Part 10: Where to next with reporting on financial and non-financial performance?

Central government: Results of the 2010/11 audits (Volume 1).

In this Part, we bring together our overall views on the reporting requirements for financial and non-financial performance information. We acknowledge both the progress that has been made to raise the quality of this information, and the challenges that public entities face. We then look to the future and suggest some ideas about possible direction for the future evolution of these reporting requirements.

The governance and accountability framework

At the heart of our system of government are some simple propositions:

  • Parliament authorises the Crown (the Government) to spend public funds;
  • the Ministers who make up the Government are responsible for how those funds are used; and
  • the Government has to account back to Parliament, through Ministers, for the funds it has spent and what it has achieved with them.

These propositions are part of the foundations of the Westminster system of representative and responsible government and ensure parliamentary control of government spending.

The Auditor-General's job in this system is to give Parliament independent assurance that the information the Government is reporting back to Parliament gives a fair and reasonably accurate picture of what has been spent and achieved. Parliament and the public are then able to use that information to hold the Government to account for its performance.

This very simple description of the accountability system for central government shows that, in principle, financial and non-financial performance are intertwined. The legislation setting out the detail of the accountability requirements requires public entities to produce two sets of information: financial statements and separate statements of service performance.

Both sets of information are needed for meaningful accountability. They are also both needed for effective governance and management of organisations, and for those leading an organisation to drive ongoing improvements in performance. Neither an organisation nor those assessing it can make any meaningful judgement on value for money or cost-effectiveness if they cannot put information on what is being done or achieved together with information on what it costs.

The Public Finance Act 1989 ushered in significant improvements in the quality of the financial information being produced and reported across central government. It introduced the disciplines of accrual accounting and financial statements prepared in accordance with generally accepted accounting practice (GAAP) to the central government sector. However, the way in which GAAP has evolved since 1989 has created new challenges for the reporting of financial information.

Improving the quality of information about non-financial performance has been more difficult. The requirements on the information that central government entities must produce and report were strengthened in 2004, with the passage of the Crown Entities Act 2004 and related amendments to the Public Finance Act. Central government entities must report in reasonable detail on their non-financial performance, the reports must be prepared in accordance with GAAP, and they must be audited. In recent years, this Office has worked hard to help public entities to produce information that meets those requirements and is meaningful.39 There has been good progress in many parts of central and local government, but we know that it has not been easy for many public entities.

Problems with the current requirements

Reporting on financial performance

Since 2007, the requirement to prepare financial statements in accordance with GAAP has meant that most public sector entities have had to use standards based on the International Financial Reporting Standards (NZ IFRS).

Our views on this financial reporting environment are reasonably well known, because in 2009, the then Auditor-General reported to Parliament his concerns about the application of these standards to public sector entities.40 He was concerned that these standards had been developed for application by large profit-oriented entities accessing capital markets, that they were not being changed enough before being applied in the very different context of relatively small public sector entities, and that the way in which the standards were likely to develop would make them even less suitable. The practical result was that the standards were likely to become increasingly difficult to apply and were leading to long financial statements with information of questionable relevance to users.

Developments since then mean that the environment is now quite different. Part 8 discusses in more detail the changes now under way in the financial reporting environment. In summary:

  • the newly established External Reporting Board (XRB) has been given responsibility for developing and approving the standards;
  • the XRB has decided to develop separate standards for entities depending on whether they are for-profit or public benefit entities, to better meet the different needs of the users of their financial statements;
  • the new standards for public benefit entities will be based on the work of the International Public Sector Accounting Standards Board (IPSASB); and
  • the new framework is likely to define three different tiers of public benefit entities (based on size) and tailor the requirements to fit each tier.

Separately, we have also recently participated in a working group with accounting colleagues from New Zealand and Scotland in a collaborative project for the International Accounting Standards Board (IASB) to consider whether mandatory disclosure should be reduced to allow more meaningful financial reporting. In July 2011, a report was published: Losing the excess baggage – reducing the disclosures in financial statements to what's important.41

Broadly, the working group's recommendations are to have disclosures for only the most important information and to give greater emphasis to materiality. Consequently, the report recommends removing a large number of currently mandatory disclosures. The increased emphasis on materiality will require greater judgement to be exercised by all involved in the financial reporting process. The working group thinks that annual financial statements could be reduced by about a third as a result of what it proposes.

It is too soon to say if this report will produce any change in the international approach. But it does show that there is scope to make financial reporting simpler and more meaningful.

We intend to continue to work, domestically and internationally, to encourage thinking on how to reduce the cost and complexity involved in preparing (and auditing) financial statements, at the same time as providing better information for users.

Reporting on non-financial performance

On non-financial performance reporting, our concerns have been different. Legislative requirements to report on non-financial performance have existed for many years, but for a long time they were regarded by many in the sector as largely a compliance exercise, with little or no value.

Yet, any well-run organisation should have a sense of its purpose, what it is achieving, how well it is performing, and what improvements it needs to be aiming for. These matters are basic to an organisation's management of its own performance, and should also be able to provide the basis for some meaningful accountability to Parliament.

The state sector management reforms of 2004 (the Crown Entities Act 2004 and the amendments to the Public Finance Act) created a more detailed and comprehensive set of legislative requirements for central government agencies to report non-financial performance information.

Therefore, we began to focus on what we, as auditors of the information, could reasonably expect to see based on these statutory requirements. So far as possible, we have worked with the Treasury and the State Services Commission to ensure that our expectations were reasonable and to support agencies as they worked to improve the quality of their monitoring and reporting of performance. Through our auditing work, we have worked progressively with public entities to help them develop and use appropriate information on their own performance, rather than regarding this as a mechanical compliance exercise.

Some entities are now telling us that they are beginning to reap the benefits of the work they have put in (see paragraph 9.18). But there is no question that many agencies have found it difficult to meet these requirements and to report simple and meaningful information.

Possible directions for future thinking

All of the work described has taken place within the existing legislative framework and government policy settings. But our practical experience with entities across the public sector suggests that there is scope to consider whether changes to the system might enable more valuable information to be provided at a reduced cost. The remainder of this Part presents some ideas that we consider should be explored. Our view is that although central government entities are improving their reporting of both financial and non-financial information, there is room for improvement and it makes sense to seek better effectiveness and efficiency not just at the entity level, but also across the central government sector.

A more collective approach to reporting?

The Public Finance Act requires each individual entity in central government to report on its non-financial performance in relation to each output, each year. However, in practice, the governance and activity of executive government is a more collective, strategic, and long-term business. Under the direction of the collective Cabinet, government departments work together in a range of different ways to achieve results that vary from the short-term delivery of services to the long-term achievement of broader changes.

The result is that governance and accountability can become disconnected in an unhelpful way. This disconnect becomes obvious in the challenges that longer-term and whole-of-government initiatives are creating for the system. For example:

  • the individual entity focus of the current funding and accountability system does not make it easy for central government to explore more collaborative ways of working or initiatives such as shared services; and
  • the current efforts to develop longer-term budget plans and strategies have also been hampered by the current requirements for detailed annual forecasting and reporting.

It is not easy to combine the existing appropriation and reporting requirements, which are annual and based on individual entities, with the more collective and longer-term governance needs of the sector.

Changing the "one size fits all" requirements?

The current legislation also has a "one size fits all" approach – generic requirements for comprehensive reporting on financial and non-financial performance for most central government entities. Yet, the entities vary widely in their size and responsibilities. Our experience with entities suggests that there could be benefit in considering a more tailored approach.

As noted, the XRB is already considering how it might tailor reporting requirements for different tiers of entities, through the reporting standards that it is developing. This approach will affect the standards for financial and non-financial performance reporting. This work should go some way towards getting a better fit between the entity and the reporting requirements.

In particular, we note that at present the legislation specifies in some detail how all entities should go about reporting on their non-financial performance, irrespective of size. This prescriptive approach risks becoming a barrier to progress. It may be useful to look at the legislative requirements alongside the work on standards, to see what changes might be needed to support sensible progress.

Once you depart from a standard approach, there are many possible variations. There may be scope to tailor requirements beyond the size-based tiers that the XRB will be working with. For example, it might be possible to distinguish between the major policy and strategic agencies that most logically monitor and report on high-level sectoral outcomes, and agencies with more practical and task-focused responsibilities. The latter might be better to report simply on how well they achieve their part of the picture. For example, the Ministry of Health is arguably better placed to report on overall health outcomes than the Blood Service, or even individual district health boards. At present, all of these entities are required to report on the outputs, objectives, and outcomes they contribute to.

Who should be reporting on what?

These first two points, about the reporting entity and what must be reported, combine to suggest that it would be useful to think about the levels and nature of accountability information at a whole-of-government level. In our view, a helpful starting point is to ask which parts of the machinery of central government are best placed to tell which parts of "the performance story", and how. Standing back and thinking about the central government sector as a whole, there may be smarter ways of getting better and more meaningful information reported.

For example, a regular comprehensive report on the state of the environment or on social indicators may be sufficient as a form of outcomes reporting for a whole sector or area of activity involving different agencies. The reporting on some outcomes may not need to be tied to a particular agency or type of agency.

In the financial area, there may also be scope for some rationalisation of requirements. For example, sometimes legislation requires separate individual and group reports to be prepared when public entities have subsidiaries, and sometimes it enables the entities to report simply at the group level. From an accountability perspective, it may be possible to simplify and standardise some of these reporting requirements.

Developing simpler and more flexible requirements

The 2004 amendments to the Public Finance Act introduced a level of prescription and analytical complexity that the original Act had largely avoided. It may be time to reconsider the balance between principle and prescription. The three points just discussed show that there might be benefit in introducing a greater level of flexibility in how to achieve the reporting goals for the Executive as a whole.

Start with the information needed for effective management and governance

In most organisational contexts, the practical focus is on the information gathering, monitoring, and reporting systems needed to support effective management and governance of the organisation. Those systems provide the information the organisation needs to manage and drive its own performance and efficiency. They will usually involve a combination of financial and performance information that helps give management a picture of what they are delivering and whether they are doing it efficiently. That information will then usually provide the basis for preparing the information needed for external reporting and accountability purposes.

However, sometimes the reverse happens in the central government context. Systems are established over time to generate financial and non-financial information for external accountability purposes and that information is then also used to manage the organisation. Entities may not adequately consider whether that is the most useful information or is sufficient for the purpose of managing the organisation and its performance.

Other work we have under way suggests that many public entities are good at generating information and putting financial controls in place but they fall down when trying to manage value.


We do see examples where public entities are working well with the current requirements. Usually, this is when an entity has a clear sense of its strategic purpose and has developed effective systems for managing and monitoring its own performance in terms of both effectiveness and efficiency. When this is in place, the external accountability information largely falls out of the information the organisation generates for its own purposes, and accountability needs are not hard to meet.

At present, the difficulty that many public entities experience often arises because they do not have the underlying strategic clarity and governance systems (or capability). In some instances, the right response will be that the entity should develop this clarity and capability, because it is necessary and important for its role. But in other instances, it may be that the current requirements are not a good match with the organisation. This prompts a question about whether the requirements could be made simpler and more fit for purpose.

We are discussing these issues with the Treasury and the State Services Commission. These departments are working on related aspects of public sector management through the Better Public Services project that the Government began in May 2011.

39: See, for example, The Auditor-General's observations on the quality of performance reporting (2008) and Central government: Case studies in reporting forecast performance information (2011), which are available on our website (

40: Controller and Auditor-General (2009), The Auditor-General's views on setting financial reporting standards for the public sector, which is available on our website (

41: Available on the website of the New Zealand Institute of Chartered Accountants (

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