Part 4: The audit reports we issued in 2014
4.1
In this Part, we provide an overview of the audit results for local authorities, other local government entities, and licensing trusts.7
4.2
Figure 4 shows that we issued 567 audit reports on local government entities and licensing trusts.8 Of the 567 reports, 505 were standard audit reports and 62 were non-standard audit reports. Appendix 2 contains summaries of non-standard modified audit opinions and unmodified audit opinions with "emphasis of matter" paragraphs. We set out the key concepts and frameworks applied in determining audit opinions in Appendix 3.
4.3
We compared the results of our audit reports issued in 2014 with our audit reports issued in 2013 for any emerging trends or patterns. There was no significant difference in the number of standard and non-standard audit reports issued during 2013 and 2014 for the local government sector as a whole. Nor did we observe any trends or significant changes between years.
Modified audit opinions
Disclaimers of opinion
4.4
During 2014, we expressed disclaimers of opinion on the financial or service performance information of four public entities.
4.5
We expressed a disclaimer of opinion for Vbase Limited, a subsidiary of Christchurch City Council (for 2013/14). We could not get enough assurance because of damage caused by earthquakes that affected:
- the carrying value of insurance receivables, as it was unclear how much of the insurance receivables will be recovered and when that recovery will occur;
- how much of the carrying value of the CBS Arena, which was revalued in 2013/14, should have been recognised in previous years; and
- the carrying value of the current and deferred tax balances that should be recognised in the financial statements and would be affected by the outcome of the matters identified above.
4.6
We were also unable to get enough appropriate audit evidence to support the "financial performance targets" section of Vbase Limited's statement of service performance, but we did issue an unmodified opinion on its statement of cash flows.
Figure 4
Audit reports issued on local government entities and licensing trusts
| Total number of audit reports issued | Standard audit reports | Non-standard audit reports issued | ||||
|---|---|---|---|---|---|---|
| Modified opinion (Disclaimer) | Modified opinion (Adverse) | Modified opinion (Qualified) | Unmodified opinion but including an "emphasis of matter" paragraph/s | |||
| Local authorities | 75§ | 68 | - | 1 | 1 | 5 |
| Council-controlled organisations | 141§§ | 122 | 1 | 4 | 5 | 9 |
| Energy companies and subsidiaries | 75∞ | 69 | 4 | - | - | 2 |
| Airports and subsidiaries | 20 | 20 | - | - | - | - |
| Port companies and subsidiaries | 34 | 34 | - | - | - | - |
| Licensing trusts | 34∞ | 30 | - | - | 2 | 2 |
| Miscellaneous other local government entities | 70* | 61 | - | 3 | - | 6 |
| Small entities** | 118*** | 101 | - | - | 13 | 4 |
| Total | 567 | 505 | 5 | 8 | 21 | 28 |
§ This number includes one audit report for the previous financial period.
§§ This number includes nine audit reports for previous financial periods.
∞ This number includes two audit reports for previous financial periods.
∂ This number includes two audit reports for previous financial periods.
* This number includes four audit reports for previous financial periods.
** This category is made up of Administering Bodies and Boards, cemetery boards, fish and game councils, and Local Authority Sinking Fund Commissioners.
*** This number includes 17 audit reports for previous financial periods.
4.7
We expressed disclaimers of opinion for three power companies on the completeness and accuracy of network reliability performance reporting. There was no independent evidence available to support the completeness and accuracy of fault information, and there were limited controls over the completeness and accuracy of data about the customer connections:
- Counties Power Limited and Group (for 2012/13 and 2013/14);
- Electricity Invercargill Limited and Group (for 2013/14); and
- Network Waitaki Limited and Group (for 2013/14).
4.8
We issued unmodified opinions for those three entities on their financial statements and other performance measures that were not affected by the limitations affecting the completeness and accuracy of network reliability performance reporting.
Adverse audit opinions
4.9
In 2014, we expressed adverse opinions on the financial or performance information of seven public entities.
4.10
We expressed an adverse opinion on Tararua District Council (for 2013/14) because it did not prepare consolidated financial statements that included its subsidiary, Infracon Limited. Infracon Limited was placed in liquidation on 25 August 2014. We also drew attention to disclosures in the financial statements about the Council's decision to write-down the value of its investment in Infracon Limited to nil, and the uncertainty about the valuation of that investment because the residual value of Infracon Limited is unknown.9
4.11
Because they did not recognise their museum collection assets or the associated depreciation expense in their financial statements, as required by generally accepted accounting practice, we expressed adverse opinions for:
- Southland Museum and Art Gallery Trust Board Incorporated (for 2013/14); and
- Canterbury Museum Trust Board (for 2013/14).
4.12
We expressed an adverse opinion for Safer Papakura Trust (for 2012/13) because the Trust had incorrectly prepared its financial statements on a going-concern basis when a decision has been made by the Trustees to disestablish the Trust.
4.13
We expressed adverse opinions for three public entities that had not reported against performance measures and targets in their statements of service performance because they did not prepare a statement of intent for the reporting year and failed to comply with the law by not preparing a statement of intent for the next reporting period. The adverse opinions were for:
- Hauraki Rail Trail Charitable Trust (for 2012/13), whose audit was also limited because we could not obtain assurance about commission revenue due to limited controls over that revenue;
- West Coast Rural Fire Authority (for 2006/07 and 2007/08); and
- Southland Regional Heritage Committee, which is a trust associated with Gore District Council, Southland District Council, and Invercargill City Council (for 2013/14).
Qualified audit opinions
4.14
During 2014, we expressed qualified opinions on the financial or service performance information of 17 public entities. We express a qualified opinion when there is a disagreement with the treatment or disclosure of an issue in the financial statements or when we cannot get enough audit evidence about a matter.
4.15
We expressed a qualified opinion on the financial statements of Christchurch City Council for 2013/14. We could not obtain enough audit evidence about:
- the carrying value of land, the Council's buildings, roading network, sewerage system, and stormwater system because there was not enough information to quantify the financial effects of the damage caused by the earthquakes on these assets;
- how much of the carrying value of the Council's water supply assets, which were revalued in the current reporting period, should have been recognised in previous years;
- the carrying value of insurance receivables recognised in the Council's financial statements because it is unclear how much of the insurance receivables will be recovered and when that recovery will occur; and
- the Council's capital work in progress balance because of the rebuild activities that are under way. The Council was unable to accurately classify this balance into completed assets, assets still under construction, and operating expenditure.
4.16
Also, we were unable to get audit evidence for the "what did it cost" sections and the associated variance explanations, including the reported comparative information, in the Council's statement of service provision.
4.17
We drew attention to disclosures that outlined the deficiencies in rates-setting resolutions made between 2004/05 and 2012/13, and noted that a Bill to correct the deficiencies is currently before Parliament.
4.18
We expressed a qualified opinion on the financial statements of Vbase Limited, a subsidiary of Christchurch City, because our audit was limited (for 2013/14). We could not get enough assurance about the valuation of buildings because the earthquakes have created a situation where there is insufficient market evidence to provide reliable fair values for buildings.
4.19
We expressed a qualified opinion on the financial statements of Tauranga City Investments Limited, a subsidiary of Tauranga City Council, in relation to comparative information (for 2013/14). We were unable to get assurance about the completeness of cash receipts revenue.
4.20
Also, we drew attention to disclosures in the financial statements of Tauranga City Investments Limited about the disestablishment basis of accounting being used appropriately in preparing the financial statements because the company was disestablished on 1 July 2014 and its assets and liabilities were transferred to Bay Venues Limited.
4.21
Because we could not get enough assurance about the completeness of revenue and/or expenditure and/or other items (such as inventory, livestock, or annual leave balances), we expressed qualified opinions for the following public entities:
- World Buskers Festival Trust, which is a trust controlled by Christchurch City Council (for 2013/14);
- Parakai Licensing Trust, whose financial statements were appropriately prepared on a disestablishment basis (for 2009/10);
- Ongarue Hall Society Incorporated, whose financial statements were appropriately prepared on a disestablishment basis (for 2010/11, 2011/12, and 2012/13);
- Nelson Creek Recreation Reserve Board, whose financial statements were appropriately prepared on a disestablishment basis (for 2010/11);
- Te Kauwhata Licensing Trust (for 2013/14);
- Mapiu Sport and Recreation Committee (for 2010/11);
- Waikiekie Domain Board (for 2011/12);
- Whatitiri Domain Board (for 2011/12);
- Taurikura Hall Board (for 2012/13);
- Kaikoura Enhancement Trust and Group, which is a trust controlled by Kaikoura District Council) (for 2008/09 and 2009/10);
- Poukiore Domain Board (for 2012/13);
- Waipu Cove Reserve Board (for 2008/09 and 2009/10);
- Ohau Hall Board (for 2012/13); and
- Ruapuke Cemetery (for 2012/13).
Unmodified audit opinions with "emphasis of matter" paragraphs
Local authorities
4.22
We drew attention to disclosures in Central Hawke's Bay District Council's financial statements for 2013/14 about:
- the Council's investment in Infracon Limited, which had been written down to nil value; and
- uncertainties with the valuation of that investment because the outcome of the liquidation process is unknown.
4.23
We drew attention to disclosures in Chatham Islands Council's financial statements for 2013/14 about how the Council, in setting its 2013/14 rates, failed to adopt a rates resolution as required by the Local Government (Rating) Act 2002. The Council was investigating options to address this situation.
4.24
We drew attention to a number of disclosures in Far North District Council and Group's financial statements for 2012/13:
- The Council spent $2,258,000 to date on the Sweetwater Aquifer Scheme (the Scheme). As a result, the assets were reported with a carrying value of $747,000 and operating expenditure of $1,511,000.
- The Council carried out an investigation into all aspects of the Scheme, including a review of the Council's decision-making and project management process relating to the Scheme, and its financial management of the Scheme.
- The Council failed to adopt its annual report within the statutory reporting deadline.
4.25
We drew attention to disclosures in Kaipara District Council's financial statements for 2013/14 about the possible significant financial effect if the ruling on the Mangawhai Ratepayers and Residents Association's appeal to the Court of Appeal was not in favour of the Council. This would overturn the High Court's judgment about the Council's ability to use rates revenue, both past and future, to service the debt raised to fund the Mangawhai Community Wastewater Scheme.
4.26
We drew attention to disclosures in Taupō District Council and Group's financial statements for 2013/14 about the breach of the Local Government Act 2002 because the Council failed to adopt its 2012-22 long-term plan by 1 July 2012.
4.27
A long-term plan is needed to provide for integrated decision-making, as a basis of accountability to the community, and setting valid rates under the Local Government (Rating) Act 2002. Because the Council did not adopt its long-term plan until 24 September 2013, it has applied to the Department of Internal Affairs for an Order in Council to validate the late adoption of the long-term plan as if it had been adopted before 1 July 2012.
Council-controlled organisations
4.28
We drew attention to the uncertainties in measuring the carrying value of an insurance settlement receivable because of inherent uncertainties in the information on which the carrying value of the asset was based for Tuam Limited, a subsidiary of Christchurch City Council (for 2013/14).
4.29
We drew attention to the uncertainties in measuring the fair value of shares in incubator and accelerator companies for Creative HQ Limited, a subsidiary of Wellington City Council (for 2013/14) because of the "early stage" nature of the investments and the absence of quoted market prices.
Audit opinions on going concern
4.30
We drew attention to uncertainties about the use of the going-concern assumption for two entities:
- Inframax Construction Limited, which is a subsidiary of Waitomo District Council (for 2013/14); and
- Pulse Energy Limited, which is a subsidiary of Buller Electricity Limited (for 2012/13). The uncertainty relating to Pulse Energy Limited had been eliminated for the 2013/14 financial statements, and we were able to issue a standard audit report for that year.
4.31
We drew attention to disclosures about New Zealand Local Government Insurance Corporation Limited and Group (trading as Civic Assurance) (for 2012/13) preparing its financial statements using the going-concern assumption, despite the company being in arbitration with its reinsurers about the limits of cover under the reinsurance programme.
4.32
We also drew attention to the uncertainty as to when Civic Assurance will be able to resume its normal business activities and whether it will make sufficient profits to allow all of its deferred tax assets to be recovered.
4.33
We drew attention to disclosures in the financial statements for four entities about uncertainties relating to their use of the going-concern assumption:
- Village Pool Charitable Trust, which is a trust controlled by Hastings District Council (for 2012/13);
- Oamaru Licensing Trust (for 2013/14);
- Rimutaka Licensing Trust and Group (for 2012/13); and
- Ruawhata Public Hall Board (for 2012/13).
4.34
We drew attention to disclosures in a number of other financial statements where the entity was no longer a going concern, and where the financial statements had been correctly prepared using an alternative basis of accounting. The relevant public entities were:
- Christchurch Stadium Trust, a trust that had forecast financial difficulties and required additional support from external parties (for 2013);
- Delta Investments Limited, which is a subsidiary of Dunedin City Council (for 2013/14);
- Scope Infrastructure Limited (for 2013/14);
- Cranberries New Zealand Limited (for 2013/14);
- Taranaki Provincial Patriotic Council (for 2011/12);
- Cooks Gardens Trust Board (for 2012/13); and
- Puhoi Cemetery, which was to be vested in Auckland Council on 20 February 2014 (for 2010/11, 2011/12, and 2012/13).
4.35
For three public entities, we drew attention to disclosures in the financial statements indicating that the entity was no longer a going concern, and where the financial statements had been correctly prepared using an alternative basis of accounting. These entities also did not have a statement of intent because they were inactive and did not have performance to report. They were:
- St James Theatre Limited, which is a subsidiary of Wellington City Council (for 2011/12);
- St James Charitable Trust, which is a trust controlled by the Wellington City Council (for 2011/12); and
- Luggate Nominee Limited, which is a subsidiary of Dunedin City Council (for 2013/14).
Other audit opinions
4.36
We drew attention to disclosures that Tauwhareparae Forests Limited, a subsidiary of Gisborne District Council (for 2013/14), did not have a statement of service performance because it is inactive and failed to comply with the law by not issuing a statement of intent for the next reporting year.
4.37
We drew attention to disclosures in Hauraki Rail Trail Charitable Trust's financial statements for 2011/12 about how the Trust failed to comply with the law by not issuing a statement of intent for the next reporting year.
7: We issued a separate report in October 2014 on licensing trusts – Challenges facing licensing trusts.
8: Local authorities, most council-controlled organisations, airports, port companies, other local government miscellaneous entities, administering bodies and boards, and local authority sinking fund commissioners have a 30 June balance date. Energy companies and cemetery boards have a 31 March balance date. Fish and game councils have a 31 August balance date, and other entities, including some council-controlled organisations and other local government miscellaneous entities, have a balance date in March, August, October, or December.
9: We also drew attention to disclosures in Central Hawke's Bay District Council's financial statements for 2013/14 relating to Infracon Limited. See paragraph 4.22 for details.