Part 1: The operating environment for central government

Central government: Results of the 2013/14 audits.

This Part briefly describes the operating environment for central government agencies in 2013/14 to provide some context for this report – in particular, for our audit of the financial statements of the Government of New Zealand (the Government's financial statements).1

Overall, 2013/14 was marked by the continuity of the Government's high-level priorities. This includes a continued focus on responsible financial management and better public sector performance, including the continued drive for greater effectiveness and efficiency. However, some of the governance and institutional arrangements changed in 2013/14. These changes were designed to help the public sector operate more effectively.

Why is the operating environment important for an audit of the Government's financial statements?

The Government's financial statements represent a consolidation of all the many and varied organisations associated with central government – including government departments, State-owned enterprises, Crown entities (including schools, Crown research institutes, and district health boards), mixed ownership model companies, Offices of Parliament, Fish and Game Councils, the New Zealand Superannuation Fund, and the Reserve Bank of New Zealand.

We conduct an annual audit of each of these organisations. These individual audits then inform our work on the Government's financial statements. To make sure we are aware of significant issues and transactions for the Government's financial statements, we rank organisations into risk categories according to their size, their nature, and the sensitivity of their transactions. When we audit the Government's financial statements, we make sure that we have an audit return from the auditor of each organisation that we judged as significant.

Our annual audits of public sector organisations do not operate in a vacuum. They take into account the context for the organisation. The Government's priorities and expectations influence how organisations operate. In turn, this affects how we select and examine particular issues and risks as part of our annual audit work. This is why the operating environment matters.

Budget 2013: Setting the scene for 2013/14

Each year, the Budget sets clear parameters for the operations of public sector organisations. The Budget outlines the Government's spending intentions, what agencies are expected to deliver, and what funding they will have. This is the backdrop for our audit of the Government's financial statements, bearing in mind that the financial statements outline what the Government in a given financial year has earned, from what sources (such as taxes), what it has spent and on what (such as health services, schools, infrastructure), and changes to what it owns (assets) and owes (liabilities).

For 2013/14, the 2013 Budget reconfirmed the four priorities the Government had set for its term:

  • responsibly managing the Government's finances;
  • building a more productive and competitive economy;
  • delivering better public services within tight financial constraints; and
  • supporting the rebuilding of Christchurch.

Financial management

The Government's first priority is particularly relevant in the context of the Government's financial statements. The Government has set a target of returning to surplus in 2014/15, measured by the total Crown operating balance before gains and losses.

The Government's financial statements provide a comparison with the financial forecasts in the Economic and Fiscal Updates and with the financial statements of the previous year. The financial statements present a snapshot of the progress the Government has made in implementing its financial strategy. This allows Parliament to consider and debate the Government's financial performance and direction.

Set in that context, knowing that the Government's financial statements fairly reflect the Government's financial performance and position is a key enabler for a functioning system of public accountability. My audit report, described in Part 2 provides this assurance.

Better Public Services

The Government has reaffirmed its commitment to the Better Public Services programme (BPS) and its 10 specific targets that agencies are expected to deliver by 2017. The Government expects the public sector to improve service delivery and transform the way it operates. Major components include:

  • a focus on results;
  • people-centred service design and delivery;
  • effective spending and delivering efficiencies; and
  • building capability to deliver services in the best way.

The approach to BPS includes strong guidance and oversight from the "Centre". The State Services Commission (SSC), the Treasury, and the Department of the Prime Minister and Cabinet have assumed the role of working together as a "Corporate Centre". This "Centre" is responsible for providing strong and co-ordinated leadership to oversee and improve state sector performance. The SSC's Performance Improvement Framework (PIF) programme continued to be used to analyse performance challenges at an agency and system level. A State Sector Reform Leadership Group was also set up to help progress system reform.

The "Centre" has also implemented functional leadership for procurement, information and communications technology (ICT), and property management. The objective of functional leadership is to improve the effectiveness of common business functions and reduce their overall costs. For example, the Government Chief Information Officer exercises ICT functional leadership, and the Government ICT Strategy and Action Plan to 2017 sets out a programme of actions to help transform service delivery and co-ordinate ICT investment.

Under BPS, agencies are expected to achieve greater effectiveness and efficiency in delivering public services. As part of its work, the SSC monitors the size of the public sector. A cap of 36,475 full-time equivalent core government administration positions remained in place in 2013/14.

Our audit of the Government's financial statements is focused on financial reporting. It does not provide insights into the effectiveness and efficiency of service delivery. We cover these aspects of public sector performance through agency or sector-specific pieces of work. For example, under our Service delivery theme, we have looked into how the Accident Compensation Corporation and the Ministry of Social Development manage complaints and cases. We have also looked at the set-up of Central Agencies Shared Services. We will publish more reports on this theme during the next few months.

Rebuilding Christchurch

The priority of rebuilding Christchurch also provides important context for the Government's financial statements. In its August Pre-Election Economic and Fiscal Update 2014, the Treasury estimated the total cost to the Crown would amount to $15.8 billion, with some costs falling outside the 2018 forecast period. More than $12 billion of the estimated costs are classed as operating expenditure. Under the Earthquake Commission Act, if the assets of the Earthquake Commission are not sufficient to meet its liabilities, the Crown is responsible for funding the deficiency by way of a grant or advance.

Reflecting the gravity of the event for the whole of New Zealand, it is important that the Government's financial statements appropriately account for the costs incurred to date and any liabilities related to the Canterbury earthquakes. Since 2011, we have discussed the significance of uncertainties arising from the Canterbury earthquakes in our audit reports on the Government's financial statements. This year is no different. This report covers in some detail significant matters related to the Canterbury earthquakes, and associated accounting issues, in paragraphs 2.11-2.25.

Changes to institutional and governance settings

In 2013, the Government made significant institutional changes to the state services. Amendments were made to the Public Finance Act 1989 (PFA), the State Sector Act 1988, and the Crown Entities Act 2004. The changes are closely related to the BPS agenda. They are intended to encourage greater collaboration between agencies. They are also intended to improve leadership throughout the system, at the sector level and at the agency level. In addition, the changes are designed to emphasise stewardship responsibilities. For example, sections 34, 35, and 45C of the PFA now specify in some detail the matters for which a chief executive must take formal responsibility.

The amendments to the PFA change aspects of the appropriation system. They also change the way in which departments can present information about their financial and service performance. Most of the changes take effect in 2014/15. However, in 2013/14, some big central government departments took up the option of putting in place Multi-Category Appropriations. These are designed to give departments greater flexibility in how they allocate resources between related categories of spending and to support a focus on a common purpose. New arrangements for the administration and use of appropriations between different departments have the same purpose of enhancing flexibility of resource use.

Reforms to public finance and state sector legislation have implications for governance roles and accountability within the core public sector. Because the Government's financial statements report on the aggregate financial position and flows, we do not expect these institutional changes to affect the Government's financial statements. However, we expect to see an effect on individual agencies and sectors.

We will monitor departments' use of the new arrangements and whether they comply with public finance requirements as part of our Controller work. Our annual audits will allow us to observe reporting changes and how agencies operating in a sector report on their collective performance. We expect to report on these matters as part of our 2014/15 work on governance and accountability.

1: The audited financial statements of the Government are published by the Treasury each year – see Financial Statements of the Government of New Zealand for the year ended 30 June 2014.

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