Auditor-General's overview

Reviewing financial management in central government.

Significant fiscal challenges are forcing change in the way central government works. The Better Public Services Advisory Group Report of November 2011 recognises these changes and recommends that better services, results, and value for money are needed throughout the public sector.

Cross-functional and cross-sector service priorities and needs mean that the structures, strategies, and operations of the Government and its agencies are being redefined. The Better Public Services Advisory Group emphasises the need for:

  • financial flexibility to:
    • ensure that results are in line with priorities;
    • reduce duplication; and
    • improve information systems; and
  • stronger leadership, including a more strategic financial management approach from chief executives.

To work out in a co-ordinated way where financial resources are directed, how they are controlled, and, ultimately, what value they create is fundamentally important. Therefore, we wanted to review whether central government's financial management system allows us to understand and manage our financial resources within and throughout government and, if not, what needs to change.

Reviewing the state of financial management

To review the state of our financial management system, we commissioned Ernst & Young to help us examine what best practice looks like and then compare this to the current system – within agencies and throughout government.

It is clear from our review that, overall, the financial management system remains on par with many other developed countries (such as Singapore, Denmark, the United Kingdom, and Australia), but it is also clear that there is room for improvement:

  • Although there are pockets of strong financial management practice, government remains focused on providing financial control, budget management and external reporting.
  • Information sets and supporting processes that help establish how well financial resources are transformed into results (a key component of financial management referred to as "value management") are not in place or not widely used.
  • Although the legislative and regulatory frameworks that govern financial management appear to be sufficient, the Better Public Services Advisory Group Report and others suggest that these may not be enough to manage financial performance throughout organisations or sectors.
  • External governance and leadership expectations are fundamental to achieving sustainable change but capability, systems , processes, and data are critical to delivering strong financial management. Because of this, the role and effect of central agencies are particularly important.

The above observations should not be surprising. Speaking in November 2010, Gabriel Makhlouf, now the Secretary to the Treasury, observed that there was:

… inconsistent buy-in and ownership of state sector performance by organisations …1

The challenge now facing us is how to make our financial management system even more effective and the financial information that underlies it more useful and used.

Meeting the challenge

We consider that there needs to be a focus on building a capability to manage value and integrating it in a way that helps in making decisions at all levels. This should build on the solid foundations of other financial management practices, and includes:

  • improving the awareness and recognition of the value of stronger financial management within public entities and throughout sectors and the whole of government;
  • enhancing the quality, analysis, and usability of the information needed to properly understand and show financial performance, from financial cost to results; and
  • combining and putting in line information throughout sectors, functions, and the whole of government.

Central agencies should keep building on their current initiatives and address how they can better co-ordinate and align their respective roles in the financial management system.

Finally, my Office is committed to playing its part in the financial management system and in promoting stronger financial management practices throughout the public sector.

I thank Ernst & Young for their work and advice, the officials and other people that we interviewed as part of our review, and the Treasury and State Services Commission for their input.

Signature - LP

Lyn Provost
Controller and Auditor-General

22 June 2012

1: The Treasury (2010), Public Sector Management: A Treasury perspective on contracting for outcomes and managing risks, Wellington.

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