Part 2: The purpose of annual reports

Local government: Improving the usefulness of annual reports.

Legislative requirements

2.1
Local authorities prepare annual reports to discharge their public accountability responsibilities. A local authority's annual report serves as a communication tool for providing wider information on activities carried out and services provided, and for comparing actual service delivery with forecast service delivery. The information in annual reports and summary annual reports should allow ratepayers, the community, and the wider public to assess how local authorities have performed in relation to stewardship of community assets, and the efficiency, effectiveness, and cost-effectiveness of operations.

2.2
Since 2004, the LGA has required local authorities to prepare long-term council community plans (LTCCPs) – now known as long-term plans (LTPs) – and to have them audited. LTPs set out local authorities' plans for at least the next 10 years. They focus on the community outcomes, activities, services to be provided and their cost, how those activities and services will be funded, and the capital expenditure requirements. Local authorities prepare LTPs every three years and an annual plan each year in between.

2.3
Local authorities are also required to prepare an annual report that fairly reflects their achievements and results against their LTP or annual plan, with particular emphasis on comparisons with their forecast financial and non-financial performance.

2.4
The annual report should link forecast performance and actual performance. The annual report should compare forecast expectations to actual results, should "feed into" the next year's forecast, and should signal any intended changes in direction, services, or actions based on an analysis of the current year's performance. Figure 1 outlines these links.

Figure 1
Cycle of local authority accountability documents

Figure 1: Cycle of local authority accountability documents.

2.5
Because the LGA requires local authorities to report the activities, levels of service delivered, and the cost of providing those services, it is reasonable to conclude that the intent of the LGA is to provide local authorities with a framework to assess the efficiency, effectiveness, and cost-effectiveness of their activities.

Local Government Act 2002 amendments

2.6
The amendments to the LGA known as the Transparency, Accountability, and Financial Management (TAFM) reform became law on 26 November 2010 and introduced a number of amendments to the LGA that were effective immediately. Other provisions will be applied as part of the 2012-22 or the 2015-25 LTPs. The TAFM changes see some requirements removed and some new financial disclosures required in annual reports and LTPs. Overall, the process leading to the amended LGA has reinforced and confirmed the importance of long-term planning by local authorities.2

2.7
Among the changes, the amending Act3 introduced a list of five core services that all local authorities should have "particular regard" to,4 a requirement to disclose the financial strategy, and regulations specifying performance measures for five groups of activities to allow performance to be compared.5 The Appendix provides relevant clauses from Schedule 10 of the amended LGA.

2.8
Local authorities will need to reflect the changes to the LGA that apply in their 2012-22 LTPs, which need to be prepared, audited, and adopted by 30 June 2012.

Using annual reports

2.9
An annual report should contain an analysis of performance results. This requires having a set of appropriate measures and robust systems to collect the results, followed with analysis, interpretation, and evaluation of the information. A local authority can then determine what actions it should take based on the analysed information.

2.10
We have interpreted the formal requirements in the LGA into three main sets of information:

  • Achievements – These include reporting on services delivered, the effect the services had on outcomes, and comparisons with past performance.
  • Value – This is the costs of the services delivered compared with what was achieved – that is, the cost-effectiveness of the services delivered. The reader should be able to tell how this has changed over time to determine whether the local authority is delivering improvements in cost-effectiveness.
  • Performance interpretation – This is an explanation of the main trends during the past 5 to 10 years, changes that were or might be required in any aspect of the business, and the results of any major management or policy decisions or operational changes made in recent years.

2.11
With a useful and effective annual report, the reader should be able to form a view on the performance of the local authority and whether it is doing well and providing value for money. A local authority inspires confidence and trust when it clearly demonstrates that it knows its own business, is consistently performing well, delivers value for money, and is transparent about any changes it needs to make and what it can do better.

2.12
A local authority measures the cost of its service delivery by assessing whether it is providing its goods and services economically and efficiently. Therefore, measures of economy (the relationship between investment and inputs) and efficiency (the relationship between inputs and services) form the foundation of performance analysis. These measures are usually found in the annual report's statement of service performance (SSP).

2.13
The legislative requirements that applied for the annual reports we analysed were:6

  • identify the activities within the group of activities;
  • identify the community outcomes to which the group of activities primarily contributes;
  • report the results of any measurement undertaken during the year of progress towards the achievement of those outcomes;
  • describe any identified effects that any activity within the group of activities has had on the social, economic, environmental, or cultural well-being of the community;
  • include an audited statement:
    • setting out a comparison between the actual levels of service of that group of activities and the intended levels of service provision (as set out in the long-term council community plan in respect of that year) of that group of activities; and
    • giving the reasons for any significant variance between the actual service provision and the expected service provision; and
  • include an audited statement:
    • describing any significant acquisitions or replacements of assets undertaken by the local authority in the year to which the report relates;
    • giving the reasons why the local authority acquired or replaced those assets; and
    • giving the reasons for any significant variation between the acquisitions and replacements projected in the long-term council community plan and those actually made.

2.14
However, this reporting against the legislative requirements is not an end in itself, but the starting point for reporting the performance story.

2.15
To complete the performance story, the SSP should also provide a clear picture of the effectiveness and cost-effectiveness of the operations of a local authority. Therefore, local authorities must also focus on impact and outcome measures (and the interpretation and explanation of these) so that a reader can understand the effect of changing levels of expenditure on a local authority's performance. Performance information needs to focus on the significant matters that underlie long-term cost-effectiveness and effectiveness.

2.16
Figure 2 summarises the above information into an outcomes-based performance management model. The model shows the relationship between different kinds of measures and what they tell the reader about performance.

Figure 2
An outcomes-based performance management model

Figure 2: An outcomes-based performance management model.

2.17
Assessing and reporting cost-effectiveness is a vital management tool. Cost-effectiveness is a result of the process of applying inputs to create outcomes. Cost-effectiveness varies over time and is influenced by external and internal events. It is an evaluation or an assessment rather than a handful of specific measures.

2.18
Providing information, analysis, and interpretation is important for a local authority in discharging its accountability requirements to comply with the LGA and New Zealand generally accepted accounting practice. The LGA and generally accepted accounting practice do not preclude local authorities from including additional information. As a general principle, commentary should be used to provide additional contextual information that helps the reader to understand the nature of the performance.7 In our view, local authorities should be including this contextual information so that readers do not have to interpret the results themselves.

2.19
Therefore, we expect to see in a local authority's annual report that the entity has analysed and evaluated its performance in the context of economy, efficiency, effectiveness, and cost-effectiveness. We also expect to see that the local authority has honestly appraised how it has performed.

Presenting activity service performance information

2.20
Local authorities are required by the LGA to include in their annual reports specific non-financial performance information. The reported information is based at the group of activities level and needs to include:

  • the actual levels of service provision compared with the intended levels of services;
  • the costs of those services;
  • the actual capital expenditure;
  • the community outcomes; and
  • the identified effects on the social, economic, environmental, or cultural well-being of the community.

2.21
Local authorities generally report the above information in their SSP. The SSP is required to comply with New Zealand Equivalent to International Accounting Standard 1: Presentation of Financial Statements. Technical Practice Aid No. 9: Service Performance Reporting issued by the New Zealand Institute of Chartered Accountants provides the following commentary, based on best practice, about specifying, measuring, and reporting service performance:

It is important for accountability and output management reasons that delivery entities demonstrate that they understand the rationale for the outputs that they are funded to deliver. To ensure clear accountability, the desired outcomes, the linkage between those outcomes and the outputs provided, and discussion of outcome achievement should be reported as additional non-financial information in the SSP or provided elsewhere in the relevant report. That discussion may also highlight for users other documentation such as Strategic Business Plans that provide more detailed information on the entity's strategic context and the link between desired outcomes and output delivery. Without this additional non-financial information, output delivery is reported in a vacuum.8

2.22
The activity service performance information should tell a meaningful story of performance to the reader. The SSP is not complete unless the outcomes to which activities are intended to contribute are disclosed either in the SSP itself or elsewhere in the annual report. Therefore, the activity service performance information should tell a meaningful story of performance to the reader. Links should be drawn between activities, the cost of the activities, and outcomes. The progress towards achieving those outcomes should also be discussed.

2.23
We discuss activity service performance information in Part 3.

Presenting financial performance information

2.24
The LGA requires the forecast9 and actual financial statements to comply with New Zealand generally accepted accounting practice. This requires compliance with the reporting requirements of the New Zealand equivalents to International Financial Reporting Standards (NZ IFRS).

2.25
NZ IFRS is prescriptive in terms of the information required to be disclosed in the financial statements. Local authorities must include in their financial statements:

  • a statement of comprehensive income (revenue and expenditure);
  • a statement of changes in equity;
  • a balance sheet (assets, liabilities, and equity);
  • a statement of cash flows;
  • a statement of accounting policies; and
  • notes supporting the financial statements.

2.26
We discuss financial performance information in Part 4.

2: Office of the Auditor-General (March 2011), Local Government: Results of the 2009/10 audits, page 67, available at www.oag.govt.nz.

3: Local Government Act 2002 Amendment Act 2010.

4: The five core services are: network infrastructure; public transport services; solid waste collection and disposal; the avoidance or mitigation of natural hazards; and libraries, museums, reserves, recreational facilities, and other community infrastructure.

5: The five groups of activities are: water supply; sewerage and the treatment and disposal of sewage; stormwater drainage; flood protection and control works; and the provision of roads and footpaths. Local authorities are not required to include and adopt these mandatory performance measures until their 2015-25 LTPs.

6: Local Government Act 2002, Schedule 10, Part 3 Information to be included in annual reports, clause 15 – before amendment by the Local Government Act 2002 Amendment Act 2010.

7: New Zealand Institute of Chartered Accountants (2007, revised), Technical Practice Aid No. 9: Service Performance Reporting, paragraph 7.16.

8: Paragraph 4.41.

9: The forecast financial statements are prepared in keeping with Financial Reporting Standard 42: Prospective Financial Statements.

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