Part 4: Government departments' audit results

Central government: Results of the 2012/13 audits (Volume 2).

4.1
In this Part, we report on the audit results of government departments in 2012/13, including our assessments of their management control environments, financial information systems and controls, and service performance information and associated systems and controls.

Audit reports for 2012/13

4.2
We audited 37 government departments in 2012/13, and issued 34 unmodified opinions for the year ended 30 June 2013.

Observations and matters arising from the audits

4.3
During our audit work, we gain insights and perspectives on the various factors and challenges facing public entities and about the initiatives for responding to these and driving improvement. In this Part, we set out some of our observations and matters raised by auditors working with government departments.

Restructuring and business transformations

4.4
A large number of government departments have undergone significant restructuring or business transformations in recent years. Restructuring and business transformations include:

  • mergers of departments, such as the creation of the Ministry of Business, Innovation and Employment (MBIE) out of the former Department of Building and Housing, the Ministry of Economic Development, the Department of Labour, and the Ministry of Science and Innovation;
  • combining the back-office functions of more than one department into shared services, such as Central Agencies Shared Services (CASS), which provides finance, information systems, and human resources support to the Treasury, the SSC, and DPMC;
  • internal restructuring of departments to align with new business models, such as the Modernisation Programme conducted by the Ministry of Foreign Affairs and Trade (MFAT); and
  • the introduction of new systems and processes within a department, such as the new Joint Border Management System being implemented by the New Zealand Customs Service (Customs).

4.5
There are a number of risks associated with organisational restructure and business transformations. These include the risk of fraud, errors, and the loss of core capability. The areas we focused on during our 2012/13 audits included:

  • ensuring that the entity has maintained an effective control environment, which includes having robust internal controls and processes that are consistently applied, especially where there is loss of significant personnel or where there are changes in staff morale;
  • ensuring that appropriate delegations are in place through the transition period;
  • ensuring that there is appropriate management and execution of the change programme, including risk identification, management and reporting;
  • reviewing severance, redundancy, and retention payments for any indication of waste and lack of probity or financial prudence; and
  • ensuring that the implications of the restructure or business transformation are correctly treated in the financial statements, including any restructuring provisions.

4.6
Generally, we found that restructures and business transformations had been reasonably well managed by departments in ensuring that appropriate systems and controls were maintained during the change process.

4.7
The most significant restructure in 2012/13 was the formation of MBIE, established on 1 July 2012 by the merger of four departments:

  • the Ministry of Economic Development;
  • the Ministry of Science and Innovation;
  • the Department of Labour; and
  • the Department of Building and Housing.

4.8
Our audit of the first year of operations for MBIE found that a number of issues needed to be addressed. We assessed MBIE's management control environment, financial information systems and controls, and service performance information and associated systems and controls as "Needs improvement".

4.9
Many of these issues are attributable to the speed of the merger, which meant that MBIE used the underlying systems and controls from the four legacy departments rather than having one coherent and consistent system. Having consistent policies and procedures is important for maintaining an effective control environment, and MBIE is committed to making the changes required to address these issues.

4.10
Restructuring and business transformations are generally intended to either improve service delivery or produce savings. Departments need to ensure that the outcomes from restructures and business transformations can be measured through robust systems that allow for timely and accurate reporting.

Governance and accountability

4.11
Governance and accountability arrangements are important to the decision-making and risk management processes of an entity. Weaknesses in governance and accountability systems can result in a breakdown in systems and controls, an increase in the risk of fraud, and expose the entity to significant reputational risk. Maintaining strong governance and accountability systems is particularly important during times of significant structural change and transformation, which many departments are currently experiencing.

4.12
Risk management is an essential part of good governance and accountability. Good risk management policies and procedures help departments identify the risky areas and develop an appropriate approach to mitigating the risks. We found that many departments need to reassess and formalise their risk management policies, which includes the process for reporting risks to management.

4.13
In 2008, we produced a good practice guide, Audit Committees in the Public Sector, on the benefits of audit and risk committees for good governance and accountability. Accountability for good governance in a department lies with the chief executive, but audit and risk committees can provide independent advice on strategic, performance, assurance, and compliance matters. We continue to recommend that departments consider whether an audit and risk committee would help with their governance and accountability.

4.14
Governance and accountability will be a focus for us during 2014/15. This will involve understanding the strengths and weaknesses of governance arrangements and accountability systems within government departments, including systems and processes that support good decision-making, delegations of authority, and risk-management processes.

Security and privacy issues

4.15
There were several high-profile security and privacy issues in the public sector in 2012/13. Auditors have found that, in general, security and privacy policies in departments are not well developed.

4.16
Through the Better Public Services programme, the Government wants to see an improvement in the way New Zealanders interact with the Government by increasing the number of transactions that can be completed in a digital environment. It is within this context that departments are moving more information into the digital environment – but this comes with significant risks to information security. We have found that many government departments have poor password settings and password policies, which are an important control for information security.

4.17
Part 8 contains more commentary on security and privacy issues – it sets out our observations from information systems work carried out as part of our annual audits.

Asset management

4.18
The size and level of investment in assets is significant to the Financial Statements of the Government. (The Crown owns $110 billion of property, plant, and equipment.) We found that there is scope to improve asset management policies and practices in the public sector.

4.19
In June 2013, we published Managing Public Assets. We reported that, for many public entities, asset condition was not being regularly reported to decision-makers. Good information about assets and future asset needs is essential for managing maintenance and renewal needs and future asset investments.

4.20
Financial constraints in the public sector have put pressure on departments' ability to ensure that assets are well maintained – even though maintaining assets is essential to departments' service delivery. For example, the New Zealand Defence Force needs to manage risks that have arisen from deferred maintenance, compounded by tight financial pressures. We understand that the New Zealand Defence Force now has a plan in place to deal with this.

4.21
We will continue to monitor asset management during 2013/14 and encourage good asset management practice in government departments and in the public sector generally.

Procurement and contract management

4.22
With financial constraints and a focus on better public services and value for money, procurement continues to be an area of audit interest.

4.23
The quality of procurement practices continues to vary in government departments. There is progress towards improving procurement practices, but there is still room for improvement. Examples of progress include:

  • The Inland Revenue Department has made good progress in adopting recommendations made by an external reviewer in 2010, with increased procurement capability and capacity, a new procurement policy, and the development of a new contract management system.
  • The New Zealand Defence Force commissioned a comprehensive review of the effectiveness and maturity of its procurement process and has prepared a plan to address the issues identified.
  • The Ministry of Justice has established a National Procurement Team to provide policy advice and lead the procurement strategy. The team is new and yet to prepare a procurement framework and plan but the introduction of the team and focus is encouraging.

4.24
An issue for some departments has been consistently applying procurement processes. For example, testing performed at the Ministry of Social Development found examples of excellent procurement record-keeping for some projects but also found some inconsistency in record-keeping, and that it was not always evident how a process had been carried out. The Ministry intends to improve its processes, which will include updating its procurement manual and providing better training.

4.25
The Ministry of Defence has a significant procurement function in purchasing large items of specialist military equipment for the New Zealand Defence Force. Although its procurement systems are sound and its procurement employees competent, our review of its procurement function found that it was lean on staff, considering the scale and value of procurement carried out. This is not uncommon – other government departments have a shortage of skilled and experienced procurement practitioners and under-resourced procurement functions. MFAT has implemented the recommendations of a procurement review, which has included recruiting procurement specialists to support its procurement function.

4.26
As part of our 2012/13 work programme, we carried out a performance audit to examine how effectively and efficiently the Canterbury Earthquake Recovery Authority (CERA), New Zealand Transport Agency, and the Christchurch City Council are managing to rebuild Christchurch's horizontal infrastructure through the Stronger Christchurch Infrastructure Rebuild Team (SCIRT). We found that the operational design of SCIRT created efficiencies that facilitated good oversight and reduced costs. SCIRT had a consistent approach to pricing, sound risk management, and used the collective experience and expertise of the various entities that make up SCIRT.

4.27
We also carried out an inquiry into the Government's decision to negotiate with SkyCity Entertainment Group Limited for an international convention centre. The inquiry highlighted the importance of having sound procedures and policies for procurement, and the requirement for good documentation to support decisions. Although there was no evidence that the final decision to negotiate with SkyCity was influenced by any inappropriate considerations, the quality of support by MBIE for decisions fell short of what we would expect, especially considering that it is the lead government department on procurement and commercial matters.

4.28
A public-private partnership (PPP) is a form of procurement that some public entities use as an alternative to traditional methods of procurement. The Department of Corrections is using a PPP for the construction of Wiri Prison. Our auditors noted that accounting for this asset is complex, and encouraged the Department to review and confirm the accounting treatment for the recognition of the Prison asset and liability during and after its construction, the borrowing costs relating to the liability, and unitary payments on the contract.

4.29
The New Zealand Transport Agency has received support from the Government to proceed with a PPP for construction of the Transmission Gully section of the Wellington Northern Corridor. Although this is still in the early stages of procurement, our auditors will continue to monitor this to ensure that there is strong project management and that the project is correctly accounted for.

Service performance reporting

4.30
Performance reporting is an integral part of our parliamentary accountability system. It enables Parliament to hold ministers and departments to account, and allows Parliament and the public to assess the performance of departments and how effectively they have used public funds.

4.31
We continue to see improvements in the quality of departments' performance reports. Paragraphs 4.43 to 4.46 set out more information on the service performance information and associated systems and control assessment for government departments.

4.32
There are a number of common reporting issues that we have identified from our audits. These include:

  • Clarity and specificity of measures and targets. For example, we noted that CERA needed to improve its measures and targets so that it is clear on "what we will do, why we will do it, when we will do it, how we will do it". This includes the need to provide clear definitions for certain terms, to ensure that they can be easily understood.
  • The need to rationalise measures to make the reporting on performance useful to the reader. For example, MBIE has a complex vote structure, which had led to it creating many measures. We recommended that MBIE rationalise its measures and focus on important ones, such as quality. We also found that the Ministry of Education has too many measures, which diminish their value to the reader.
  • Having robust systems and controls to ensure that performance data is accurate and complete. For example, we recommended that MFAT continue to improve its business processes and information systems, to ensure that service performance results can be reported through a systematic process rather than requiring manual collection and collation.

4.33
The Ministry of Social Development is moving towards contracting with third parties to achieve outcomes, rather than just producing outputs. The aim is to bring together multiple funding agreements into one document and create a "whole-of-Ministry" way of thinking. We will continue to monitor progress on contracting for outcomes.

4.34
Amendments to the Public Finance Act 1989 were passed in July 2013. The amendments give greater reporting flexibility to government departments for reporting on service performance, such as removing the need to define performance in terms of outcomes, impacts, and outputs, and to encourage reporting as a sector on common goals. These amendments come into force on 1 July 2014, and we will be working with the Treasury and other government departments to help them with this transition.

Environment, systems, and controls

4.35
We assessed and graded the environment, systems, and controls for managing and reporting financial and service performance information for 35 government departments in 2012/13. The summary excludes the assessments for both the Government Communications Security Bureau and the New Zealand Security Intelligence Service. We explain the grading scale in Appendix 2.

Management control environment

Figure 10
Government departments – grades for management control environment, 2006/07 to 2012/13

Figure 10 Government departments – grades for management control environment, 2006/07 to 2012/13.

4.36
The overall trend for government departments is positive. Generally, departments are maintaining good management control environments (see Figure 10), especially those experiencing significant changes in organisational structure and strategy. The Ministry of Women's Affairs improved from "Good" to "Very good". Statistics New Zealand also improved its grade after implementing a business continuity plan and improving its asset management planning.

4.37
Although the trend is positive, there has been an increase in the percentage of entities with "Needs improvement" grades:

  • MBIE – 2012/13 was the first year of operation for MBIE. This assessment reflects the transitional state of its systems and processes, particularly as it looks to prepare consistent policies.
  • Te Puni Kōkiri (the Ministry of Māori Development, or TPK) – TPK was undergoing a strategic review at the time of the audit, which affected the Ministry's ability to set a meaningful performance framework. This is a downgrade from "Good" in 2011/12.
  • CERA – Improvements have been made on 2011/12 but more improvements need to be made, including improvements to the management of information systems.

Financial information systems and controls

Figure 11
Government departments – grades for financial information systems and controls, 2006/07 to 2012/13

Figure 11 Government departments – grades for financial information systems and controls, 2006/07 to 2012/13.

4.38
As Figure 11 shows, 2012/13 saw a significant improvement in our assessment of government departments' financial information systems and controls.

4.39
The SSC and Customs have improved from "Good" to "Very good". The SSC has increased its grade as a result of improvements to reporting and budgeting processes and appropriate financial training for managers. The New Zealand Defence Force and Parliamentary Service also improved their grade in 2012/13 from "Needs improvement" to "Good". Although these entities require additional improvements to their financial systems and controls, this grade shows that they are resolving system deficiencies identified in previous periods.

4.40
MBIE has been assessed as "Needs improvement" in its first year of operation. This grade reflects the difficulty of merging four systems, inherited from the four departments that became MBIE, into one coherent and consistent system.

4.41
The Ministry of Education was downgraded from "Good" to "Needs improvement" in 2012/13. The primary reason for this is the significant issues with the new payroll service, which has resulted in inaccurate payments.

4.42
TPK's grade moved from "Very good" to "Good". This was as a result of difficulties in delivering good quality and timely financial information for the audit.

Service performance information and associated systems and controls

4.43
Figure 12 shows the results of our assessment of departments' service performance information and associated systems and controls during the past five years.

Figure 12
Government departments – grades for service performance information and associated systems and controls, 2008/09 to 2012/13

Figure 12 Government departments – grades for service performance information and associated systems and controls, 2008/09 to 2012/13.

4.44
The Inland Revenue Department and the Ministry for the Environment maintained the grade of "Very good" that they achieved in 2011/12 (the first departments to achieve this grade). Inland Revenue had strong links between all levels of its performance measurement framework, resulting in clear and logical reporting.

4.45
MBIE was graded as "Needs improvement", reflecting its first year of operations. MBIE has a large number of votes, which makes its reporting complicated and administratively demanding. We recommended that it rationalise this complex vote structure and the performance measures, focusing on the measures that target quality.

4.46
The Ministry for Culture and Heritage, Office of the Clerk of the House of Representatives, and Parliamentary Service all improved from "Needs improvement" to "Good". It is pleasing to see that departments were continuing to work on their performance measurement frameworks and reporting in 2012/13.

10: Controller and Auditor-General (2013), Effectiveness and efficiency of arrangements to repair pipes and roads in Christchurch, Wellington.

11: Controller and Auditor-General (2013), Inquiry into the Government's decision to negotiate with SkyCity Entertainment Group Limited for an international convention centre, Wellington.

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