Part 1: Introduction

Local government: Results of the 2011/12 audits.

The Public Audit Act 2001 requires the Auditor-General to report on matters arising from carrying out her functions and duties and exercising her powers.

In 2012, we audited the 2011/12 annual report of each of the 78 regional and territorial local authorities and the annual reports of council-controlled organisations (CCOs) and other subsidiaries of local authorities. We also audit other local government-related entities, including energy companies, cemeteries and administering bodies, and licensing trusts. The audit results of central government entities are set out in a separate report.

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 improving trend of local authorities meeting their legislative obligations.

In 2011/12, only one local authority did not adopt its annual report by the statutory deadline, compared with eight in 2010/11 and seven in 2009/10.

Three local authorities did not provide their community with audited summaries of their annual report within one month of adopting their annual report. This is a breach of the statutory deadline.

Although more local authorities met their statutory obligations for 2011/12 than for 2010/11, we are still concerned that breaches happened. Local authorities that miss the statutory deadline fail to give their stakeholders and community the timely information that they are entitled to receive.

Financial results in the 2011/12 annual reports of local authorities

Consistent with last year, we have reported our observations on the financial performance and financial position of local authorities, based on information in their audited financial statements.

Historically, our approach had been to consider the financial data, primarily based on trends, without a method for interpreting, analysing, and assessing the information. However, in this report, we continue with the approach in our December 2012 report, Matters arising from the 2012-22 local authority long-term plans (the long-term plan report), where we used a set of indicators to assess financial performance and potential for financial risks and uncertainty.

Using these indicators, we conclude that local authorities are:

  • operating sustainably and appear to be resilient to short-term uncertainties; and
  • improving the accuracy of delivery against their forecasting.

In 2011/12, local authorities had combined operating expenditure of $8.1 billion and capital expenditure of $2.3 billion. Local authorities' combined operating revenue was $8.3 billion, of which revenue from rates made up 55%.

Local authorities had combined debt of $8.5 billion as at 30 June 2012. This is an increase of nearly $0.9 billion on the June 2011 debt level. Most of the increase related to Auckland Council.

Financial reporting changes

From 2012/13, the transparency, accountability, and financial management (TAFM) amendments to the Local Government Act 2002 (the Act) will affect the content of local authorities' annual reports. Among the changes are additional disclosure requirements, including funding impact statements for each group of activities and for the local authority as a whole, and disclosures on internal borrowing and reserves.

In the next two to three years, local authorities, their CCOs, and other public entities will move to a new "multi-standards approach" for financial reporting. The External Reporting Board, which is responsible for preparing and setting standards for financial reporting, is leading this work. The approach distinguishes different tiers of reporting for classes of entities, with each having different financial reporting requirements. The changes are expected to increasingly provide useful accountability information to ratepayers and other users of public entity financial statements.

Activities to reduce and manage greenhouse gases

During the last three years, we have collected and analysed how local authorities measure, reduce, and offset their greenhouse gas emissions. Although there is no explicit requirement for local authorities to measure or reduce the environmental effects of their activities, some have chosen to measure emissions from their activities, consider their waste management practices, or mitigate the environmental effects if it makes business sense to do so.

Since 1 January 2013, local authorities with waste disposal facilities have had to take part in the New Zealand Emissions Trading Scheme (the ETS). However, small and remote landfills have been granted an exemption from all surrender and reporting obligations under the emissions trading scheme. Since January 2013, local authorities with landfills that do not meet the exemption criteria have been required to pay a price for each tonne of methane emitted. As a result, local authorities may have increased user changes and investigated ways to reduce their liabilities, or focused on minimising waste.

We continue to see about one third of local authorities measuring their greenhouse gas emissions, but some of these local authorities have no plans to reduce their emissions or targets for reducing their emissions. Overall, it has been difficult to discern strong trends or clearly identifiable effects of the emissions trading scheme, although some local authorities have a strong commitment to environmental sustainability and are acting in keeping with this.

Managing leaky building liabilities

As in previous years, we have reported on the effect of leaky building liabilities, which is still a major matter for many local authorities. Auckland Council, Christchurch City Council, Tauranga City Council, and Wellington City Council are the local authorities most affected.

The challenge for local authorities in managing these liabilities has increased since we reported last year. This is a result of the Supreme Court ruling in October 2012 that local authorities' duty of care extends to all residential and commercial buildings.

In general, local authorities carried out significant reviews of their provisions for their leaky building liability when they prepared their 2012-22 long-term plans. Of the four local authorities that we considered, the combined provision for leaky building liability as at 30 June 2012 decreased by a net $32 million to $482 million compared with June 2011. This was mainly attributed to a decrease of $39 million in Auckland Council's provision.

Our work in local government

In Parts 8, 9, and 10, we outline our performance audit work, other work completed by the Office, inquiries, and our areas of future focus in local government. Among other matters, we intend to consider the governance and accountability of CCOs and other subsidiaries of local authorities.

We continue to receive many requests for inquiries into local government matters from members of Parliament, public entities, and the public.

Non-standard audit reports

We issued 647 audit reports for local government entities in 2012 559 standard audit reports and 88 non-standard audit reports. This figure does not include the 77 audit reports we issued on local authorities' 2012-22 long-term plans, which we have reported on in our long-term plan report.

This year, some audit reports included "emphasis of matter" and "other matter" paragraphs – drawing readers' attention to disclosures on financial uncertainty/going concern or use of a disestablishment basis to prepare the financial statements. We issued non-standard audit reports for some public entities where we could not get enough assurance about the completeness of revenue and/or expenditure. Most of these were small public entities, such as cemeteries and administering bodies, but 21 were CCOs.

We issued disclaimers of opinion on seven entities, including Christchurch City Council and Group. With Christchurch City Council and Group, we were unable to form an opinion on the Group's financial statements because of the significant damage to assets caused by the Canterbury earthquakes.

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