Part 1: Introduction

Local government: Results of the 2010/11 audits.

In keeping with the approach we took last year, this report on the 2010/11 audits of the local government sector is in two sections:

  • Section A reports on the full results of the 2010/11 annual reporting round of local authorities; and
  • Section B contains short articles written in December 2011 to directly inform local authority chief executives and mayors of what the Office was working on during 2011, and that work's findings.

In this Part, we describe and summarise the content of Section A.

The timeliness of annual reporting

Local authorities' annual reports provide information that helps communities to assess how authorities have performed. This year's results show an unsatisfactory trend of local authorities not meeting their legislative obligations. In 2010/11, eight local authorities did not adopt their annual report by the statutory deadline. This compares with seven local authorities in 2009/10 and one local authority in 2008/09.

As at 31 January 2012, two local authorities had not yet completed their annual report – three months after the statutory deadline. In 2009/10, all annual reports were adopted by 30 November 2010.

Within one month of adopting its annual report, a local authority is required to:

  • publicly release its annual report to the community; and
  • make publicly available an audited summary annual report.

Excluding the two local authorities that have yet to finalise their annual reports, three local authorities missed the one-month timeframe for releasing their annual report to the community. Three local authorities missed the one-month timeframe for making available an audited summary annual report.

These reporting obligations are not new to local authorities. The trends that we see concern us. Local authorities that miss the statutory deadline fail to provide their stakeholders and community with the timely information that they are entitled to receive.

Our observations on reported financial performance

This is the second time we have reported our observations on the financial performance and position of local authorities, based on information in their audited financial statements.

Our comments are descriptive. We will continue to collect information from the audited financial statements of local authorities and report more fully over time.

Overall, trends are similar to those described in last year's report, Local government: Results of the 2009/10 audits.1 Local authorities are collecting more revenue and spending more compared to last year and to their budget. Spending on capital is greater than last year, but less than the amount that local authorities budgeted.

Because the capital expenditure was less than budgeted, local authorities did not borrow as much as they had budgeted.

The financial information for two of the largest local authorities Auckland Council and Christchurch City Council has had a large effect on the consolidated financial information collected for 2010/11.

The Canterbury earthquakes' effect on Christchurch City Council's finances has been - and will continue to be - significant.

Auckland Council, established on 1 November 2010, prepared its first annual report for the eight months ending on 30 June 2011. Because the information disclosed is for only eight months, there is no comparative financial information for Auckland Council.

The financial reporting environment

In previous years, we have expressed concern about the New Zealand equivalents to International Financial Reporting Standards (NZ IFRS) for many entities in the sector. Changes are under way, with amendments to the financial reporting standards that different types of entities should apply.

The proposed changes will not immediately resolve all our concerns. However, we do support the long-term strategy of separately considering the reporting requirements of public benefit entities and for-profit entities.2

Although the changes in the financial reporting environment are positive, there are still some challenges. Under NZ IFRS, financial statements have become longer and more complex, with increased disclosures. We continue to question the need for the volume of information disclosed, particularly for smaller entities in the local government sector.

We consider it important that an appropriate standard be prepared for non-financial performance information. Non-financial performance information needs to be integrated with financial information to present a complete picture of an entity's performance for the financial year.

Reporting underlying profit

We have been uneasy about the practice of some entities that are associated with local authorities including alternative performance measures, such as "underlying profit", in their annual reports.

We reviewed the underlying profit disclosures made in the 2010/11 annual reports of electricity lines businesses and port companies. We found that the few of these companies that reported underlying profit in their annual reports 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, the companies can report more clearly. We will continue our work to ensure that public sector practice is in line with private sector practice, given that public entities that make such disclosures have a commercial focus.

Relationships with chief executives

We have been following the recent debate about the hiring and pay of the chief executives of local authorities. Because the employer and employee – with the support of expert legal advice where necessary - best resolve individual employment matters, we rarely intervene in them.

The employment of chief executives must follow a proper process. The Local Government Act 2002 sets out the main requirements for appointing and reappointing chief executives. Local Government New Zealand (LGNZ) has produced useful guidance for the sector. Proper processes include making clear the roles and responsibilities of those involved in the recruitment process, keeping good records and confidentiality, and behaving professionally.

The pay of chief executives also needs to follow proper process. We encourage local authorities to take expert advice on the relevant employment market and salary movements but to consider that with the circumstances of the organisation. The governing body holds the final responsibility.

Something else that is being raised with us is the need for elected members and chief executives to understand clearly their roles and responsibilities governance and management respectively. For an organisation to be run appropriately, it is critical that constructive working relationships are set up and maintained.

Reducing and managing greenhouse gas emissions

Last year, we reported that about 25% of local authorities were measuring, reducing, and offsetting their greenhouse gas emissions. In 2010/11, about 30% of the 78 local authorities were doing this.

Local authorities have different reasons for measuring and reporting their emissions, including to reduce corporate energy use and costs, to get or keep sustainability accreditation, or to lead their communities by example.

We expected that the New Zealand Emissions Trading Scheme (ETS) would encourage local authorities to begin measuring and reducing emissions, given increases in fuel and electricity prices. The ETS should encourage more focus on reducing waste when further costs (based on waste disposed of at landfills) are introduced.

The effect of the ETS on how local authorities measure and reduce greenhouse gas emissions is not yet apparent. However, some local authorities are taking part in the ETS through their forestry activities, and more local authorities will take part when the waste sector enters the ETS in 2013.

Managing leaky home liabilities

Providing for leaky home liabilities continues to be a major matter for local authorities. The collective liabilities of the four local authorities that leaky home liabilities affect the most increased from $477 million in 2009/10 to $510 million in 2010/11. This is an increase of $37 million, or 7.8%.

The increase happened because, having better historical information on which to base assumptions, local authorities were able to estimate their leaky home liabilities more reliably.

On 29 July 2011, the Government's Financial Assistance Package (FAP) became available to homeowners. Under the FAP, the Government and the local authority (if they are participating in the scheme) each pay 25% of the agreed repair costs. The homeowner pays the other half. As at 30 June 2011, the Crown provided $567 million for its obligation to contribute 25% of agreed repair costs to eligible owners of leaky homes.

As at January 2012, 29 local authorities had agreed to participate in the FAP.

Non-standard audit reports

We continue to use more "emphasis of matter" and "other matter" paragraphs in our audit reports. We see these paragraphs as helping to draw attention to significant matters relevant to understanding the financial and/or non-financial information about the entity.

This year, we wrote an emphasis of matter paragraph in the audit reports of the public entities that were dissolved as a result of Auckland Council's creation. We drew readers' attention to the fact that the financial statements were prepared on the basis that the entity was being wound up.

The large earthquakes of 2010 and 2011 affected the financial and non-financial performance of many Canterbury entities. We issued modified audit opinions for Christchurch City Council and those of the council's group, Tuam Limited (a subsidiary of Christchurch City Council), and Waimakariri District Council and its group accounts.

1: Available at

2: The Treasury defines public benefit entities as "reporting entities whose primary objective is to provide goods or services for community or social benefit and where any equity has been provided with a view to supporting that primary objective rather than for a financial return to equity holders". All local authorities are public benefit entities but some council-controlled organisations are not. See for more information.

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