Part 2: Results of State-owned enterprise audits

2.1
In this Part, we provide background information about State-owned enterprises (SOEs) and report the results of our 2010/11 audits of SOEs,⁹ including our assessments of their management control environment and financial systems and controls.

About State-owned enterprises

2.2
SOEs are established under the State-Owned Enterprises Act 1986 (the Act), registered as companies, and bound by the provisions of the Companies Act 1993.¹⁰ The Auditor-General is the statutory auditor of all SOEs and their subsidiaries. In this role, she is responsible for the annual audit and other aspects of the Auditor-General's mandate provided for by the Public Audit Act 2001.

2.3
The principal objective of an SOE is to operate as a successful business and to be as profitable and efficient as comparable businesses that are not owned by the Crown. SOEs are also required to be good employers and to show a sense of social responsibility.

2.4
We audited 17 SOEs and Air New Zealand Limited in 2010/11. These entities are listed below, with a brief description of each:

• Airways Corporation of New Zealand Limited (Airways) – commercial provider of air navigation services and associated aviation infrastructure services;
• Animal Control Products Limited (Animal Control Products) – manufacturer and seller of pest management products;
• AsureQuality Limited (AsureQuality) – provider of a wide range of services to the food and primary industries in New Zealand and other countries;
• Electricity Corporation of New Zealand Limited (ECNZ) – a residual entity, left after assets were transferred in 1999 to the newly established electricity generator SOEs, which has been selling assets, settling liabilities, and winding down operations before its eventual disestablishment;
• Genesis Power Limited (Genesis) – generator, wholesaler, and retailer of electricity;
• Kordia Group Limited (Kordia) – telecommunications and media business that provides network and technology solutions;
• Landcorp Farming Limited (Landcorp) – pastoral farming, including dairy, sheep, beef, and deer;
• Learning Media Limited (Learning Media) – publisher, producer, marketer, and seller of education materials;
• Meridian Energy Limited (Meridian) – generator, wholesaler, and retailer of electricity;
• Meteorological Service of New Zealand Limited (MetService) – provider of weather information services in the form of forecasting, advice, weather graphics, and data systems;
• Mighty River Power Limited (Mighty River Power) – generator and retailer of electricity;
• New Zealand Post Limited (NZ Post) – postal and courier business;
• New Zealand Railways Corporation (KiwiRail) – operator of New Zealand rail network and Interislander ferry services;
• Quotable Value Limited (QV) – valuation and property information company;
• Solid Energy New Zealand Limited (Solid Energy) – a company mining coking coal for export markets and New Zealand Steel Limited, and thermal coal for the Huntly power station and a number of industrial customers;
• Timberlands West Coast Limited (Timberlands) – ceased trading on 31 December 2008 after the sale of its forest and land assets to the Ministry of Agriculture and Forestry on 1 January 2009 and was disestablished on 30 June 2011;
• Transpower New Zealand Limited (Transpower) – operator of the National Grid, which links generators of electricity to distribution companies and major industrial users; and
• Air New Zealand Limited (Air New Zealand) – an international and domestic airline group that provides air passenger and cargo services.

2.5
At 30 June 2011, the SOEs and Air New Zealand had a combined total equity of $27.7 billion. Figure 9 shows the size of each SOE (including Air New Zealand, but excluding ECNZ and Timberlands) with total staff, revenue, assets, liabilities, and equity.¹¹

Figure 9
Total staff, revenue, assets, liabilities, and equity of each SOE (excluding ECNZ and Timberlands but including Air New Zealand)

* Numbers for Air New Zealand are expressed in proportion to the Crown's ownership interest in the company.

Governance and accountability

2.6
Each SOE has two shareholding Ministers, who hold the SOE shares on behalf of the Crown and are responsible to Parliament for the SOE's performance. The shareholding Ministers appoint the board of directors, which is accountable for the performance of the SOE.

2.7
The key accountability documents for SOEs are the statement of corporate intent (SCI), the annual report, and the half-yearly report.

2.8
The SCI must be finalised before the start of each financial year and must include specified information, including information about objectives, activities, targets and measures, and dividends.

2.9
The annual report, which is required to be finalised within three months of the end of each financial year on 30 June, must include audited financial statements and any information that is necessary to enable an informed assessment of the SOE's operations, including a comparison of its performance with the relevant SCI.

2.10
The Crown Ownership Monitoring Unit within the Treasury monitors SOEs on behalf of the shareholding Ministers.

Changes in the SOE sector

2.11
The Government announced in the 2011/12 Budget its intention to sell up to 49% of the shares in the State-owned energy companies Genesis, Meridian, Mighty River Power, and Solid Energy. An ownership structure of at least 51% Crown ownership and up to 49% private ownership is commonly referred to as a mixed ownership model. Air New Zealand currently operates under a mixed ownership model in which the Crown owns more than 51% of the shares.

2.12
In July 2011, the Treasury appointed financial advisors to do preparatory work on applying the mixed ownership model to the four State-owned energy companies and on reducing the Crown's shareholding in Air New Zealand. It was proposed that the Crown would retain a 51% stake in all of these companies. As a result, they would remain public entities and continue to be within the mandate of the Auditor-General.

2.13
We expect the sale of shares in any SOE to be a matter of significant public interest, so we are monitoring the Treasury's work.

2.14
We expect financial information to be included in any prospectus documents, and our auditors are likely to be requested to provide assurance over this financial information. To preserve the integrity of any sale process, we have considered what work our auditors can or cannot do in keeping with our independence policies. We have advised the companies that are intended to operate under the mixed ownership model about the work our auditors can complete.

2.15
We will continue to monitor the work being carried out on the mixed ownership model.

Audit results

2.16
We issued unmodified audit opinions for all 17 SOEs and for Air New Zealand for the year ended 30 June 2011.

2.17
The audit report for Timberlands included an emphasis of matter paragraph. This paragraph drew readers' attention to the disclosures in the financial statements that referred to the going concern assumption appropriately not being used in preparing the financial statements because the company was working through the process of winding up at 30 June 2011.

Environment, systems, and controls

2.18
As part of the annual audit, we examine, assess, and grade SOEs' environment, systems, and controls for managing and reporting financial information.

2.19
We assess two aspects: the management control environment and the financial information systems and controls.¹²

2.20
The auditors we appoint to audit public entities identify deficiencies in each of these aspects and recommend improvements. The grades assigned reflect the recommendations for improvement as at 30 June 2011. Figure 10 explains these grades.

Figure 10
Grading scale for assessing SOEs' environment, systems, and controls

2.21
We report our assessments to the SOE, the responsible Minister, and the relevant select committee. We also advise the Treasury.

2.22
In practice, SOEs also provide additional information in their annual reports, including reporting against their SCI as required by the Act. They also provide a range of information on corporate social responsibility and sustainability matters, including some reporting against recognised international frameworks.

2.23
The Act does not require this additional information to be audited. However, auditors will consider the information reported against the SCI, particularly the performance measures and targets, to make sure that it is consistent with the rest of the information disclosed in the annual report.

2.24
Some of the reported information on corporate responsibility and sustainability is also subject to independent assurance, provided at the SOE's request.

Grades for 2010/11

2.25
Figure 11 sets out a summary of the grades for 15 SOEs and Air New Zealand for 2010/11 for the two aspects we assess. We did not grade Timberlands (which was disestablished on 30 June 2011) or ECNZ (which is being wound up).

Figure 11
Summary of grades for the 15 SOEs and Air New Zealand for 2010/11

Grades used are: VG – Very good, G – Good, NI – Needs improvement, P – Poor.

2.26
Overall, the results for 2010/11 show that SOEs have sound management control environments and financial information systems and controls. More SOEs have a "Very good" grade for their management control environment than for their financial information systems and controls. Five SOEs received a "Very good" grade for both their management control environment and financial information systems and controls. This result reflects that SOEs have made good progress during the past year in responding to our recommendations for improvement.

2.27
The grade for two SOEs' financial information systems and controls dropped from "Good" in 2009/10 to "Needs improvement" in 2010/11. For these two SOEs, we identified significant deficiencies with their internal control systems and have assessed that improvements are necessary. No SOEs received a "Needs improvement" grade for their financial information systems and controls in 2009/10.

2.28
Figures 12 and 13 show the grades for SOEs for the five years from 2006/07.

Figure 12
Grades for SOEs' management control environment, 2006/07 to 2010/11, as percentages

Figure 13
Grades for SOEs' financial information systems and controls, 2006/07 to 2010/11, as percentages

2.29
Figure 12 shows a steady increase in the "Very good" grade for the management control environment aspect. Figure 13 shows deterioration in the "Very good" and "Good" grades for the financial information systems and controls grade. This is because of the two SOEs that received a "Needs improvement" grade in 2010/11.

2.30
We have included SOEs in our comparison of the 2010/11 grades for different types of central government entities in Part 1 (see Figures 4 and 6).

2.31
The comparison of grades for the management control environment in Figure 4 in particular shows that SOEs (and CRIs) are graded higher for this aspect than other types of entities in the central government sector. The reader needs to note the importance of considering the longer-term trends when making comparisons (see paragraph 1.24)

9: We include Air New Zealand with SOEs for the purpose of reporting audit results.

10: Except for the New Zealand Railways Corporation, which is a statutory corporation established by the New Zealand Railways Corporation Act 1981. It is an SOE but not a company.

11: Crown Ownership Monitoring Unit, 2011 Annual Report Portfolio Report, pages 112-114.

12: The Auditor-General is not required to attest to SOEs' service performance. Therefore, we do not assess and grade this aspect.