Part 5: The Controller function and the appropriation audit

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

The Controller function and appropriation audit are important aspects of the Auditor-General's work. They support the fundamental principle of Parliamentary control over government expenditure.

In this Part, we discuss the appropriation matters that arose from the Canterbury earthquakes, and the amount of unauthorised expenditure in 2010/11.

The system of appropriation

The Public Finance Act 1989 (the Act) defines the system of appropriation, which is the primary means by which Parliament authorises the Executive to use public resources. Under this system, expenses and capital expenditure should be incurred only within an appropriation or other statutory authority. The net assets of government departments should not exceed the limits set in the relevant Appropriation Act.

The Controller function ensures that the Government is operating within the financial authorities that Parliament has approved.

Audit work carried out on appropriations supports the formal operation of the Controller function. Section 15(2) of the Public Audit Act 2001 now explicitly recognises this audit work as part of the basic functions of the Auditor-General.

Our appointed auditors must carry out an appropriation audit in conjunction with the annual audit of each government department, to confirm that:

  • expenses and capital expenditure have been incurred within the amount, scope, and period of an appropriation or other statutory authority;
  • expenses incurred have been for lawful purposes; and
  • any unappropriated expenditure is reported in the Government's financial statements.

The Treasury provides useful guidance on the system of appropriations on its website ( This guidance includes:

  • Guide to the Public Finance Act;
  • Guide to Appropriations;
  • Treasury Circular 2007/05: Multi-year, Revenue Dependent and Department to Department Appropriations;
  • Treasury Circular 2006/04: Unappropriated Expenditure – Avoiding Unintended Breaches; and
  • Treasury Instructions.

Appropriation issues arising from the Canterbury earthquakes

One of the defining events of 2010/11 has been the series of earthquakes experienced by the Canterbury region. The two major earthquakes were on 4 September 2010 and 22 February 2011, and have been followed by thousands of aftershocks (including a significant earthquake on 26 December 2010 and two significant earthquakes on 13 June 2011). These earthquakes were devastating. They caused substantial damage to property and infrastructure and 182 people died as a result of the February earthquake.

At a different level, but nevertheless important, the earthquakes have also raised significant appropriation issues.

After the declaration of a state of emergency by the Mayor of Christchurch on 22 February 2011, the Minister of Finance invoked the provisions of section 25 of the Public Finance Act to enable expenses to be incurred to meet the emergency, whether or not an appropriation is available. On 23 February 2011, the Minister of Civil Defence declared a state of national emergency, which superseded the state of emergency declared by the Mayor. The Minister of Finance confirmed the section 25 approval that day.

The section 25 approval power should be used only where the proposed expenditure:

  • needs to be incurred immediately to meet the emergency, or will be incurred automatically as a result of the emergency; and
  • is outside the scope of any existing appropriation administered by a department or is in excess of the unused amount of an existing appropriation.

On 23 February 2011, the Secretary to the Treasury wrote to the Auditor-General about the use of section 25 and the approval process put in place to monitor expenditure. The following day the Auditor-General formally acknowledged this letter, and the extraordinary event that had required the Government to invoke this power.

The Treasury told departments to use existing appropriations where possible and to obtain approval from the Secretary to the Treasury or the Deputy Secretary if they were intending to incur expenditure under section 25. Departments were to separately record spending under section 25 and report this to the Treasury.

Two approvals were granted, for Vote Emergency Management and Vote Finance. Total spending under this section 25 authority for the year ended 30 June 2011 was just over $28 million. The use of section 25 of the Act ended on 1 May 2011 when the national state of emergency was lifted.

Where possible, costs associated with re-instating departmental assets and/or operations after the 22 February earthquake were met using existing appropriations. Nine departments received an additional "other expense" appropriation to provide authority for these expenses because existing appropriations were insufficient.

Under the current Government policy setting, outlined in the National Civil Defence Emergency Management Plan, four Canterbury local authorities will be reimbursed for 60% of permanent repairs to essential infrastructure (such as freshwater, stormwater, and wastewater systems) and river management systems.

The Government has provided an indemnity under section 65ZG of the Public Finance Act, which enables this expense to be incurred without further appropriation. As at 30 June 2011, it was not possible to reliably estimate the total amount that will be reimbursed. The obligation to reimburse the four local authorities was recorded as an unquantifiable contingent liability.

The Treasury is monitoring the total earthquake-related expenditure incurred by departments and the estimated future costs for all appropriation types. When the Government's financial statements were published, the estimated total cost was $13.601 billion. Of this sum, $4.514 billion was expected to be recovered through EQC's claims on its reinsurers and other earthquake-related revenue.

We worked closely with the Treasury to address various appropriation matters arising from the earthquakes. We jointly presented a seminar to affected government agencies in June 2011, outlining our views on the significant accounting and appropriation matters arising. We also issued guidance to appointed auditors on the expected accounting treatment for earthquake-related matters. These matters included:

  • Whether asset write-offs or impairment of assets resulting from earthquake damage qualify as remeasurements. We concluded that these expenses do not meet the criteria of a remeasurement, and require an appropriation.
  • Potential breaches of the scope of appropriations arising from costs associated with re-instating departmental assets and/or operations after the 22 February earthquake.
  • The risk that departments would understate their earthquake recovery expenses by incorrectly accounting for their insurance receipts.

We set up a central process to review the proposed accounting responses to matters arising from the Canterbury earthquakes. We did this to help ensure a consistent approach to the accounting issues that arose. It also gave us the opportunity to share the lessons learnt with the appointed auditors.

The circumstances arising from the Canterbury earthquakes were unique and we had concerns about how it would affect the appropriation framework. Overall, the appropriation framework proved to be flexible enough to allow the response to the Canterbury earthquakes while retaining appropriate accountability for the funds used.

Expenditure in 2010/11

Turning to the more routine authorisation matters arising during the year, we can report that almost all government expenditure during 2010/11 was authorised by appropriations in the usual way.

There was one use of section 26B of the Public Finance Act, which enables the Minister of Finance to approve expenses that exceed an appropriation in the last three months of the financial year, if those additional expenses are within the scope of the appropriation and do not exceed the greater of $10,000 or 2% of the total appropriation. The relevant appropriation authorised more than $90 million of expenditure on naval helicopter forces and the Minister of Finance approved additional expenditure of $0.99 million.

In two instances, the Government used Imprest Supply to approve expenditure and the decisions were too late in the year to be incorporated into Supplementary Estimates. This expenditure needs to be validated in the Appropriation (Financial Review) Act for the financial year.12 The two areas of expenditure were:

  • additional expenditure in two appropriations for some electoral administration expenses, which amounted to $0.735 million; and
  • new expenditure to acquire Canterbury properties that were zoned as unsuitable to live in (properties in residential red zones), which amounted to $1.039 billion.

Unauthorised expenditure in 2010/11

There were 25 instances of expenditure that was not authorised by an appropriation or any other approval process. The total of this expenditure was about $135 million.

In 17 of these instances, there was an appropriation authorising that type of expenditure, but the Government spent more than was authorised.13 For these 17 instances, the total expenditure in excess of authority was more than $58 million. The biggest individual instance was just over $25 million, incurred by the Ministry of Foreign Affairs and Trade. The unappropriated expenditure arose from a review of the application of the Ministry's accounting policy for New Zealand's International Agency commitments, which are unconditional obligations under New Zealand International Financial Reporting Standards.

The other eight instances14 involved expenditure that was outside the scope of, or without any, appropriation. The total expenditure in these instances was nearly $77 million. The biggest single instance was $70 million incurred as a result of the refinancing of district health board debts.

Overall, expenditure in excess of or outside appropriation, and therefore without any parliamentary authority, is a very small proportion of overall government expenditure.

We continue to encourage departments to pay closer attention to ensuring that they have authority before incurring any expenditure. Departments should seek the necessary authority and approval as soon as they become aware that they have incurred unappropriated expenditure. We also continue to work with the Treasury to provide better guidance and support through the administrative systems that support the Crown's financial management.

Net asset holdings

The Act sets a limit on the net assets that departments may hold. Section 22(3) states:

The amount of net asset holding in a department must not exceed the most recent projected balance of net assets for that department at the end of the financial year, as set out in an Appropriation Act in accordance with section 23(1)(c).

A breach of a department's net asset limit is treated as a breach of appropriation.

Three departments breached their net asset limits during 2010/11,15 one more than in the previous year. These breaches (amounting to $2.031 million) were without the authority of an Imprest Supply Act. Two of the breaches in 2010/11 were the result of administrative errors.

This aspect of appropriations is complex, from a legal and an accounting perspective. Accordingly, departments need to continue taking care in applying the net asset requirements of the Act. We are working with the Treasury to improve the processes and associated guidance to reduce the probability of further breaches.

12: See pages 171 and 174 of Financial Statements of the Government of New Zealand for the year ended 30 June 2011.

13: These are listed on pages 172 and 173 of Financial Statements of the Government of New Zealand for the year ended 30 June 2011.

14: These are listed on pages 171 and 172 of the Financial Statements of the Government of New Zealand for the year ended 30 June 2011.

15: The three departments were the New Zealand Customs Service, New Zealand Police, and State Services Commission (see page 174 of the Financial Statements of the Government of New Zealand for the year ended 30 June 2011).

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