Part 7: Results of Crown entity audits

Central government: Results of the 2011/12 audits.

In this Part, we report on the results of our 69 audit reports issued for Crown entities in 2011/12. In this report, we do not consider the results for TEIs, schools, Crown research institutes, or DHBs,21 nor do we provide any comment on the results of the audit reports for Crown entity subsidiaries for 2011/12 other than to note non-standard reports issued. For a list of the entities we considered, see Appendix 2.

We also report on our assessments of the management control environments and financial information systems for 62 Crown entities, and the service performance information and associated systems and controls for 61 Crown entities. Five Crown entities were disestablished in 2011/12, and we do not grade disestablished entities.

About Crown entities

There are more than 2700 Crown entities, including 2460 school boards of trustees. Crown entities have a wide range of roles, functions, and responsibilities and different degrees of autonomy. By law, the Auditor-General is the auditor of all Crown entities and their subsidiaries.

The Crown Entities Act 2004 provides a framework for the establishment, governance, accountability, and operation of Crown entities.22 It sets out five categories of Crown entities:

  • statutory entities:
    • Crown agents, such as ACC and the DHBs;
    • autonomous Crown entities, such as the Standards Council of New Zealand and the New Zealand Symphony Orchestra; and
    • independent Crown entities, such as the Law Commission;
  • Crown entity companies, including Television New Zealand and the Crown research institutes (CRIs);
  • Crown entity subsidiaries;
  • school boards of trustees; and
  • TEIs (polytechnics, universities, and wānanga).

In 2011/12, there have been some structural changes (including disestablishing and establishing entities) for Crown entities in response to the Government's priorities (see paragraph 1.14).

Audit reports for 2011/12

We issued standard audit reports for 59 Crown entities and 10 non-standard reports (nine for the year ended 30 June 2011/12 and one for a prior year).

We issued a qualified opinion for the New Zealand Fire Service Commission (NZFSC), for the two years ended 30 June 2011 and 30 June 2012, because industrial action prevented performance data being collected during part of the period audited.

"Emphasis of matter" paragraphs (see Part 4) drew readers' attention to:

  • disclosures relating to the disestablishment or pending disestablishment of entities;
  • uncertainties about measuring the fair value of unlisted venture capital investments; and
  • uncertainties relating to the response to the MV Rena oil spill and the appropriate use of the "going concern" assumption for EQC because of uncertainties around the response to the Canterbury earthquakes.

We also audit a number of Crown entity subsidiaries. Our audits drew attention to the disestablishment of some of the Public Trust's subsidiaries and uncertainties in measuring the fair value of unlisted venture capital investments for the New Zealand Venture Fund and subsidiaries.

Observations and matters arising from the audits

During our audit work, we gain insights and perspectives about the various factors and challenges facing public entities and about the initiatives being advanced to respond to these and drive improvement. In this Part, we discuss some of our observations and matters raised by auditors working with Crown entities.

Final audits for Crown entities that were disestablished

We carried out final audits for five Crown entities that were disestablished with effect from 1 July 2012. The five entities were the:

  • Health Sponsorship Council;
  • Alcohol Advisory Council of New Zealand;
  • Crown Health Financing Agency (CHFA);
  • Charities Commission; and
  • Mental Health Commission.

We did not assess the entities' environments, systems, and controls when we carried out the final audits. This is because the grades we give reflect our recommendations for improvement, and deficiencies identified in the final audit of an entity to be disestablished may or may not be relevant to any new entity.

However, we did report our audit findings and any significant issues to the responsible minister. We also commented on the operation of the environment, systems, and controls during the disestablishment period.

Overall, we found that the five disestablished entities maintained sound systems and controls until disestablishment.

Managing the implications of the Canterbury earthquakes

A number of Crown entities are continuing to face issues caused by the Canterbury earthquakes. These issues range from the role that entities are required to play in the Christchurch rebuild to damaged premises and future costs of seismic strengthening.

NZTA has the important role of rebuilding the Canterbury transport network in partnership with CERA and Christchurch City Council. The estimated cost of this project is $816 million.23

Housing New Zealand Corporation (HNZC) and NZFSC have both been adversely affected by the Canterbury earthquakes and the resulting review of building standards. In 2011/12, HNZC recognised $56 million of impairment on properties damaged during the earthquakes and a further $15 million impairment to reflect the costs of seismically strengthening its earthquake-prone buildings. NZFSC had similar issues with a number of properties requiring seismic strengthening or rebuilding at an estimated cost of $39.7 million as at 30 June 2012.

The implications of the Canterbury earthquakes will continue to affect Crown entities into the foreseeable future, whether it is through costs associated with damages and seismic strengthening or a change in the entities' objectives.

Our appointed auditors will remain vigilant with regard to the funding constraints and the value of capital commitments. They must also ensure that particular attention is paid to the assumptions used in calculating impairment losses and provisions to gain assurance that the values reported accurately reflect the future costs of earthquake strengthening.

Structural and organisational change

Structural and organisational change continues to be a trend across Crown entities. The changes take many forms, including:

  • merging of entities or back-office functions;
  • integrating new functions;
  • disestablishing and creating positions;
  • executive management changes; and
  • changes in operational objectives.

These changes have been driven by a number of factors, the most significant of which is fiscal constraints. With pressure from the Government to reduce costs while also providing better public services, entities have reassessed their structures and business models.

The back-office functions of the Civil Aviation Authority (CAA) and the Aviation Security Service have been combined to reduce costs. Other entities, such as the Public Trust, are in the process of reviewing their business structure and operations to identify the most effective and efficient business model for delivering their desired outputs.

The Health and Disability Commissioner has had to prepare for taking on functions of the Mental Health Commission, which was disestablished with effect from 1 July 2012.

Appointed auditors need to remain alert to a number of unintended adverse effects caused by structural and organisation change. With changes in senior management personnel, there is a risk that the internal control environment might be weakened because the new management changes control procedures. Restructuring announcements can cause staff to become disgruntled, which in turn increases the risk of fraud and inappropriate sensitive expenditure. Reduction in staff numbers can also reduce organisational capability, which can have a detrimental effect on an entity's ability to achieve its major outcomes.

Business transformation programmes and projects

Several Crown entities have begun to prepare and implement business transformation programmes or projects. These include planning and/or procurement of major information management systems and review, and subsequent streamlining of business processes. Once again, the driving force behind these initiatives is to reduce costs and provide better services to service users.

HNZC's business transformation exercise progressed significantly during the year. The aim of this exercise is to develop a new service delivery model to better deliver services to tenants. The initiative is supported by the replacement of major information technology (IT) applications, including the implementation of a financial management application and a property management application. These applications were implemented, after balance date, on 5 August 2012.

To reduce costs and provide better public services, many Crown entities have started business transformation programmes or projects. Initiatives focused on streamlining business processes and modernising systems are essential if savings are to be made without reducing the quality of service provided.

For entities implementing IT systems involving migration, storage, and capture of sensitive information, it is important that both the entity and the auditor pay particular attention to the security measures used by the entity.


With several Crown entities managing assets of significant value and strategic importance, procurement remains an area of audit focus. It is important for entities to have clear and effective procurement policies.24 This helps to ensure that the procurement process is transparent and that entities receive the best value for money. The need for transparency and value for money stems from the public sector's commitment to accountability and fiscal constraint.

In 2011/12, our auditors noted a higher than expected proportion of closed tenders to initiate procurement decisions by HNZC. The major drivers for this were earthquake-related matters and HNZC's Enterprise Transformation Programme, which generated an increased level of procurement activity. Our auditors have recommended that entities apply increased scrutiny when using closed tender processes so as to confirm that it is the only approach or most economic approach available.

Previous reviews of NZTA's procurement policies have concluded that they are consistent with good practice. In 2011/12, our audit of NZTA did not identify any specific issues worthy of disclosure.

Although we have discussed only two specific entities, procurement remains a focus for many Crown entities. Appointed auditors will continue to review entities' procurement policies to ensure that they have robust processes in place and will continue to review significant contracts to test that they have been awarded within the guidelines set out in the entity's policy.

Financial sustainability

We note that some entities, such as CAA and the Office of Film and Literature Classification (OFLC), continue to grapple with concerns about long-term financial viability and sustainability.

A proposal resulting from the review of the Aviation Security Service (which addressed issues about charging for passenger security) that will enable CAA's operation to continue on a sustainable basis was put to the Government in mid-2012. Cabinet agreed to implement proposals from 1 November 2012.

Auditors noted the challenges facing OFLC given a reported loss of $41,000 in 2011/12 and budgeted losses of $185,000, 188,000, and $195,000 for the three years 2012/13 to 2014/15. With fewer submissions from the Film and Labelling Body Inc, its revenue is adversely affected. OFLC is actively working to manage its operating costs and looking to realise efficiencies. We will continue to monitor OFLC's financial performance.

Environment, systems, and controls

We assessed and graded the environment, systems, and controls for managing and reporting financial information for 62 Crown entities and service performance information for 61 Crown entities in 2011/12.25 See Appendix 1 for an explanation of the grading scale.

A number of new Crown entities were assessed for the first time:

  • the Financial Markets Authority (FMA);
  • the External Reporting Board (XRB);
  • the Environmental Protection Authority (EPA); and
  • Education New Zealand.

Against the three aspects, three of the four new entities were assessed as "Very good" or "Good". We note in other Parts the challenges and risks arising from change, including structural change. The challenges of integrating systems and processes also carry risks. For the EPA and FMA, the establishment processes were able to build on existing systems and processes of predecessor organisations, which may have helped to maintain systems and controls.

Education New Zealand, established on 1 September 2011, was graded "Needs improvement" across all aspects. The issues identified by the auditor reflect the transitional issues associated with establishing an organisation and relate to staffing, systems, and organisational structure. The entity inherited systems, staff, assets and liabilities, and intellectual property from the Education New Zealand Trust, the Ministry of Education, and New Zealand Trade and Enterprise.

We continue to be interested in the effects and management of change within the public sector. Our appointed auditors will consider the risks and issues associated with change and reflect that in their audit work and reporting.

Management control environment

Figure 6 shows the results of our assessment of Crown entities' management control environment from 2006/07 to 2011/12. Overall, the results for 2011/12 show that Crown entities have generally sound management control environments. Of the 62 Crown entities, 42 (68%) were assessed as having "Very good" management control environments, with another 15 (24%) graded as "Good".

Figure 6
Management control environment – grades for the Crown entities assessed from 2006/07 to 2011/12

Figure 6 Management control environment – grades for the Crown entities assessed from 2006/07 to 2011/12.

In terms of trends, controls have strengthened, with six entities moving from "Good" to "Very good" grades in 2011/12. These entities were:

  • the Broadcasting Standards Authority;
  • the Electoral Commission;
  • the New Zealand Film Commission;
  • the New Zealand Walking Access Commission;
  • OFLC; and
  • Public Trust.

Five entities were assessed as "Needs improvement". Looking at the recommendations supporting the assessment, we note that the issues and recommendations for each entity vary:

  • EQC – Although the auditors found that an appropriate level of governance existed, a number of recommended improvements still have to be addressed. We acknowledge that both 2010/11 and 2011/12 were extraordinary years for EQC, requiring a number of pragmatic responses and structural changes to address pressing issues. In our audit, we have advised management and the Board of the need to improve IT controls, and processes for the Housing Repair Programme.
  • Education New Zealand – As noted in paragraph 7.39, the auditor's assessment and recommendations reflect the fact that the entity was established on 1 September 2011 and that many of its policies and procedures require further work to ensure that they are relevant and appropriate. Internal controls are also underdeveloped. We have briefed Education New Zealand's Audit and Risk Committee and Board on our major recommendations and will monitor progress during the next financial year.
  • Museum of New Zealand Te Papa Tongarewa (Te Papa) – A number of recommended improvements have yet to be addressed to strengthen management systems and controls, including:
    • preparing an asset management plan;
    • preparing and adopting a collections stocktake policy; and
    • implementing recommendations for procurement policy.
  • Real Estate Agents Authority – Areas for improvement include the need to enhance the reporting capability of the Authority's complaints and licensing system.
  • Te Taura Whiri i Te Reo Māori (the Māori Language Commission) – Work is required to improve expenditure policies and guidance.

We note that, in the last two years, the slight increase in the proportion of Crown entities being assessed as "Needs improvement" simply reflects the addition of the newly established Education New Zealand.

Financial information systems and controls

Figure 7 shows the results for our assessments of Crown entities' financial information systems and controls from 2006/07 to 2011/12. In 2011/12, 40 (64%) Crown entities were assessed as "Very good" and 19 (31%) as "Good".

Figure 7
Financial information systems and controls – grades for the Crown entities assessed from 2006/07 to 2011/12

Figure 7 Financial information systems and controls – grades for the Crown entities assessed from 2006/07 to 2011/12.

The decline in "Good" grades last year mainly reflects the improvement in grade from "Good" to "Very good" for the:

  • Arts Council of New Zealand Toi Aotearoa (Creative New Zealand);
  • Electoral Commission;
  • Independent Police Conduct Authority;
  • New Zealand Blood Service;
  • New Zealand Film Commission;
  • New Zealand Historic Places Trust; and
  • Takeovers Panel.

However, it also reflects the downward movement from "Good" to "Needs improvement" for two entities:

  • Real Estate Agents Authority – The Authority was still working through issues related to its financial management system and the calculation of operating levies and deferred revenue; and
  • Te Papa – The auditors identified weaknesses in some major financial controls in the early part of the year and noted that major controls were reinstated for the year-end audit.

For completeness, it is also useful to note that some entities' grades moved from "Very good" to "Good" - for example:

  • CAA – auditors reviewed the effect of CAA's change programme on systems and controls, and found issues regarding reconciliations, masterfile changes reviews, and the timely review of journals. CAA also had difficulty obtaining payroll reports from its replaced payroll system.
  • The Electricity Authority – auditors noted weaknesses in the approval of journals and asset additions.

The Health Quality and Safety Commission improved its grade from "Needs improvement" to "Good".

We brief management and the relevant Boards if our auditors identify deficiencies or recommend improvements. We will review the entities' progress with addressing issues and expect those issues to be addressed during 2012/13.

As noted in paragraph 7.11, we did not grade the five entities disestablished with effect from I July 2012. For similar reasons, we did not assess the Road Safety Trust, which is to be wound up by 30 June 2013. Assessing fewer entities affected the trends noted above.

Service performance information and associated systems and controls

Figure 8 shows the trends for the grades for Crown entities' service performance information and associated system and controls since 2008/09. In 2011/12, 42 (69%) Crown entities were graded as "Good" against this aspect and 17 (28%) as "Needs improvement." In 2010/11, we reported that 28 Crown entities were assessed as "Needs improvement".

For the year ended 30 June 2012, two (3%) Crown entities, the New Zealand Artificial Limb Board and the New Zealand Blood Service, were graded "Very good", marking an improvement on previous assessments. In 2010/11, we reported that CHFA was assessed as "Very good" against this aspect. However, because CHFA was disestablished with effect from 1 July 2012, we did not grade it in 2011/12.

We are encouraged by the continued progress of entities that are working to improve their service performance information. In 2012/13, we will apply the Auditor-General's revised auditing standard for auditing service performance reports to the remaining, generally smaller, departments and Crown entities.

For more information on the quality of performance reporting as we have continued to phase in the Auditor-General's revised auditing standard, see Part 9.

Figure 8
Service performance information and associated systems and controls – grades for the Crown entities assessed from 2008/09 to 2011/12

Figure 8 Service performance information and associated systems and controls – grades for the Crown entities assessed from 2008/09 to 2011/12.

21: For the results of our audits of other entities, see our reports: Education sector: Results of the 2011 audits, Crown research institutes: Results of the 2011/12 audits, and Health sector: Results of the 2011/12 audits.

22: Many Crown entities also have their own enabling legislation.

23: For more results about our audit of NZTA, see our sector report: Transport sector: Results of the 2011/12 audits.

24: The main sources of guidance are the Mandatory Rules for Procurement by Departments, which were endorsed by Cabinet on 18 April 2006, our good practice guides (especially Public sector purchases, grants, and gifts: Managing funding arrangement with external parties (2008) and Procurement guidance for public entities (2008)), and Mastering procurement: A structured approach to strategic procurement (2011, available at

25: Note that the Standards Council of New Zealand does not prepare a Statement of Service Performance because the Council has obtained a reporting exemption under section 143 of the Crown Entities Act 2004. Therefore, we assess only the Council's management control environment and financial information systems and controls.

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