Part 2: How auditors are appointed in the public sector

What resources does the Auditor-General use to audit public entities?

By law, the Auditor-General is the auditor of all public entities. However, the Act allows the Auditor-General to appoint people to carry out audits on her behalf. This is necessary because there are about 4000 public entities, for which the Auditor General needs to:

• plan, conduct, and report the results of annual audits; and
• carry out other auditing functions under the Act.

The people who carry out annual audits on the Auditor-General’s behalf are called appointed auditors. They can be appointed from the Auditor-General’s own business unit, Audit New Zealand, or from within a chartered accounting firm. Chartered accounting firms and Audit New Zealand are referred to as audit service providers.

How are the Auditor-General’s resources organised?

The Auditor-General’s own staff are organised into two business units:

• The Office of the Auditor-General (the OAG) is responsible for planning the Auditor-General’s work; setting auditing standards; allocating audits to appointed auditors; overseeing auditors’ performance; carrying out performance audits, special studies, and inquiries; and Parliamentary reporting and advice.
• Audit New Zealand carries out annual audits and other assurance services on the Auditor-General’s behalf. Public entities pay for the work that Audit New Zealand does for the Auditor-General. Audit New Zealand is required to be financially viable and self-sustaining, while maintaining the capacity and capability to perform all the audits that the Auditor-General allocates to it.

The Auditor-General also contracts with the chartered accounting firms that carry out annual audits on her behalf. Public entities also pay for this work.

Figure 1 shows the relationship between the Auditor-General, the OAG, Audit New Zealand, and private sector accounting firms.

Figure 1
The organisational arrangements of the Auditor-General

How are public sector audits different from private sector audits?

A public sector audit must comply with standards set by the Auditor-General. These are based on international auditing standards but are broader than the standards that apply to a private sector audit.

A public sector audit can examine whether:

• public entities fairly reflect the results of their activities in their annual reports;
• public entities comply with their statutory obligations;
• public entities carry out their activities effectively and efficiently;
• waste is occurring or likely to occur as a consequence of any act or failure to act by a public entity;
• there is any sign or appearance of a lack of probity as a result of any act or omission by a public entity or by one or more of its members, office holders, or employees; and
• there is any sign or appearance of a lack of financial prudence as a result of any act or omission by a public entity or by one or more of its members, office holders, or employees.

What are the criteria for appointing auditors?

The Auditor-General allocates most audits directly to appointed auditors, and those allocations are periodically reviewed against important criteria, comprising:

• auditor independence;
• auditor knowledge about public entities and public sector audits;
• the particular audit skills required;
• the audit’s quality and cost; and
• the need for the Auditor-General to always have access to enough audit capacity and capability.

Why doesn’t the Auditor-General put audits to tender?

Until 2002, most audits went to tender. However, in 2002/03, the then Auditor-General moved away from a contestable tender regime to an allocation model where audits are directly allocated to auditors.

The Auditor-General considered that the contestable tender regime was no longer consistent with carrying out quality public sector audits because:

• the contestability process had not been building enough market concentration (critical mass) in specific sectors to ensure that each appointed auditor developed in-depth sector knowledge;
• the contestable environment discouraged joint initiatives and sharing information between competing audit service providers;
• the compliance costs of the contestability process (including due diligence, and preparing and evaluating tender proposals) were high for everyone involved;
• there was tension between downward price pressure and increasing audit scope expectations, with evidence of market distortion, including “strategic pricing” of audits (for market-retention purposes);
• mergers, structural changes, and reductions in the provincial presence of major private sector providers had reduced the size and spread of resources available to the Auditor-General through the contestability process;
• the involvement of public entities in decisions about whether and when audits would be subject to tender, and in evaluating tenders jointly with representatives of the Auditor-General, had created a cyclical pressure on audit service providers that distracted them from the ongoing audit function, with a consequent threat to auditor independence; and
• there was concern about boards and/or managers of some public entities reacting inappropriately to proper and vigorous audit by seeking to influence decisions about auditor appointments or seeking a change in appointed auditor.

The Auditor-General now rarely uses tendering to appoint auditors, and generally only when critical issues cannot be resolved in another way. In the rare circumstances when the Auditor-General decides to use a tender, the OAG co-ordinates the tender process with the public entity, usually with an external qualified mediator.

How often does the Auditor-General review auditor appointments?

Auditors are usually appointed for three years. The same auditor is usually reappointed for a further three years subject to satisfactory performance.

During the reappointment process, public entities will usually be given an opportunity to comment on the Auditor-General’s proposal to either retain or replace the appointed auditor or audit service provider.

Appointed auditors for most public entities must be replaced after six years to ensure the auditors’ independence.

When appointing a replacement auditor (after three or six years), the Auditor-General will consider how effectively the criteria for audit appointments are being met, and will usually (but not always) appoint an auditor from within the same audit service provider unless a change would improve compliance with those criteria.