Auditor-General's overview

Central government: Results of the 2011/12 audits.

This report presents the aggregate results from our audits of central government entities for 2011/12. I also present in-depth results of our audits of government departments, Crown entities, and State-owned enterprises. We have already published our reports on Crown research institutes, local government, and the education, transport, and health sectors.

I have also included a section examining the use of memorandum accounts by central government entities, as well as an analysis of the financial statements of entities in the sector.

My auditors issued 481 audit reports in the central government portfolio. Of these, 400 were standard and 81 were non-standard. Three reports included emphasis of matter paragraphs that drew attention to uncertainties associated with the effects and recovery from the Canterbury earthquakes. We also drew attention to uncertainties associated with the response to the oil spill from the grounding of the container vessel MV Rena, as well as uncertainties arising from structural changes in a range of organisations. We issued adverse opinions for two public entities and qualified the opinions on the financial or non-financial information of eight entities. The reasons for these opinions are detailed in this report.

As the analysis of our environment and systems controls grades in this report shows, the management controls and financial systems controls of both government departments and Crown entities continue to strengthen. And I am pleased to see that the positive momentum towards better reporting of non-financial performance continues across the sector.

Change and consolidation has been a feature in the central government portfolio. We carried out final audits for four government departments that were disestablished with effect from 1 July 2012 and amalgamated to form the new Ministry of Business, Innovation and Employment. During our audits of these entities, we considered the monitoring and control environment, paying particular attention to the risk of fraud and errors; the appropriate treatment of assets, liabilities, and provisions; and compliance with relevant legislation. We also monitored financial prudence around severance, redundancy, and retention payments. Overall, I am pleased to report that the four disestablished entities maintained sound systems and controls until their disestablishment.

We have noticed that, in an environment of fiscal constraint, some departments are considering alternative revenue streams to fund service delivery, including cost recovery through user charges for some services. In 2011/12, non-tax revenue from departments was $7.5 billion. This is an area I intend to watch closely, and my staff will be working with entities to ensure that they understand the requirements and guidelines for setting charges and fees for public services. Part 11 describes some of the main memorandum accounts that record the accumulated surplus or deficit arising from these types of third-party funding of services.

Our audit of the Government's financial statements showed that there is uncertainty in estimating the costs associated with the recovery from the Canterbury earthquakes. Our report also included consideration of the accounting for KiwiRail after the Government's decision to restructure KiwiRail and create a new company called KiwiRail Holdings Limited. I am satisfied that the accounting treatment was appropriate, and I am pleased that the accounting for metropolitan-only rail infrastructure means that the recent financial investment made by the Government is not written off in the Government's financial statements, which is good for accountability.

I am pleased to report that almost all government expenditure during 2011/12 was authorised by appropriations in the usual way. However, there were 17 instances of expenditure that were not authorised. In 12 instances, the Government had spent more than was authorised. In total, this amounted to over $262 million. The biggest individual instance was just over $175 million, which was incurred by Canterbury Earthquake Recovery Authority. This arose from the Government's decision to extend the red zone offer to owners of 285 severely at risk or largely destroyed houses in the Port Hills area of Christchurch.

There were five instances where expenditure was outside the scope of, or without any, appropriation. This amounted to a total of $10 million, mostly associated with expenditure related to the Canterbury recovery. I continue to encourage departments to pay close attention to whether they have authority before incurring expenditure.

The State Sector and Public Finance Reform Bill is before the Finance and Expenditure Committee. The proposed changes to the Public Finance Act 1989 are intended to improve financial flexibility and provide more meaningful information to Parliament about what the Government is spending and achieving. My Office has been consulted on those aspects of the reforms that affect public sector accountability, and my staff have been providing advice to the select committee while it has been considering the Bill.

This report also highlights changes to financial reporting in New Zealand, which introduce a new multi-standards approach. This new approach recognises that financial and non-financial information should meet the information needs of users of financial reports, so financial reporting standards will now be more tailored to particular classes and sizes of entities. Broadly, I support these changes. They provide a sound platform for financial reporting by public benefit entities in the public sector. However, the changes do not resolve all the issues with financial reporting, and my staff will continue to contribute to work aimed at strengthening financial reporting in the public sector.

Signature - LP

Lyn Provost
Controller and Auditor-General

15 April 2013

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