Part 3: The Controller function and the appropriation audit

Central government: Results of the 2011/12 audits.

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.

In this Part, we outline the system of appropriation then discuss:

The system of appropriation

The Public Finance Act 1989 (the Act) defines the system of appropriation, which is the primary means by which 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.

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

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 functions of the Auditor-General.

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 the Appropriation (Financial Review) Bill.

The Treasury provides useful guidance on the system of appropriations on its website ( This guidance includes:

  • Guide to the Public Finance Act;
  • Guide to Appropriations;
  • Treasury Circular 2007/05: Multi-year, Revenue Dependent and Department to Department Appropriations – 11 May 2007;
  • Treasury Circular 2006/04: Unappropriated Expenditure – Avoiding Unintended Breaches; and
  • Treasury Instructions.

Authorised expenditure in 2011/12

Almost all government expenditure during 2011/12 was authorised by appropriations in the usual way.

Section 26B of the Public Finance Act

There were seven 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 totalled $21.903 million. The largest instance was $12.327 million of additional spending on early childhood education over the authorised amount of $1.312 billion.

In one instance, the Government used imprest supply12 to authorise expenditure too late in the year to be incorporated into Supplementary Estimates. This expenditure had to be validated in the Appropriation (Financial Review) Act for 2011/12. The instance related to additional write-downs of debt, totalling $2.379 million, incurred for "deemed values" of fish taken in excess of quota by the fishing industry.

Unauthorised expenditure in 2011/12

Seventeen instances of expenditure were not authorised by an appropriation or any other approval process. The total of this expenditure was about $273 million.

In 12 of these instances, there was an appropriation authorising that type of expenditure, but the Government spent more than was authorised. For these 12 instances, the total expenditure in excess of authority was more than $262 million. The biggest individual instance was just over $175 million, incurred by CERA. This unappropriated expenditure arose from the Government's announcement that the red zone residential offer will be extended to the owners of 285 severely at-risk or largely destroyed residential properties in Christchurch's Port Hills. This announcement was made before the relevant authority was adjusted to accommodate this additional expenditure.

The other five instances involved expenditure that was outside the scope of, or without any, appropriation. The total expenditure in these instances was just over $10 million and mainly related to activities associated with the Canterbury recovery.

Overall, expenditure in excess of or outside appropriation, and therefore without any parliamentary authority, is a very small proportion of overall government expenditure.

We continue to encourage 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.

Net asset holdings

The Act sets a limit on the net assets that 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).

Net asset holdings in excess of a department's net asset authority are treated as breaches of appropriation. These are listed on page 167 of the Government's financial statements.

Four departments breached their net asset authority during 2011/12. The breaches (amounting to $16.694 million) were without the authority of an Imprest Supply Act.

This aspect of appropriations is complex from a legal and an accounting perspective. A number of breaches continue to occur because of administrative errors. Accordingly, departments need to continue taking care in applying the net asset requirements of the Act. We are working with the Treasury to prepare additional guidance to departments before the net asset rules are changed, as described below.

Changes to the public accountability regime

The State Sector and Public Finance Reform Bill is currently before Parliament's Finance and Expenditure Committee. The proposed changes to the Act are intended to:

  • improve financial flexibility to facilitate different ways of working between the various agencies within the Executive branch of government; and
  • provide more meaningful information to Parliament about what the Government is spending and achieving, and reduce the compliance costs involved in producing that information.

The changes include:

  • clarifying departmental chief executives' responsibilities for financial management and financial stewardship;
  • shifting the emphasis from reporting by departments to reporting against appropriation, sharpening the focus on what is achieved with public resources;
  • removing the existing one-size-fits-all approach to reporting requirements by providing flexibility for how performance is specified and where it will be reported;
  • replacing the net assets rule with a requirement for Parliament to authorise capital injections made to departments; and
  • specifying the governance regime for companies that are currently listed in Schedule 4 of the Act.

The Bill will affect some aspects of the Auditor-General's audit and Controller functions. The Government consulted with the Office of the Auditor-General when developing the reform proposals that affect public sector accountability, and the Office will also provide advice to the select committee while it considers the Bill.

12: Imprest supply is a statutory mechanism that allows Parliament to provide the Government with the authority to incur expenses or capital expenditure in advance.

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