCPs.

For the Statements of Proposal, we used an emphasis of matter paragraph to highlight the following:

  • Auckland Regional Council – the uncertainty facing the Council after the Minister of Transport announced the withdrawal of the Auckland Regional Fuel Tax scheme, and that, in principle, the Crown would take over responsibility for purchasing Auckland's new electric trains.
  • Chatham Islands Council – the significant assumption, made by the Council, that operational funding from central government will continue throughout the period covered by the Statement of Proposal. The Council had a confirmed financial assistance package with central government until 2011/12 to enable it to fulfil its regional and territorial local government responsibilities. The Council prepared the Statement of Proposal on the basis that this funding would continue throughout all the years of the LTCCP.
  • Grey District Council – the projected operating revenues had not been set at a high enough level to meet the projected operating expenses. The Council based this decision on what it considered ratepayers could afford at present. The consequence of this strategy is that the revenue levels will need to increase after 2018/19 to generate funds required to replace assets.
  • Mackenzie District Council – the Council's financial strategy met the financial prudence requirements of the Act. However, we considered that the financial strategy of the Council, on which the LTCCP is based, was not clearly outlined for the reader.21
  • Porirua City Council – we considered that the Council's financial strategy for funding its assets and facilities (especially for water supply, waste water, and stormwater) will have significant effects on future levels of rates and debt, beyond the period of the current LTCCP. Our audit opinion highlighted the need for readers to assess the Council's funding approach for intergenerational equity.22

We were satisfied that, in highlighting these issues, the audit opinion was able to direct the reader to consider particularly important issues when, during the consultation process, they evaluated the Statement of Proposal.

Emphasis of matter paragraphs – final LTCCP

For the final LTCCPs, we used an emphasis of matter paragraph in two significant ways. We added an emphasis of matter paragraph to the audit opinion of Waitomo District Council's LTCCP, and also to the LTCCPs of all local authorities affected by the Auckland local government reforms.

Waitomo District Council

We drew the reader's attention to the fact that the financial strategy used by Waitomo District Council in the 2009-19 LTCCP relied on the successful restructuring of the Council's subsidiary Inframax Construction Limited to ensure that dividends return to historical levels.

The Council's 2006-16 LTCCP had received a qualified audit opinion because it was not sustainable and therefore not a financially prudent plan, as required by section 101 of the Act. Since 2006, the Council had carried out a significant amount of work to address the qualification. When the 2009-19 LTCCP was adopted, we were satisfied that it was fit for purpose and that the financial strategy was prudent.

During the period that the Council was consulting on the 2009-19 Statement of Proposal, further information was provided to the Council about the ability of Inframax Construction Limited to meet its 2008/09 performance criteria. As a result, the company could not deliver the budgeted dividends for the first three years of the 2009-19 LTCCP. The dividends were identified as crucial to reducing the Council's level of borrowing. The company also required further capital from the Council to enhance its capital structure.

Auckland local government reforms

In May 2009, the Local Government (Tamaki Makaurau Reorganisation) Act 2009 was passed into law. The emphasis of matter paragraph was useful to highlight the effect of local government reorganisation in the Auckland region. Information about the reorganisation process and its effect on the LTCCP was included in the audit opinions on the final LTCCP of the 10 councils known at that stage to be affected by the reform.23

"Except for" opinions – final LTCCP

Waimate District Council provides an example of how the final audit opinion – although not qualified – was linked to, and affected by, the qualified opinion issued for the Statement of Proposal.

Waimate District Council

Waimate District Council failed to prepare a coherent Statement of Proposal – it was so flawed, in our view, that it was not fit for purpose. Because of this, the auditor issued a qualified audit opinion. The issues contributing to this opinion were:

  • non-compliance with GAAP – because capital expenditure was not adjusted for estimated future price increases;
  • the debt funding and repayment strategy was not clearly explained;
  • the performance management framework was inadequate; and
  • assurance could not be gained about the integrity of the financial model.

These issues were resolved so that the final LTCCP met the minimum standard. However, an "except for" audit opinion was issued. This "except for" opinion was considered appropriate because the outcome of the consultation process could have been significantly different if the Statement of Proposal had been presented to the community without all the flaws in it.

The "except for" opinion also noted that the Summary did not include any information about the qualified audit opinion. In our view, issuing this "except for" audit opinion alerts the reader to these issues, which is important because the audit opinion on the Statement of Proposal becomes obsolete and is withdrawn from circulation after the LTCCP is adopted and becomes final.

Our conclusions

We are responsible for reporting our audit opinion on the LTCCP. We have no mandate to require any action of the local authority – particularly where we report a qualified opinion. Where local authorities received a non-standard audit opinion, they were still able to adopt the LTCCP and, because it is closely linked to the planning process, set their rates for the next financial year. These LTCCPs are still "in force", with the flaws that we have pointed out.

This means that some local authorities have set their strategic direction based on inadequate underlying information and with performance management frameworks that will not enable them to assess their actual performance meaningfully. This position is accentuated for those local authorities that received a qualified audit opinion on their final LTCCP. In our view, these LTCCPs were not fit for purpose.

Some of these local authorities, such as Central Otago District Council, have indicated that they will try to rectify the issues that our audit opinion raised before they prepare the next LTCCP for 2012-22. This will probably require them to make an amendment to the 2009-19 LTCCP. Although amending the LTCCP can address the issues, it is costly and time consuming. The issues could have been addressed more efficiently if the project of preparing the 2009-19 LTCCP had been better managed.

Where a local authority has received any non-standard audit opinion – but particularly a qualified audit opinion24 – this reflects matters that should be of serious concern to the ratepayer.

Overall, we consider that our audit opinions on the 2009-19 LTCCPs indicate that the sector, as a whole, has improved the quality of the LTCCPs. There were significantly fewer breaches of legislative requirements. The matters that led to the non-standard audit opinions reflect significant and challenging issues for local authorities – such as establishing a financially prudent financial strategy during a recession.

17: For the 2006-16 and 2009-19 LTCCPs, these audit service providers were Audit New Zealand, Deloitte, and Ernst & Young.

18: This included eight adverse audit opinions and one "except for" audit opinion.

19: This included four adverse audit opinions and one "except for" audit opinion.

20: We issued standard unqualified audit opinions for 72 of the 85 2006-16 Statements of Proposal and for 68 of the final 2006-16 LTCCPs.

21: In addition to the outlined emphasis of matter, the Mackenzie District Council's Statement of Proposal was qualified because of weaknesses in the performance management framework. However, both of these issues were resolved, and the qualification and emphasis of matter were removed from the audit opinion on the final LTCCP.

22: The same issue was highlighted in our audit opinion on the 2006-16 LTCCP of Porirua City Council, using an emphasis of matter paragraph. This was the only use of the emphasis of matter paragraph in the audit opinions on the 2006-16 LTCCPs.

23: Councils known to be affected by the reform at the time of finalising the LTCCPs were Auckland City Council, Auckland Regional Council, Environment Waikato, Franklin District Council, Manukau City Council, North Shore City Council, Papakura District Council, Rodney District Council, Waikato District Council, and Waitakere City Council. Subsequently, Hauraki District Council was also affected by boundary changes.

24: Including adverse and "except for" audit opinions.

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