Part 2: The Controller function and the appropriation audit

2.1
The Controller function and appropriation audit are important aspects of the Auditor-General's work. They support the fundamental principle of Parliamentary control over government expenditure.

2.2
In this Part, we discuss the amount of unauthorised expenditure in 2012/13, and the changes to the public accountability regime that will affect the controller function and appropriation audit in the future.

The system of appropriation

2.3
The Public Finance Act 1989 (the Act) defines the system of appropriation, which is the main way that Parliament authorises the Executive to use public resources. Under this system, expenses and capital expenditure should be incurred only within an appropriation or other statutory authority. The net assets of government departments should not exceed the limits set in the relevant Appropriation Act.

2.4
The Controller function is a way of checking that the Government is operating within the financial authorities that Parliament has approved.

2.5
Audit work carried out on appropriations supports the formal operation of the Controller function. Section 15(2) of the Public Audit Act 2001 explicitly recognises this audit work as part of the basic work of the Auditor-General.

2.6
Our appointed auditors must carry out an appropriation audit in conjunction with the annual audit of each government department, to confirm that:

• expenses and capital expenditure have been incurred within the amount, scope, and period of an appropriation or other statutory authority;
• expenses have been incurred for lawful purposes; and
• any unappropriated expenditure is reported in the Government's financial statements and submitted to Parliament for validation in an Appropriation (Financial Review) Bill.

2.7
The Treasury provides useful guidance on the system of appropriations (see www.treasury.govt.nz). This guidance includes:

• Guide to the Public Finance Act;
• Putting It Together: An Explanatory Guide to New Zealand's State Sector Financial Management System;
• Treasury Circular 2006/04: Unappropriated Expenditure – Avoiding Unintended Breaches;
• Treasury Circular 2011/10: Guidance for the Operation of Departmental Memorandum Accounts; and
• Treasury Instructions.

2.8
Appropriations authorised almost all government expenditure during 2012/13 in the usual way.

Unappropriated expenditure in 2012/13

2.9
The Statement of Unappropriated Expenditure on pages 165-167 of the Financial Statements of the Government reports all expenses and capital expenditure that were incurred without, in excess of, or outside the scope of, existing appropriations.

2.10
There were four uses of section 26B of the Act, which enables the Minister of Finance to approve expenses that exceed an appropriation in the last three months of the financial year, if those additional expenses are within the scope of the appropriation and do not exceed the greater of $10,000 or 2% of the total appropriation. The additional expenditure approved in this way was $1.8 million.

2.11
In two instances, the Government used Imprest Supply to approve expenditure, with the decision too late in the year to be incorporated into Supplementary Estimates. This expenditure needs to be validated in the Appropriation (2012/13 Financial Review) Act. The larger of the two instances involved Land Information New Zealand, which incurred $25 million of unappropriated expenditure relating to proceeds from the sale of Transit New Zealand properties. NZTA administers these properties.

Unauthorised expenditure

2.12
In 2012/13, 13 instances of expenditure were not authorised by an appropriation or any other approval process. The total of this expenditure was about $49 million.

2.13
In eight of these instances, there was an appropriation authorising that type of expenditure, but the Government spent more than was authorised. For these eight instances, the total expenditure in excess of authority was slightly more than $9 million.

2.14
The other five instances involved expenditure that was outside the scope of, or without any, appropriation. The total expenditure in these instances was about $40 million. The Treasury incurred most of this unappropriated expenditure $30 million – relating to a capital injection for Crown Asset Management Limited.

2.15
Expenditure in excess of or outside appropriation, and therefore without any parliamentary authority, is a small proportion of overall government spending.

2.16
We continue to encourage government departments to pay closer attention to ensuring that they have authority before incurring any expenditure. Departments should seek the necessary authority and approval as soon as they become aware that they have incurred unappropriated expenditure.

Consideration of matters relating to the authorisation of party funding

2.17
We considered one significant issue under the Controller function towards the end of the financial year. In June 2013, Hon Trevor Mallard asked the Controller and Auditor-General to confirm whether funding provided to Hon Peter Dunne's office was being spent within the scope and purpose for which it was appropriated. This request followed the de-registration of the United Future party by the Electoral Commission.

2.18
In a response published on 25 June 2013, the Controller and Auditor-General confirmed that there was lawful authority for the party to receive party funding under the relevant legislation, for as long as it was recognised as a party for parliamentary purposes under Standing Orders. Its funding entitlements would change if the Speaker ceased to recognise United Future as a party for parliamentary purposes.

2.19
Funding entitlements are administered by the Parliamentary Service under the Parliamentary Service Act 2000.

2.20
In considering Mr Mallard's request, the Controller and Auditor-General took into account the relevant appropriation, the Parliamentary Service Act 2000, the "Directions by the Speaker of the House of Representatives 2011", and the Speaker's ruling on 6 June 2013 that the United Future party is for the time being recognised under the Standing Orders of the House.

2.21
Later on 25 June 2013, the Speaker announced that he would no longer recognise United Future as a party for parliamentary purposes. Its funding changed accordingly. When the Electoral Commission registered the party again in August 2013, its parliamentary status and funding were also returned.

Net asset holdings

2.22
The Act sets a limit on the net assets that government departments may hold. Section 22(3) states:

The amount of net asset holding in a department must not exceed the most recent projected balance of net assets for that department at the end of the financial year, as set out in an Appropriation Act in accordance with section 23(1)(c).

2.23
Net asset holdings in excess of a department's net asset authority are treated as breaches of appropriation. These breaches are listed on page 167 of the Financial Statements of the Government for the year ended 30 June 2013.

2.24
One department breached its net asset authority during 2012/13. This breach (by $742,000) was without the authority of an Imprest Supply Act.

Changes to the public accountability regime

2.25
Changes to the Public Finance Act 1989 and the Crown Entities Act 2004 were passed this year. Information about the amendments can be found on the Treasury's website. We will be monitoring and reporting on how public entities give effect to the legislation. Most of the changes to the use of appropriations and requirements for reporting against appropriations will not be evident until 2014/15.