Part 5: Auditing licensing trusts

Challenges facing licensing trusts.

In this Part, we discuss the audits of licensing trusts. We set out the factors that determine the audit fees for licensing trusts. We also discuss licensing trusts with late financial statements and those that have received non-standard audit reports.

Audit fees

Audit fees are currently a contentious matter for some licensing trusts. With many smaller licensing trusts struggling financially, facing pressure from the community, and operating in an increasingly competitive market where it is difficult to produce profits, there is often little willingness to pay audit fees. This is particularly so when private entities operating in the industry can avoid this cost by choosing not to appoint an auditor.

Audit costs are equally a challenge for the Auditor-General's audit service providers. Because of capability and capacity issues in licensing trusts, this challenge has escalated in recent years.

In this Part, we do not seek to establish any metric for calculating audit fees, because we continue to support the view that fees must take into account the individual circumstances of each entity.

Fee-setting background

Section 42 of the Public Audit Act 2001 authorises the Auditor-General to charge fees for auditing public entities. In practice, each public entity and its appointed auditor negotiate audit fees. The Auditor-General intervenes only if the parties fail to reach agreement.

Licensing trust audits are carried out in keeping with the Auditor-General's Auditing Standards. They include aspects that are not required in an audit of a private sector entity – in particular, consideration of effectiveness and efficiency, waste, and lack of probity or financial prudence.

How licensing trusts' financial capability affects audit costs

Licensing trusts vary considerably in terms of their size and complexity of activities. In turn, the size and complexity of the business of each licensing trust affects the size and cost of its audit.

An equally significant determining factor of audit costs is the capability of the licensing trust to govern, operate, and control all aspects of its business and to provide the auditor with complete and accurate financial statements and supporting information for the audit.

The manner in which the auditor carries out the audit will also affect audit costs. Our audit service providers often do additional work to compensate for the lack of capability and capacity in public entities, particularly in smaller licensing trusts. Our auditors often work from incomplete and inaccurate initial draft financial statements to assist the entity's staff to meet statutory and accountability requirements during the audit process.

If a more hard-nosed "commercial” approach were adopted, it is likely for many (but not all) licensing trusts that the auditor would simply carry out an audit to the extent possible based on the information supplied and issue an appropriate audit opinion – which might well be a modified opinion.

Additional audit costs do not automatically translate into additional audit fees for entities. In the private sector, if audit fees are unacceptably low, or for other reasons such as excessive audit risk, the auditor can decide whether to continue as the auditor. The Auditor-General cannot do this because she is the statutory auditor. A consequence is that audit fees are affected not only by the above factors, but also by how prepared the auditor is to absorb costs "for the public good”.

The Auditor-General's audit service providers often also absorb additional audit costs to avoid incurring further cost in trying to negotiate a higher fee. Our experience with some smaller licensing trusts is that trustees often view audit costs as a "grudge purchase”. As a result, audit fees for licensing trusts vary widely and often do not reflect the apparent size or complexity of the activities of the trust or the actual audit costs.

We acknowledge that, for some of the smaller trusts, the audit fee can be a significant proportion of their often minimal profit, even if the audit goes smoothly. This can directly affect the funds available to distribute to the community.

In Figure 6, we set out the fees actually charged for the 2012/13 audit (or the most recently completed audit before 2012/13) for each licensing trust group and the actual costs the audit service provider incurred to complete that audit. Although cost overruns, which are often not on-charged to the entity, are not uncommon in the public sector, we consider that they are too common in licensing trust audits. In our view, this reflects the lack of capability and capacity in some licensing trusts.21 In the current environment, we consider that the situation faced by audit service providers is unlikely to improve.

Figure 6
Audit costs, audit fees, and resulting fee overruns for the year ended 31 March 2013*

Figure 6 Audit costs, audit fees, and resulting fee overruns for the year ended 31 March 2013.

* For the 2012/13 audit, the following licensing trusts had a change of auditor, which might have affected the costs incurred by the audit service provider – Oamaru Licensing Trust, Clutha Licensing Trust, the Porirua Community Trust group, Portage Licensing Trust, Waitakere Licensing Trust, West Auckland Trust Services Limited, and two of the subsidiaries in the Mount Wellington Licensing Trust group. West Auckland Trust Services Limited is included because it has an audit fee in its own right in addition to the audit fees for the trusts that it provides management services to. The audit fees for Flaxmere and Rimutaka Licensing Trusts are included in the Trust House group fees.

As with Figures 1, 2, and 3 earlier, the licensing trusts that are shown with all capital letters are those that have exclusive rights to operate hotels, taverns, and off-licences in their districts, and the trusts are ordered from left to right based on highest to lowest revenue, as identified in Figure 1.

Late financial statements

We issued 30 standard audit reports and six non-standard audit reports for licensing trusts and their subsidiaries for the period 1 January 2013 to 30 April 2014.

Ten sets of financial statements for licensing trusts for the year ended 31 March 2013 or earlier years had not been completed or audited by 30 April 2014. These are listed in Figure 7.

Figure 7
Licensing trust audits in arrears

Entity Years in arrears Number of years
Birkenhead Licensing Trust 2013 1
Birkenhead Charitable Trust 2013* 1
Hawarden Licensing Trust 2012, 2013 2
Parakai Licensing Trust 2011, 2012, 2013 4
Mount Wellington Licensing Trust 2011, 2012, 2013 3

* Subsequently completed prior to publication of this report.

Non-standard audit reports

In Figures 8 and 9, we set out details of the non-standard audit reports that we issued during the period 1 January 2013 to 30 April 2014.

Figure 8
Qualified opinions

Te Kauwhata Licensing Trust

Financial statements year ended: 31 March 2013

The Trust had limited controls over some of its revenue, which limited the assurance we could get about the completeness of its revenue.
Mount Wellington Licensing Trust and group

Financial statements year ended: 31 March 2009

The financial statements of the Trust's subsidiaries, Mount Wellington Charitable Trust and Mount Wellington Foundation Limited, were not consolidated in the group financial statements. This is a departure from New Zealand Equivalent to International Accounting Standard (NZ IAS 27): Consolidated and Separate Financial Statements, which requires an entity that has one or more subsidiaries to prepare consolidated financial statements for the group.*
Parakai Licensing Trust

Financial statements year ended: 31 March 2010

The Trust had limited control over some of its revenue, which limited the assurance we could get about completeness of its revenue.

We also drew attention, without modifying our opinion, to the fact that on 12 June 2013 the Parakai Licensing Trust was dissolved and its undertakings vested in the Parakai Community Trust. Further, on 16 July 2013 the Trustees gifted the operations, assets, and liabilities to the Helensville District Health Trust and disestablished the Community Trust.

* This was a complex technical issue that took time to resolve. We have a timetable in place to complete outstanding audits by March 2015.

Figure 9
Emphasis-of-matter paragraphs

Oamaru Licensing Trust

Financial statements year ended: 31 March 2013

We drew attention to the disclosures in the financial statements that referred to the going-concern assumption being appropriately used in preparing the financial statements. The validity of the going-concern basis depends on the Trust being able to obtain ongoing funding. It is required to renew its loans in October 2013 because it was in breach of one of its banking covenants at 31 March 2013.
Kauri Finance Limited (Porirua Community Trust)

Financial statements year ended: 31 March 2013

We drew attention to the fact that the financial statements for the year ended 31 March 2012 were not audited and the prior year comparative information in the current year's financial statements has not been audited.*
Rimutaka Licensing Trust and group

Financial statements year ended: 31 March 2013

We drew attention to the disclosures in the financial statements that referred to the uncertainties surrounding the going-concern assumption, which include continued pressure on the Trust's turnover and the options for the future of the Trust. The validity of the going-concern assumption depends on the decisions to be made by the Trustees on the future of the Trust by considering the various options that are available to them.

* Financial years ending March 2011 and 2012. Kauri Finance Limited was audited through the consolidated financial statements of the Porirua Community Trust. This approach did not comply with the accounting and auditing standards and, once identified, was corrected.

21: We acknowledge that, in some instances, overruns are the result of poor performance by the audit service provider and cannot be wholly attributed to the performance of the audited entity.

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