Part 21: The accountability system for local authorities

21.1
In this Part, we briefly summarise the main agencies that have some oversight or accountability role for local authorities. We then explain the different roles and business units of the Auditor-General in more detail, because they had the most involvement in matters involving the wastewater project. In the Parts that follow, we assess in detail the work that was carried out by:

• Audit New Zealand, as the appointed auditor for KDC until 2012; and
• the Office of the Auditor-General (OAG) and other agencies, who each received correspondence raising concerns about KDC and the wastewater project at various points.

The main agencies and their roles

21.2
No single agency oversees all of the work of local authorities. Local authorities are independent statutory bodies governed by directly elected members. As such, they are primarily accountable to the electorate through the democratic process.

21.3
Several agencies have some role in scrutinising the work of local authorities and holding them to account. However, each of these agencies does so within the limits of their role and statutory mandate.

21.4
Most of the work of accountability agencies involves reviewing the work of local authorities and reporting an independent view of that work, which helps to inform the electorate when it votes. Most agencies have little, if any, capacity to directly intervene in what local authorities do. It is also fundamental that accountability agencies respect the right of the elected members to make decisions and set policy. Accountability agencies therefore focus on reasonableness and procedural fairness to ensure that they do not usurp the proper role of the governing body.

The Auditor-General

21.5
The primary role of the Auditor-General is to report on how public money has been used and what has been achieved with it. The focus is on providing audit assurance on public accountability reports and selected areas of public entity performance. The Auditor-General has associated powers to inquire when serious concerns are raised about how resources have been used. The different parts of the Auditor-General's work are discussed in more detail in paragraphs 21.20-21.37.

Ombudsman

21.6
An Ombudsman investigates the administrative decisions, recommendations, and acts or omissions of central and local government agencies as they affect individuals or bodies in their personal capacity. Investigations are conducted under the Ombudsmen Act 1975. Investigations can be conducted after an Ombudsman receives a complaint or on an Ombudsman's own initiative.

21.7
An Ombudsman generally cannot investigate complaints if the complainant has a right of appeal or review to a court or tribunal on the merits of their case. For local authorities, an Ombudsman can investigate decisions made by a committee of the Council or advice given by a Council employee to the Council. However, an Ombudsman cannot investigate decisions or actions of the Council itself. This restriction ensures that the focus is on "matters of administration" rather than the policy choices of the governing body.

21.8
An Ombudsman may refuse to investigate a complaint if there is another remedy or right of appeal that it would have been reasonable for the complainant to pursue or if, during an investigation, it appears that any further investigation is unnecessary.

21.9
An Ombudsman's initial consideration is whether it is the agency best placed to deal with the complaint or whether it should refer the complaint another agency. The first step in assessing whether the matter falls within its jurisdiction is to obtain information relevant to the complaint from the entity complained about, because the complainant might not have had access to all relevant information.

21.10
The Office of the Ombudsman is aware that the effectiveness of this approach depends on it obtaining full and accurate information from the agency concerned.

21.11
The Offices of the Ombudsman and the Auditor-General will sometimes consult each another on correspondence one has received. This is because the Ombudsman is often better placed to deal with a matter affecting an individual and the Auditor-General with systemic issues.

Department of Internal Affairs and the Minister of Local Government

21.12
The primary function of the Department of Internal Affairs (the Department) for local government is to provide support to the Minister of Local Government (the Minister) and to administer the relevant legislation. The Minister:

• leads the relationship between central and local government;
• is responsible for policy issues about the constitution, structure, accountability, and funding of local government; and
• has primary responsibility for legislation concerned with the system of local government and its overall efficiency.

21.13
However, the Minister is not answerable for local government decisions and cannot intervene in them. A local authority is not accountable to central government. Instead, it is accountable to its ratepayers and residents.

21.14
Under the Local Government Act 2002, the Minister can, in certain circumstances, appoint ministerial reviews and commissioners to act in place of elected members if they cannot perform their functions or if they are not properly performing their functions. Part of the Department's concern, therefore, is to assess whether there is evidence that would support the Minister's intervention.

21.15
At the time of the events with which this inquiry is concerned, the Minister's powers in this respect were blunt. Unless the local authority asked the Minister for assistance, the statutory threshold for intervention was high. Intervention was considered only if there was significant evidence that a local authority had a problem that it could not resolve on its own and that the problem involved serious organisational failure, mismanagement, or misgovernance.

New Zealand Police and the Serious Fraud Office

21.16
The New Zealand Police have general responsibility for investigating possible criminal offences. The Serious Fraud Office is a separate organisation with specific responsibility for investigating and prosecuting serious or complex fraud.

Other agencies

21.17
As well as the agencies described above, many other agencies are involved in overseeing specific aspects of the work of local authorities.

21.18
The courts provide a forum for deciding disputes and resolving questions of law involving public entities. In particular, judicial review is a form of legal action that has been specifically developed to enable the courts to rule on whether public sector entities are acting lawfully.

21.19
Within central government, the State Services Commission has the power to carry out inquiries into the performance and conduct of state sector organisations. There is no equivalent of the State Services Commission for local government.

The Auditor-General's overall role and structure

21.20
The Auditor-General is an Officer of Parliament. The primary function of the Auditor-General is to audit the financial and other information that public entities are required to have audited. The Auditor-General also has discretion to carry out related assurance work, performance audits, and inquiries into how entities are using their resources.

21.21
In carrying out these roles, the Auditor-General must act independently of central and local government and of public entities.

21.22
The Auditor-General's main power is to report her findings to Parliament and to the public generally. The Auditor-General has no direct powers to intervene in the actions public entities take or the decisions they make. The Public Audit Act 2001 specifically prohibits the Auditor-General from questioning the merits of a policy with which a public entity must comply. Nor is the Auditor-General able to make a determination of legality – legal issues can only be finally decided by a court.

21.23
The organisation supporting the Auditor-General is made up of three business units – the OAG, Audit New Zealand, and a Corporate Service Team that supports both units. The Auditor-General also contracts audit service providers and other expertise from the private sector.

21.24
Audit and assurance work is funded by charging fees to the entities being audited. Funding for performance audits and inquiries comes from Parliament. The appropriation for performance audits and inquiries for each of the three years from 2009/10 to 2011/12 was $6.587 million.

What the Office of the Auditor-General does

Oversight of annual audits

21.25
The OAG oversees and co-ordinates all annual audit work, sets auditing standards, appoints auditors (either from Audit New Zealand or the private sector), provides technical support to auditors, carries out quality assurance reviews of audit work, and helps to manage the relationship between auditors and public entities and between the Auditor-General and Parliament.

21.26
The OAG analyses and reports the results of annual audit work to Parliament and the public. It also provides support to select committees when they review how public entities have performed.

Performance audits

21.27
A performance audit is a systematic assessment of a specific aspect of a public entity's role or function. A performance audit may consider any of the following:

• whether an entity is carrying out its activities effectively and efficiently;
• whether an entity is complying with its statutory obligations;
• any act or omission resulting in waste; and
• any act or omission appearing to show a lack of probity or financial prudence.

21.28
Performance audits are major projects requiring considerable planning. Topics are carefully selected and set out in an annual work programme, which is finalised after consultation with Parliament and other parties.

Inquiries

21.29
As well as financial audits and performance audits, the Auditor-General has discretion to inquire into any public entity's "use of its resources". The inquiries function is ancillary to the Auditor-General's main work of carrying out annual audits.

21.30
The OAG receives between 200 and 400 requests for an inquiry each year. Managing this correspondence and carrying out formal inquiries into the small number of matters selected for in-depth work comprises 1% or 2% of the Auditor-General's overall work. No team of staff is dedicated to this work. It is regarded as part of the general work of various staff within the OAG. The number of substantial inquiries can vary significantly from year to year. During the last five years, OAG has completed between six and 21 substantial inquiries each year.

21.31
Although an individual's complaint may trigger an Auditor-General's inquiry, the purpose of that inquiry is not to resolve the individual's complaint against a public entity. The primary focus is the accountability of the public entity and lessons for others working in similar areas.

21.32
Given the overall role and expertise of the Auditor-General, the OAG's inquiries generally focus on one or more of the following areas:

• financial impropriety;
• problems with an organisation's overall governance or management; and
• other systemic or significant concerns that may be significant for the organisation, its sector, or the public.

What Audit New Zealand does

21.33
For most public entities, the Auditor-General appoints a particular person to act as the auditor for that entity on her behalf. The appointed auditor is supported by a team of audit staff and the general professional support systems of that person's firm.

21.34
Audit New Zealand is the business unit of the Auditor-General that carries out annual audits and related assurance work for the public entities allocated to it. Audits of other public entities are allocated to private sector audit firms.

21.35
In formal terms, the auditor's role is to give an opinion on whether information produced by a public entity fairly reflects the entity's actual performance. Historically, the focus of audit work was on an entity's financial statements. Nowadays, many public entities are required to report not only financial information but also information explaining how well they have carried out their role and functions. In the public sector, the auditor's role therefore involves auditing both financial and other performance information.

21.36
The essence of the public sector auditor's role is to give an opinion on the reliability of the information the entity has produced. The auditor explains the entity's financial situation, what has been spent, and what has been achieved with that spending.

21.37
All auditors must comply with the auditing standards set by professional bodies when they carry out this work. In the public sector, the Auditor-General also sets some additional auditing standards to take account of the public sector context.