Part 2: Managing in a changeable operating environment

Statement of Intent 2010-13.

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

Figure 1
Our outcomes, outputs, and strategy

Strategic directions and operating intentions

The Auditor-General, in her overview, identified external factors that are influencing the Office or that are areas of focus to improve the assurance we provide to Parliament and the public and the opportunities for public sector improvement. Each of the issues and focus areas identified below will both challenge us and give us the opportunity to give effect to our 2009–12 strategy of:

better understanding public entities;
better using the full range of our resources; and
better customising our reporting.

The issues, and our responses to managing them, are as follows:

Auckland: The amalgamation of eight local authorities into one “super” council on 1 November 2010 is a complex exercise with major implications for the whole country, and local government in particular.
Performance measures – AG-4 (revised): There are numerous challenges for the Office to implement the revised auditing standard AG-4 for auditing service performance information. During the next two years, we will focus on carrying out good quality audits of service performance information to underpin our statutory reporting duties and our efforts to add value to the organisations we audit. Our challenges include how we maintain independence and give advice, how we build confidence for this work, and how to report.
Good analysis and reporting of sector information: We have enormous amounts of data and knowledge that we can use much better to inform our audit work and to share with others. We will focus on getting the best from what we know and improving our understanding and reporting of sector themes.
Implementing Ministry of Economic Development/Accounting Standards Review Board changes: There is still a lot of work to do to arrive at the right set of financial reporting standards for the public sector in New Zealand. We will focus on making a positive contribution to the work of the Ministry of Economic Development and the Accounting Standards Review Board in setting and implementing appropriate standards.
Choosing a cross-cutting theme for 2012/13: In the next two years, we will choose one theme for our discretionary effort in 2012/13 that we will report on and that will make a lasting difference to the New Zealand public sector.
… and, of course, adding value through our 4000-plus annual audits, inquiries, and performance audits: Our auditing and assurance work is our core business, and the foundation for our ability to have a positive influence on public sector performance. We will focus on maintaining the underlying quality of all our financial and performance audits and inquiries, and on how to add value to the organisations that we audit. We will also focus on improving our reporting and our supporting communications and relationships.

Performance improvement actions

In adding value through our 4000-plus annual audits, inquiries, and performance audits and our response to managing this, there is a particular aspect of our performance that we are looking to improve. Our statement of service performance for our audit and assurance services includes an impact measure relating to public entities’ audited annual reports being issued on time and an output measure related to outstanding audit reports that are because of inaction on our part. We want those interested in the accountability of public entities to receive our audit assurance as soon as possible after the end of the financial year. However, not all public entities meet their statutory time frames. Overall, the timeliness of audit completions improved slightly last year from the previous year, with 81% of the audits due for completion in the year finished within the statutory time frame, compared with 78% and 83% in the previous two years.

We assessed 49% of the arrears at 30 June 2009 to have been caused by inaction on our part, compared with 55% at the end of the previous year. This was a new measure and target included for the first time in the 2007/08 year. Since the introduction of this measure, we have compared trends by sector for our actual results in reducing arrears that are due to our inaction. We propose as a result to reset the target for future years from 10% to 30%, reflecting the result achieved for our best performing sector within the overall results, which we consider to be a more reasonable best estimate.

We would like to significantly reduce both the number of arrears in total and those that are our responsibility, and will be working with our audit service providers to ensure that the main obstacles to prompt completion of audits are removed. We have previously reported that we give priority to audit work in larger public entities at the expense of smaller audits such as cemeteries and administering bodies (for example, hall boards). These smaller audits (of entities that often do not have revenue to pay for their audit costs) make up an undue proportion of both total arrears in public entity reporting and those that are caused by inaction on our part.

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

In the Forecast statement of service performance (pages 27-41), we set out our outcome, intended impacts, outputs, and their associated impact and performance measures and standards:

Our impact measures help us understand whether our outputs are likely to be contributing to the overall outcome we want (building trust in the public sector). They help us know the effect of our work and that this work is contributing to improving public management.
Our output performance measures and standards help us understand whether we are producing quality outputs within time and resource constraints and in doing so that we are meeting expectations and being known for our expertise in public management and auditing.

Strategic risks and risk management

The Auditor-General faces four ongoing strategic risks. These risks are primarily managed through processes that support the work we do, as shown in Figure 2.

Figure 2
Our strategic risks and risk management

Risk	Management
Loss of independence – independence underpins the value of the Auditor-General’s products. Losing that independence in fact or appearance, whether by failure on the part of the Auditor-General or her appointed auditors to act independently or otherwise, would undermine trust in our organisation.	The Auditor-General sets a high standard for independence for her employees and the auditors she appoints from chartered accounting firms. The Auditor-General’s independence standards apply to all appointed auditors. Monitoring of the independence standards, including for the two statutory officers and all employees, is carried out through a system that includes regular declarations of interest and, where necessary, implementation of measures to avoid conflicts of interest.
Audit failure – the risk that we issue an incorrect audit opinion with material impact, or a report that is significantly wrong in nature or process.	The Auditor-General adheres to professional auditing standards, including implementing and complying with the revised quality control standards from the New Zealand Institute of Chartered Accountants, and supplements such standards with the Auditor-General’s auditing standards to address public sector matters on which general auditing standards are not relevant or appropriate. Monitoring of adherence to these standards is carried out through external quality assurance regimes (such as participating in New Zealand Institute of Chartered Accountants’ practice reviews and from time to time International Peer Reviews’ annual independent evaluation of our audit allocation and fee monitoring processes, independent external review of two performance audits each year, and stakeholder feedback studies) and through internal peer review and substantiation procedures that include carrying out quality assurance reviews of all our appointed auditors and our Office products on a risk basis and at least three-yearly. A range of opinion and consistency review processes are used to confirm audit team conclusions where non-standard opinion opinions are proposed, and changes to audit standards and work are being introduced. Before performance audits are presented to Parliament, we carry out a process of external report clearance and internal substantiation and review.
Loss of capability – the risk that we are unable to retain, recruit, or access people with the technical and other skills our audit work requires.	Ongoing training and development of our staff is carried out – including talent and capability management programmes, leadership development initiatives, and professional development programmes. Further information is provided in our organisational capability section.
Loss of reputation – the risk that we may lose reputation or credibility that affects our ability to maintain effective relationships with stakeholders. This could arise either because of failings in one of the three areas above or because of external expectations and perceptions about the role of the Office or its findings on any particular matter that has been the subject of audit scrutiny. The Auditor-General’s discretionary mandate is broad and it is inevitable that we will not meet all expectations.	Managing this risk requires the exercise of judgement about where to focus our audit effort and how best to report while also achieving the greatest likelihood of public sector improvement. There are a number of ways this risk is managed in our day-to-day work. The combined leadership team of the Office meets regularly, discussing issues and feedback from key stakeholders and public entities on our audit work. Senior staff liaise with public entities and key stakeholders. We carry out regular stakeholder and client feedback surveys as well as media monitoring to identify areas in which the Office may not be effectively communicating on matters such as its role and the results of its audit work.

We consider that our strategic risks are more likely to materialise in two main areas in the coming three years, and we intend to take specific risk management actions for them:

Auckland – The complexity of the pending amalgamation of eight local authorities into one “super” council on 1 November 2010 has led to the Auditor-General determining that she will oversee the audit of the new Auckland Council and its associated controlled subsidiaries, including signing the audit opinion for the new council.

Performance measures – AG-4 (revised) – We will be building our expertise to provide assurance to Parliament and advice to public entities about the quality of performance information and reporting by entities. To do this we have been preparing and carrying out a greater range of training modules for our staff and making these available to our other audit service providers (where they carry out service performance work on our behalf). We have also established a range of consistency and review processes to support the introduction of our revised auditing standard.

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