Part 10: Implications for public entity audits

The ETS is a new and complex scheme with significant implications for many public entities. As statutory auditor of public entities, the Auditor-General must consider:

• the effect of the ETS on operations, costs, and revenues of public entities;
• the systems and processes that public entities have in place to ensure that they comply with the Act and its regulations;
• the systems and internal controls in place to ensure accurate measuring and reporting of emissions;
• the systems and internal controls in place to ensure accurate recording of ETS-related financial transactions;
• the appropriateness of the accounting policy selected for ETS transactions, and the compliance of financial reporting with that policy;
• applying the ETS accounting policy, including, for example, how public entities have determined the fair value of their NZU holdings given the immature state of the NZU market; and
• the effect of the ETS on asset valuations, particularly of forests and forest land, but also of assets such as electricity generation facilities that are valued based on future cash-flow models.

For our audits of the ETS administering agencies, the audit issues include:

• the robustness of their processes and internal controls over:
  • the issuing of free NZUs to ensure that only those parties entitled to receive a free allocation do so; and
  • the processing of emissions returns to ensure that liabilities to surrender NZUs for emissions and entitlements to NZUs for carbon removals are accurately assessed;
• the security of the NZEUR to ensure that only authorised transactions can occur;
• the processes to ensure that all required emissions returns are received (including for activities where reporting is not regular, such as deforestation); and
• the audit, compliance, and enforcement programmes and the extent to which these programmes are risk-based (that is, focus on areas of greatest risk).

The Auditor-General also audits local authorities’ long-term plans. Some of the above points are relevant to long-term plan audits but, additionally, our audits of these plans will need to consider:

• a council’s forecasts of the effect of the ETS in the waste sector, including forecast emission costs and changes to user charges;
• for councils with forestry holdings, the council’s forecasts of the effect of implementing the ETS in the forest sector, including consideration of forest type (pre-1990 or post-1989) and the forecast receipt and surrender of NZUs;
• a council’s forecasts of the effect of the ETS on its input costs over the 10-year period of the long-term plan; and
• a council’s consideration of how the ETS will affect its community over the 10-year period of the long-term plan (for example, to what extent the ETS is expected to affect the local economy, or whether ETS-driven fuel price increases are expected to change land transport use).