Part 3: The Controller function and the appropriation audit
3.1
The Controller function and appropriation audit are important aspects of the Auditor-General's work. They support the fundamental principle of Parliamentary control over government expenditure.
3.2
Under New Zealand's constitutional and legal system, the Government needs Parliament's approval to:
- make laws;
- impose taxes on people to raise public funds; and
- spend public money.
3.3
In this Part, we explain what the Controller and Auditor-General does to help ensure that Government spending stays within the limits approved by Parliament. In particular, we discuss:
- why the Controller work is important;
- how public spending is authorised;
- who is responsible for ensuring that public funds are spent lawfully;
- the controls and checks over the spending that support our system of parliamentary democracy;
- how unappropriated expenditure can occur;
- breaches of spending authority, including those that occurred during 2013/14; and
- emerging issues.
Why is the "Controller" work important?
3.4
In her role as Controller, the Auditor-General helps maintain the transparency, integrity, and legitimacy of the public financial management system.
3.5
The appropriation system ensures that Parliament, on behalf of the New Zealand electorate, has adequate control over how the Government uses public resources. It also ensures that the Government can be held to account for how it has used those funds.
3.6
Most of the Crown's funding is obtained through taxes. Taxpayers and other New Zealanders want assurance that executive government is spending public money lawfully.
3.7
The Controller and Auditor-General provides an important check on the public financial management system on behalf of Parliament, taxpayers, and the New Zealand public in general. As an Officer of Parliament, the Controller and Auditor-General is independent of executive government. She is able to provide independent assurance to Parliament and the public that the Government's spending is within the rules and that spending outside the rules has been identified and dealt with appropriately.
Who approves the spending of public money, and how?
3.8
Each year, the Government puts forward its spending proposals for the coming financial year in the Budget (usually in May). It formally presents its proposed budget to Parliament in the form of a Bill, called the Appropriation (Main Estimates) Bill, along with various explanatory documents.
3.9
The Bill sets out estimates of what will be spent under each ministerial portfolio – in general, every ministerial portfolio has a corresponding "Vote" in the budget (for example, Vote Health sets out all the spending in that portfolio). Each Vote is made up of several more specific "appropriations", which are descriptions of a particular area of activity and the spending approval sought for that area. Each appropriation has to set out:
- the maximum amount of spending being approved;
- the scope (that is, what the money can be used for); and
- the date on which the appropriation lapses (most appropriations last for one year).
3.10
Once Parliament has considered and passed the Bill, it becomes law and controls Government spending. In general, any spending outside what has been approved in this Act of Parliament will be unlawful.
3.11
Under a permanent legislative authority-type appropriation, the appropriation authority is "permanent" – it does not need to be sought from and approved each year by Parliament.
What happens if things change during the year?
3.12
The system recognises the need for some flexibility to respond to changing events:
- a second Bill during the financial year - the Appropriation (Supplementary Estimates) Bill – allows the Government to update the initial estimates in the budget and get approval for those changes;
- the Public Finance Act includes several mechanisms for approving minor changes to the spending authorities approved by Parliament; and
- a series of Imprest Supply Acts during each year also give the Government a general authority to spend up to a specified amount, subject to later reporting back to Parliament of how that authority has been used.
Does the Controller and Auditor-General have a role in the Budget process?
3.13
The Government prepares the budget. The Minister of Finance and the Treasury co-ordinate the work of the various government departments and individual Ministers to put together a set of spending proposals for the Government as a whole. The Auditor-General is not part of the Government or answerable to Ministers, so has no role in this process.5 She does not audit the Budget either.
3.14
Once the Government has presented its proposed budget to Parliament, individual select committees consider the proposals in the various Votes. The Auditor-General's staff provide advice to the select committees to assist their scrutiny of the spending proposals in the budget Estimates.
3.15
Parliament then votes on whether to pass the Appropriation (Main Estimates) Bill. Votes on budget and spending matters are automatically regarded as confidence matters. That means that, if a Government cannot persuade a majority of Parliament to support its spending plans, then it does not have enough support to continue as the Government.
Who spends the money, and how?
3.16
All public money must be held in a Crown or departmental bank account. The Treasury is responsible for managing Crown bank accounts unless it delegates responsibility to a department to operate as an agent of the Crown. Government departments are responsible for managing departmental bank accounts.
3.17
Each department forecasts its cash requirements based on its budget and agrees cash payment schedules with the Treasury. The Treasury is responsible for disbursing cash to departments during the year in keeping with those schedules. Responsibility for how that cash is applied rests with the departments.
3.18
The departments are responsible for paying non-departmental providers (for example, Crown entities within their Votes) and for their own departmental spending.
3.19
The public financial management system operates on an "accruals" rather than a cash basis of accounting. To keep within budget limits, departments need to manage expenditure on an "accruals" basis. This means that expenditure is accounted for when it is incurred (that is, when there is an obligation to pay, as opposed to when the payment is made).
Who is responsible for ensuring that the money is spent correctly?
3.20
Departmental chief executives are responsible under the Public Finance Act for the financial management and performance of their department.6 This includes ensuring that they have both the funds and the necessary legal authority before incurring expenses or capital expenditure.
3.21
Departments are required to report to the Treasury (usually monthly) the expenses and capital expenditure incurred by the department against the appropriation or other statutory authority provided.
3.22
The Treasury is then required to compile a (usually) monthly report to the Controller and Auditor-General that sets out all actual expenditure incurred compared with the appropriation (or other authority)7 and all expenditure incurred without authority or in excess of the authority given.
Who checks whether the departments are actually spending the money lawfully and responsibly?
3.23
This is where the function of the Controller comes in.8 To check and verify the spending, the Controller and Auditor-General's staff:
- review the Treasury's monthly report;
- carry out some tests on the financial information (provided by the Treasury from the Crown's financial and information system);
- report back to the Treasury highlighting any issues including any breaches, commenting on actions needed to validate any unappropriated expenditure, and advising on any further action that needs to be taken by the Treasury or the department to resolve outstanding issues; and
- inform appointed auditors of issues affecting the departments they audit.
3.24
As well as her responsibilities under the Public Finance Act, she is responsible under the Public Audit Act for auditing the financial statements of every public entity. For government departments, as well as auditing the financial statements, her auditors are responsible for auditing the appropriations administered by the department (the "appropriation audit").9
3.25
Through the appropriation audit, the Controller checks to ensure that public money was spent as intended by Parliament. If an auditor appointed by the Controller and Auditor-General detects spending outside authority through the appropriation audit work, then the auditor will discuss the matter with the department's chief executive and advise the department about reporting the matter and taking corrective action. The auditor will also check to ensure that the department reports the matter in its financial statements.10
How great is the risk that public money might be spent above or beyond the appropriation limits?
3.26
Expenditure outside the bounds of the appropriations tends to be unintended and inadvertent. The unappropriated expenditure represents a very small proportion of the Government's total budget (less than 1% in 2013/14).
3.27
When the proper authority for unappropriated spending is not obtained, it constitutes a breach of appropriation and is unlawful. Not all unappropriated expenditure is unlawful, because the appropriations system provides some flexibility (see paragraph 3.12). In some circumstances, unappropriated expenditure can be authorised under an Imprest Supply Act or by ministerial approval. The Minister of Finance can approve expenses that exceed appropriation in the last three months of the financial year if those additional expenses are within the scope of the appropriation. The amount can be up to the greater of $10,000 or 2% of the total amount of the appropriation concerned.11
3.28
Some of the more common reasons for exceeding the spending limit set out in the appropriations include under-estimating expenditure that is demand-driven, write-downs of asset values, and the write-off or write-down of Crown receivables. (For the latter two, there is no cash outflow but they are nonetheless expenses for appropriation and accounting purposes.)
3.29
Examples of unappropriated expenditure in recent years include:
- Increased demand from New Zealanders for the SuperGold card in 2009/10 led to increased government spending on public transport concessions. The amount spent was $327,000 greater than anticipated, leading to spending in Vote Transport in excess of the appropriation limit.12
- Unappropriated expenditure can occur because of spending not envisaged at the time the Budget was prepared. In 2010/11, the New Zealand Defence Force overspent $990,000 of Vote Defence Force money in the appropriation for funding Naval Helicopter Forces. This happened because damage to three Seasprite helicopter rotor blades was beyond repair and the blades needed to be replaced.13
- Sometimes financially neutral transfers are made between appropriations during the year and, if the amount transferred is miscalculated, then it can result in underexpenditure in one appropriation and overexpenditure in the other. This happened in Vote Prime Minister and Cabinet in 2011/12, when too much funding was transferred from an existing appropriation into a newly created appropriation for Support Services to the Governor-General and Maintenance of Residences.14 In this instance, the over-spending was incurred without the proper authority.
- Incorrect financial forecasting led to spending in excess of a Vote Statistics appropriation in 2012/13. Statistics New Zealand forecast underexpenditure when the budget was revised during that financial year (that is, in the Supplementary Estimates). Accordingly, the Official Statistics appropriation was reduced by $1.937 million. The appropriation should not have been reduced, and the adjustment resulted in over-spending of $1.03 million.15
Unappropriated expenditure incurred with proper authority in 2013/14
3.30
The Minister of Finance used his powers under the Public Finance Act to authorise two instances of unappropriated expenditure during 2013/14, for Vote Education ($21.779 million). Almost all of the $21.779 million overspent in Vote Education's non-departmental appropriations resulted from higher than expected costs for early childhood education. The Ministry of Education says that this was because of greater than anticipated attendance on non-school days, a faster transition from sessional to all-day operations, and higher than expected population growth due to higher than expected migration.16
3.31
The Government used an Imprest Supply Act to approve just over $9.095 million of unappropriated expenditure in Vote Canterbury Earthquake Recovery.
3.32
This expenditure will need to be confirmed in the next Appropriation (Financial Review) Act.
How often is expenditure incurred without proper authority?
3.33
Figure 1 shows the number of appropriation breaches, that is, the instances of unappropriated expenditure incurred without authority over the last five years. (The graph shows a combined total for expenses and capital expenditure.)
Figure 1
Number of instances of unappropriated expenses and capital expenditure incurred without authority
3.34
The downward pattern of recent years has reversed in 2013/14. Given the inadvertent nature of appropriation breaches, we expect the numbers to fluctuate between years. However, we also want to see the number of instances reducing.
How does the Controller deal with breaches of appropriation?
3.35
When departments become aware of an appropriation breach or a potential breach, they are expected to immediately advise their auditor, the Treasury, and their Minister (who will need to seek additional authority for the expenditure). The department should provide the Treasury with an explanation of the breach as well as an explanation of actions being taken to resolve the issue (for example, to gain additional authority in advance to avoid a breach) or to validate any already unappropriated expenditure through an Appropriation (Financial Review) Bill.
3.36
The Treasury then collates the reports from the departments and provides a single, monthly report to the Office of the Auditor-General, highlighting actual, expected, and potential breaches. The Controller then carries out the work described in paragraph 3.23.
3.37
Auditors might detect breaches through their audit process, as might the Treasury through its financial management and budgeting work.
3.38
However detected, the facts of the situation are reviewed and the nature and amount of the breach is confirmed. If the department has not acted already, the Auditor-General's staff advise the department to immediately inform the Minister and the Treasury. They also advise on the corrective action that needs to be taken, for example, seeking further authority for spending17 and/or seeking to legitimise the expenditure after the event, usually through validating legislation.18
3.39
The Controller monitors all matters reported to her or detected by her staff until they are resolved. If the department does not take the required action, then the Controller, in conjunction with her auditor, can write to the department's chief executive and the relevant Minister instructing that no further expenditure may be incurred under the affected appropriation until approval has been obtained.
3.40
If the department continues to fail to obtain the correct approval, then the Controller can direct the Minister, the Treasury, and the department to stop payments from the relevant bank account and direct the Minister to report to the House of Representatives. Such measures would be a last resort, and the Controller does not expect to resort to them.
How much public money was spent without proper authority in 2013/14?
3.41
As shown in Figure 1, 21 instances of expenses and capital expenditure incurred without authority were identified in 2013/14.
3.42
Figure 2 provides more detail on the unauthorised expenditure, including the Votes and amounts involved. During 2013/14, the total amount of public money identified as being in excess of, or without, appropriation and without proper authority was $214.158 million. This was 0.26% of the total appropriations for all Votes authorised through the Budget 2013 process.19
Figure 2
Unappropriated expenditure incurred without authority identified during the year ended 30 June 2014
| 2012/13 No. |
2013/14 No. |
2013/14 $million |
2013/14 Votes |
|
| Expenses and capital expenditure in excess of appropriation and without authority of an Imprest Supply Act | 8 | 10 | 12.028 | Internal Affairs; Arts, Culture and Heritage; Labour; Economic Development; Pacific Island Affairs; Food Safety; Finance; and Education |
| Expenses and capital expenditure outside scope of an existing appropriation and without authority of an Imprest Supply Act | 0 | 3 | 1.872 | Attorney-General, Employment, and Māori Affairs |
| Expenses and capital expenditure without appropriation and without authority of an Imprest Supply Act | 5 | 8 | 200.258 | Canterbury Earthquake Recovery, Revenue, and Commerce |
| Total | 13 | 21 | 214.158 |
Note: The number of breaches for 2013/14 includes two breaches in Vote Education departmental output expenses (totalling $1.096 million), which were inadvertently omitted from the Financial Statements of the Government disclosures but were disclosed in the financial statements of the Ministry of Education.
3.43
Because this expenditure was not authorised during the year (that is, by appropriation or any other approval process), it will need to be validated in the next Appropriation (Financial Review) Act.
3.44
Of the 21 breaches in 2013/14, there was an appropriation for the type of expenditure concerned in 10 instances but the Government spent $12.028 million more than the amount that was authorised. In three instances, expenditure totalling $1.872 million was outside the scope of existing appropriations. Another eight breaches amounting to $200.258 million were from expenditure for which there was no appropriation.
3.45
The more significant instances of unauthorised expenditure in 2013/14, in terms of the amounts involved, were in Vote Canterbury Earthquake Recovery and Vote Revenue.
3.46
Unappropriated expenditure is nothing unusual for Vote Canterbury Earthquake Recovery because of the inherent uncertainties about the costs of the remediation and rebuild of the earthquake-affected areas. In 2013/14, CERA incurred $130.575 million without an appropriation and authorisation. The expenses that caused the breach related to movement in the provision for vesting in land, losses on the valuation of land, and land-related transaction and demolition costs. As such, most of the excess expenses reflect changes in assumptions underlying the accounting for land.20
3.47
Also of major significance in terms of the amount breached was the $67.7 million of public money spent under Vote Revenue. The spending funded Paid Parental Leave Payments, for which there was no Parliamentary authority at the time – the result of a historical oversight. Inland Revenue had been making parental leave payments on the assumption it had permanent legislative authority to do so. It did not. During 2013/14, it was identified that the appropriation had been incorrectly classified as a permanent legislative authority. Inland Revenue failed to seek Parliamentary authority for the payments, as it should have done.21
3.48
Further details of unauthorised (and other unappropriated) expenditure are provided in the annual reports of the departments responsible for administering the Vote and in the Financial Statements of the Government of New Zealand for the year ended 30 June 2014.
How did the Controller address the issues that arose during 2013/14?
3.49
The auditors appointed by the Controller and Auditor-General for the affected departments carried out the actions described in paragraph 3.38, which included confirming that expenditure was unappropriated, confirming the amount of the unappropriated expenditure, and advising the amounts to be disclosed in the Government's and individual departments' financial statements.
3.50
As a result of the Vote Revenue issue, the Treasury carried out a review of appropriations under permanent legislative authority. The Treasury's review identified three other Vote Revenue appropriations that might not have been operating under the required Parliamentary authority and required closer examination. The Controller and Auditor-General considered the legal situation for these three appropriations and concluded that they were covered by the permanent legislative authority provisions of the Public Finance Act 1989.
3.51
In October 2014, the Controller and Auditor-General and the Secretary to the Treasury sent a joint letter to department chief executives, expressing their wish to see a continuing decline in appropriation breaches. They reminded chief executives that the primary responsibility for ensuring that expenditure remains within appropriation rests with the departments. The Controller and Auditor-General and the Secretary to the Treasury also provided some guidance to help departments avoid inadvertent breaches in the future.
Can the Controller guarantee that all public expenditure provides value for money?
3.52
No. It is not the role of the Controller to determine how public money is spent, and she does not express opinions on Government policy.
3.53
However, through her powers as Auditor-General (but outside her function as Controller), she can report to Parliament on various aspects of the value for money of government spending. For example:
- She can carry out performance audits to look into the effectiveness and efficiency of different areas of Government spending.
- Some aspects of value for money can be inferred from public entities' annual reports. The Auditor-General is the auditor of all public entities. By auditing the financial and performance statements of public entities, the Auditor-General provides assurance about the reliability of the information in those reports.
What are the emerging "Controller" issues?
3.54
Recent reforms in state sector legislation have introduced more flexibility into the appropriation system, with the aim of helping government agencies to work more efficiently and effectively.22 Two reforms of particular interest to the Controller are the creation of the "Departmental Agency" model (under the State Sector Act 1988) and distinguishing between the "administration" and "use" of appropriations (under the Public Finance Act 1989).
3.55
A Departmental Agency is an operationally autonomous agency that will exist within a host department. This is a new structural model for New Zealand, which enables a tightly focused agency to operate without needing to create a new department or Crown entity. It is suited to a limited-life agency, such as CERA. CERA will become the first Departmental Agency, operating inside the Department of the Prime Minister and Cabinet from 1 February 2015. This will place disaster recovery work at the core of central government planning.23
3.56
Distinguishing between the administration and use of appropriations formalises a system to make it easier for one department to spend public money from an appropriation administered by a different department (with the administering department's or Minister's agreement). This is designed to provide greater flexibility when several departments need to work together to share resources or work towards a common outcome.
3.57
Initiatives such as these reforms are intended to help the Government to better achieve its objectives with the use of public money. They open up new authorising, funding, and accountability channels. We will be interested to see how these new arrangements are put into practice and will be monitoring them as part of our Controller responsibilities.
5: There is a special process for working out the budget for Officers of Parliament, such as the Auditor-General, to ensure that the funding decisions are made by Parliament, not the Government.
6: Section 34(1)(a) of the Public Finance Act 1989.
7: Such as imprest supply and Cabinet or ministerial decisions made within delegated authorities.
8: The Auditor-General exercises her Controller function under sections 65Y to 65ZA of the Public Finance Act 1989.
9: Section 15(2) of the Public Audit Act 2001.
10: Within the Statements of Appropriations and Statement of Unappropriated Expenses and Capital Expenditure.
11: Section 26B of the Public Finance Act 1989.
12: Ministry of Transport, Annual Report 2009/10, page 52. The excess spending was authorised by the Minister of Finance under section 26B of the Public Finance Act 1989.
13: New Zealand Defence Force, Annual Report 2011, pages 94 and 149. The excess spending was authorised by the Minister of Finance under section 26B of the Public Finance Act 1989.
14: Department of the Prime Minister and Cabinet, Annual Report for the Year Ended 2012, page 33.
15: Statistics New Zealand, Annual Report of Statistics New Zealand for the year ended 30 June 2013, page 79. The excess spending was authorised by the Minister of Finance under section 26B of the Public Finance Act 1989.
16: Ministry of Education, Annual Report for the year ended 30 June 2014, page 156.
17: Additional authority may be obtained under the Public Finance Act 1989. Cabinet may approve the use of imprest supply as a source of temporary authority and agree to include the amounts in the next Appropriation (Financial Review) Bill.
18: Detailed information on seeking additional authority or validating unappropriated expenditure is provided on the Treasury's website, www.treasury.govt.nz.
19: The Budget 2013 appropriations for all Votes totalled $82,817 million.
20: Canterbury Earthquake Recovery Authority, Annual Report 2014, page 106.
21: Inland Revenue, Annual Report 2014, pages 107-108.
22: The Treasury, State Sector Public Finance Reform Resources, at www.treasury.govt.nz/statesector/2013reform.
23: Canterbury Earthquake Recovery Authority, Annual Report 2014, page 13.