Auditor-General's overview

Central government: Results of the 2010/11 audits (Volume 2).

This is my fourth and final report on the central government audits for 2010/11. In December 2011, I published Central Government: Results of the 2010/11 audits (Volume 1) and Education sector: Results of the 2010/11 audits. This year, I complete my reporting with Health sector: Results of the 2010/11 audits and this report, Central Government: Results of the 2010/11 audits (Volume 2).

This fourth report summarises the audit findings for Crown entities other than the education and health sector entities, and for State-owned enterprises. I also comment on the practice of some State-owned enterprises reporting alternative performance measures such as "underlying profit".

Overall, the results for 2010/11 show that Crown entities and State-owned enterprises have generally sound management control environments and financial information systems and controls.

The management control environment of an entity is especially important in times of change and restructuring. With an emphasis now on shared "back office" functions, entities need to maintain a sound control environment to ensure that risks are well managed.

There were many changes for Crown entities during 2010/11. For 11 Crown entities, the financial statements were prepared on a disestablishment basis. Six were disestablished during the year, and five were due to be disestablished.

We issued 68 unmodified audit opinions and one modified opinion on the 69 existing and disestablishing Crown entities in 2010/11. The modified opinion was because 2010/11 performance information could not be directly compared to the 2009/10 data.

We issued unmodified audit opinions on all 17 State-owned enterprises and Air New Zealand Limited for the year ended 30 June 2011, and drew attention to the impending winding up of Timberlands West Coast Limited.

We drew attention to several matters in our audit letters to the managers of Crown entities, from breaches of legislation to the need to prepare or implement asset management plans.

Crown entities have continued to improve their service performance information and reporting, with 53% of Crown entities graded "Good" in 2010/11 (compared to 43% in 2009/10). State-owned enterprises are not required to report service performance in the same way. In practice, State-owned enterprises also provide additional information in their annual reports, including reporting against their statement of corporate intent and providing information on corporate social responsibility and sustainability matters.

Many Crown entities were affected by the Canterbury earthquakes. Those effects included reduced revenue and/or increased expenditure, and damaged buildings, equipment, or other assets. There was a significant effect on the Earthquake Commission, including a much expanded role and major financial implications, such as outstanding claims liabilities and associated reinsurance recoveries.

Last year, we reported our unease about the practice of disclosing alternative performance measures, such as underlying profit, by some State-owned enterprises. This year, we reviewed all the underlying profit disclosures made in the 2011 annual reports of State-owned enterprises.

About half of the State-owned enterprises reported underlying profit in their annual reports. They did a reasonably good job of disclosing how they calculated underlying profit and how that profit related to the information in the financial statements. However, in our view, there is room for greater clarity. We will continue to work with State-owned enterprises and our auditors where we consider improvements can be made to such disclosures.

In all four reports about the 2010/11 audits in central government, I have commented on the ongoing importance for public entities to continue improving their reporting. I am pleased to note the improvements to date, and will continue to encourage simpler and more meaningful reporting, of both financial and performance information.

Signature - LP

Lyn Provost
Controller and Auditor-General

2 March 2012

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