Part 2: Results of Crown entity audits

Central government: Results of the 2009/10 audits (Volume 2).

2.1
In December 2010, we reported on the 2009/10 audit results for government departments, Crown research institutes (CRIs), and State-owned enterprises (SOEs) in Central government: Results of the 2009/10 audits (Volume 1).1

2.2
In Volume 1, we set out the background and framework that our auditors use to examine, assess, and grade central government entities' environment, systems, and controls for managing and reporting financial and service performance information. We also describe the scope of the three aspects that we assess and the associated grading system.

2.3
In this Part, we report on our 2009/10 audit results and assessments of the management control environment, information systems, and controls of Crown entities.

Summary: Audit results for Crown entities

2.4
We audited 66 Crown entities in 2009/10 – one more than in 2008/09 because of the Real Estate Agents Authority's creation.

2.5
We issued 65 unqualified audit reports and one qualified report on those Crown entities. We issued a qualified report, with an "except-for" opinion, on the New Zealand Fire Service Commission because we were unable to form an opinion on the completeness of service performance information for four months of 2009/10 due to industrial action by firefighters. We set out details of our audit opinion in Part 6 of Volume 1.

2.6
Seven of the 65 unqualified reports we issued were non-standard.2 Six of these included explanatory paragraphs highlighting that the financial statements had been prepared on a disestablishment basis, because those Crown entities were due to be disestablished and integrated into new or existing government entities.3

2.7
Figure 1 shows a summary of the grades for our 2009/10 assessments of environment, systems, and controls for the three aspects that we assess.

Figure 1
Summary of Crown entities' grades for 2009/10

Management control environment Financial information systems and controls Service performance information and associated systems and controls*
VG G NI P VG G NI P VG G NI P
39 24 3 0 42 21 3 0 1 28 35 1

Grades used are: VG – Very good, G – Good, NI – Needs improvement, P – Poor.
* We did not grade this aspect for one Crown entity that was due to be disestablished in early 2010/11.

2.8
Overall, the results for 2009/10 are pleasing. They show that Crown entities have sound management control environments and financial information systems and associated controls. The results also show notable improvements in the grades for service performance information and associated systems and controls, including the first "very good" grade and 28 "good" grades – six more than in 2008/09.

2.9
We set out below our findings on the management control environment, financial information systems, and service performance information and associated systems and controls for Crown entities.

Assessment of management control environment

2.10
Figure 2 shows the trends in grades for Crown entities' management control environment for the four years since we began grading in 2006/07.

Figure 2
Grades for Crown entities' management control environment from 2006/07 to 2009/10, as percentages

Figure 2: Grades for Crown entities’ management control environment from 2006/07 to 2009/10, as percentages.

2.11
Figure 2 shows that Crown entities' management control environment grades have not changed much in the past four years. There has been an overall 6% increase in "very good" grades and corresponding decrease in "good" grades since 2006/07.

2.12
Each year, an average of three or four entities have been assessed as needing to improve their management control environments, but they are different entities in different years. Grades for a particular entity may fluctuate from year to year because of changes in, for example:

  • the entity's operating environment;
  • standards;
  • good practice expectations; and/or
  • auditor emphasis.

Results for 2009/10

2.13
In 2009/10, we assessed all but three Crown entities as having either "very good" or "good" management control environments. We issued "very good" grades to 59% of Crown entities, the same proportion as in 2008/09.

2.14
Of the 65 entities assessed in 2008/09, 53 remained on the same grade and 12 entities had grade changes, with seven entities improving their grades and five receiving lower grades. As noted in paragraph 2.11, fluctuations in grades occur from year to year. This change is not unusual or of concern, given that most grades are "good" or "very good".

2.15
In 2008/09, auditors recommended improvements to the management control environments of 26 Crown entities. All 26 entities responded either fully or in part to these recommendations in 2009/10.

2.16
In our examination of the 2009/10 audit results, we identified three main areas for improvement in Crown entities. Auditors recommended that:

  • nine Crown entities review their sensitive expenditure policy;
  • seven entities ensure that their conflicts of interest registers are kept updated; and
  • seven entities improve/implement their risk management policies/systems.

2.17
Maintaining and implementing up-to-date policies and systems is an integral aspect of an effective management control environment. This is particularly the case for public entities, which face increased scrutiny about the efficient and appropriate use of public funds. Crown entities must be able to assure Parliament and the public that their policies and practices follow best practice.

2.18
In Volume 1, we discussed the central government context of ongoing change and fiscal constraint. This includes government initiatives to improve the state sector's performance, effectiveness, and efficiency, such as alternative approaches to delivering services. We also outlined how change and improvement initiatives can affect organisational capability and capacity, and heighten the need for public entities to manage core services and maintain effective control environments.

2.19
As noted above, six audits in 2009/10 were of Crown entities due to be disestablished. We note that two of these entities received "very good" grades for their management control environments and the other four received "good" grades. It is reassuring that, in this context of change, these entities – and Crown entities overall – maintained sound management control environments in 2009/10.

Sector comparison

2.20
Figure 3 compares Crown entities' grades for management control environment in 2009/10 with the equivalent grades for other central government sector entities.

Figure 3
Grades for management control environment by type of entity, 2009/10, as percentages

Figure 3: Grades for management control environment by type of entity, 2009/10, as percentages.

Note: Percentage figures have been rounded and may not add up to 100.

2.21
In Volume 1, we reported on the management control environments of CRIs, SOEs, and government departments. Figure 3 shows that, in 2009/10, Crown entities performed better than government departments and district health boards but not as well as CRIs and SOEs.

Assessment of financial information systems and associated controls

2.22
Figure 4 below shows the trends in grades for Crown entities' financial information systems and associated controls during the four years since we began grading in 2006/07.

Figure 4
Grades for Crown entities' financial information systems and associated controls from 2006/07 to 2009/10, as percentages

Figure 4: Grades for Crown entities’ financial information systems and associated controls from 2006/07 to 2009/10, as percentages.

Note: Percentage figures have been rounded and may not add up to 100.

2.23
Figure 4 shows that Crown entities have steadily improved their financial information systems and controls during the past four years.

2.24
During the four-year period, our auditors have recommended to Crown entities how they could improve. The percentage of Crown entities receiving a "very good" grade doubled from 32% in 2006/07 to 64% in 2009/10. It is pleasing to see this significant improvement.

Results for 2009/10

2.25
In 2009/10, we assessed all but three Crown entities as having either "good" or "very good" financial information systems and controls.

2.26
We are pleased to report a significant improvement in 2009/10. Auditors assessed 42 Crown entities as having "very good" financial information systems and controls. The equivalent figure in 2008/09 was 34.

2.27
In 2008/09, auditors recommended improvements to the financial information systems and controls of 31 Crown entities. Thirty of these entities responded either fully or in part to these recommendations.

2.28
In 2009/10, auditors recommended that 13 Crown entities ensure that they strengthen internal control over financial processes, including the quality of internal independent review. This is the most common area for improvement we identified in our examination of the 2009/10 audit results. It is important because a lack of independent review can lead to errors and/or opportunities for fraud.

2.29
The overall improvement in Crown entities' financial information systems and controls is reassuring in the current context of change and fiscal constraint in the central government sector.

Sector comparison

2.30
Figure 5 compares Crown entities' grades for financial information systems and associated controls in 2009/10 with the grades of other central government sector entities.

2.31
Figure 5 shows that Crown entities had the largest proportion of "very good" grades for their financial information systems and controls in 2009/10.

Assessment of service performance information and associated systems and controls

2.32
There are statutory requirements for the Auditor-General to attest to the statement of service performance in the annual reports of Crown entities (excluding school boards of trustees) and government departments. This requirement includes DHBs. There is no such requirement for CRIs and SOEs.

2.33
Volume 1 sets out the background to our work to improve the way we audit non-financial performance information. This work includes phasing in the Auditor-General's revised auditing standard on auditing performance information, referred to as AG-4 (Revised) – The Audit of Service Performance Reports.

Figure 5
Grades for financial information systems and associated controls by type of entity, 2009/10, as percentages

Figure 5: Grades for financial information systems and associated controls by type of entity, 2009/10, as percentages.

Percentage figures have been rounded and may not add to 100.

2.34
The revised standard will be effective for nine Crown entities from 1 July 2010, 21 entities from 1 July 2011, and the remaining Crown entities from 1 July 2012.4

2.35
Our primary objective in examining service performance information is to assess the quality of the forecast performance reports and supporting systems and controls, and to audit the non-financial performance reported in the 2009/10 annual report. Our auditors considered the relevance, reliability, understandability, and comparability of information in presenting a clear and cohesive description of performance.

2.36
As we have reported before, we consider that improving the quality of non-financial performance reporting is critical not only for demonstrating accountability but also for improving public sector effectiveness.

Results for 2009/10

2.37
The 2009/10 financial year is the second for which we have graded service performance information and associated systems and controls.

2.38
Crown entities' grades for service performance information and associated systems and controls in 2009/10 have improved notably compared with 2008/09, as shown in Figure 6.

Figure 6
Comparison of grades for service performance information and associated systems and controls in 2008/09 and 2009/10

Figure 6: Comparison of grades for service performance information and associated systems and controls in 2008/09 and 2009/10.

2.39
In 2009/10, the Crown Health Financing Agency was the first entity in the central government sector to receive a "very good" grade for service performance information and associated systems and controls. We issued only one "poor" grade to a Crown entity in 2009/10. We issued three in 2008/09.

2.40
During 2009/10, we worked with central agencies, auditors, and central government entities to help lift capability and the quality of non-financial performance information. Our work included:

  • providing focused support to government agencies, including 13 Crown entities;
  • publishing examples of better practice in performance reporting; and
  • facilitating workshops to strengthen knowledge and understanding of specific areas of non-financial performance information.

2.41
Thirteen Crown entities, including five entities that received focused support, improved their grades for service performance information and associated systems and controls from 2008/09:

  • three went from "poor" to 'needs improvement";
  • eight went from "needs improvement" to "good";
  • one went from "poor" to "good"; and
  • one went from "good" to "very good".

2.42
Two Crown entities dropped grades from "good" in 2008/09 to "needs improvement" in 2009/10. However, overall, Crown entities have made significant improvement.

2.43
We are particularly interested in how Crown entities respond to auditor recommendations for improvement. In 2009/10, seven Crown entities responded in full and 52 responded in part to recommendations from the 2008/09 audits. We are aware of the work that Crown entities are putting into reporting their performance, including measuring the performance of services and the impacts/outcomes of those services. We expect to see more improvement as Crown entities build on this work and continue to respond to auditor recommendations.

2.44
The common areas that we identified for improvement for Crown entities in the 2009/10 audits of non-financial performance information are similar to those identified for government departments. They include:

  • the need to clarify and/or simplify the performance framework – for example, the relationship between services (outputs) and impacts is not always clear;
  • the need to introduce or improve performance measures for outputs that cover timeliness, cost, quality, and quantity; and
  • the need to introduce or improve performance measures or targets for outcomes/impacts.

2.45
AG-4 (Revised) will apply to the audit reports of nine Crown entities in 2010/11. Three of these entities received "needs improvement" grades and six received "good" grades in 2009/10 (including one improved from "needs improvement" and one improved from "poor" in 2008/09). Many issues can affect the audit reports. In many cases, the improvements required are not substantial. We expect that further improvements will be made.

Sector comparison

2.46
Figure 7 compares Crown entities' grades for service performance information and associated systems and controls in 2009/10 with those of some other central government sector entities.

Figure 7
Grades for service performance information and associated systems and controls for some central government sector entities, 2009/10, as percentages

Figure 7: Grades for service performance information and associated systems and controls for some central government sector entities, 2009/10, as percentages.

Note: Percentages have been rounded and may not add up to 100.

2.47
In 2009/10, 54% of Crown entities received a "needs improvement" grade compared with 64% of government departments. Three government departments received "poor" grades compared with one Crown entity.

2.48
Figure 7 shows that Crown entities have performed notably better than other central government sectors in 2009/10. Several reasons are likely for the difference, some of which may not be general throughout the Crown entities. Contributing factors may include the nature of services that most Crown entities provide. These are typically narrower in scope, more easily articulated, and possibly more easily measured than some services provided by government departments.

2.49
We are encouraged by the progress that Crown entities have made in improving their non-financial performance reporting in 2009/10. We will continue to monitor audit findings and trends to try to understand the reasons particular sectors have stronger performance. We will continue to work with central government agencies to understand their businesses and help them to better align performance information and reporting with legislative and accounting requirements, and good practice.

1: Office of the Auditor-General, Central government: Results of the 2009/10 audits (Volume 1), December 2010, available at www.oag.govt.nz/central-govt/2009-10/.

2: We report on non-standard audit reports issued in 2009/10 in Part 6 of Volume 1.

3: The six Crown entities are the Electoral Commission; Electricity Commission; Environmental Risk Management Authority; Foundation for Research, Science and Technology; Legal Services Agency; and Securities Commission.

4: Part 5 of Central government: Results of the 2008/09 audits provides further explanation of the phasing in and categorisation of entities for the application of AG-4 (Revised).

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