Part 2: About the audits of public entities
2.1
The Auditor-General's mandate is set by the Public Audit Act 2001. Under section 14 of that Act, the Auditor-General is the auditor of all public entities.
2.2
The Public Audit Act defines the term public entity. It includes a diverse range of entities. As well as the "core" public sector, it includes subsidiaries (as defined in the Companies Act 1993) of public entities and any other entity that is controlled by a public entity under relevant financial reporting standards (controlled entities).
2.3
This means that the Auditor-General's mandate includes not only entities set up directly under Parliamentary authority but also entities such as subsidiary companies, limited partnerships, charitable trusts, and incorporated societies set up by public entities for investment reasons or to support their operating objectives. It is not always easy to determine whether an entity is a public entity.
2.4
Figure 1 lists the number and type of entities we expected to audit for the year ended 30 June 2014.
2.5
The size, scale, and nature of these entities' operations vary significantly, from large government departments with budgets of billions of dollars to small cemetery trusts operating with hundreds of dollars. Over time, entities are disestablished and new entities are created, and legislative changes can affect whether an entity is required to report.
Figure 1
Number and type of reporting entities, 2013/14
| Entities | Subsidiaries and related entities | Total | |
|---|---|---|---|
| Central government entities | |||
| Government departments | 37 | 17 | 54 |
| Crown research institutes | 7 | 28 | 35 |
| District health boards | 20 | 27 | 47 |
| Tertiary education institutions | 29 | 111 | 140 |
| Other Crown entities | 64 | 82 | 146 |
| Other central government entities | 83 | 24 | 107 |
| State-owned enterprises and mixed-ownership companies | 18 | 104 | 122 |
| Rural education activities programmes | 14 | 0 | 14 |
| Schools | 2427 | 34 | 2461 |
| Local government entities | |||
| Local authorities | 78 | 0 | 78 |
| Council-controlled organisations | 0 | 179 | 179 |
| Exempt council-controlled organisations | 0 | 29 | 29 |
| Other local government entities | 0 | 63 | 63 |
| Energy, port, and airport companies | |||
| Energy companies | 24 | 47 | 71 |
| Port companies | 12 | 24 | 36 |
| Airport companies | 19 | 4 | 23 |
| Other public entities | |||
| Fish and game councils | 14 | 1 | 15 |
| Administering boards and bodies | 38 | 0 | 38 |
| Cemetery trusts | 95 | 0 | 95 |
| Licensing and community trusts | 20 | 19 | 39 |
| Māori trust boards | 10 | 1 | 11 |
| Section 19 entities | 6 | 0 | 6 |
| Total | 3015 | 794 | 3809 |
Notes: The legislation for Māori trust boards has changed, removing the requirement that we audit them. Under section 19 of the Public Audit Act 2001, entities that are not public entities can ask the Auditor-General to be their auditor, as long as the entity exists "for a public purpose" and is, or ought to be, accountable to the Crown, the House of Representatives, the public, or a section of the public.
What are public entities required to report on?
2.6
The reporting requirements of public entities are usually set out in legislation, either in the specific Act of Parliament that created the entity or in sector-specific legislation. For example, local authorities and council-controlled organisations are required to report under the Local Government Act 2002 and government departments are required to report under the Public Finance Act 1989.
2.7
The reporting requirements for controlled entities (if there are any) might be set out in legislation or in the entity's founding document – such as a trust deed, company constitution, partnership deed, or incorporated society rules.
2.8
Legislation specifying which entities need to publicly report also usually specifies that the financial statements need to comply with generally accepted accounting practice (GAAP). Some entities must also report and have audited their performance information (which might also need to comply with GAAP). For example, government departments are required to report against the measures included in the Information Supporting the Estimates of Appropriations and/or in the entity's statement of performance. Some entities are also required to report on specific functions they are required to perform. That information must be audited.
2.9
The entity's governing body is responsible for preparing accountability documents, such as the entity's annual financial statements. For example, the board of trustees is responsible for a school's accountability documents.
2.10
Recent changes to legislation mean that some public entities that have previously been required to prepare financial statements will no longer need to do so. Examples include controlled entities of Crown entities and subsidiary companies of other entities. We are looking into how many public entities will no longer need to report separately after the legislative changes have been implemented.
What are the reporting standards?
2.11
The External Reporting Board (the XRB) is an independent Crown entity, set up under section 22 of the Financial Reporting Act 1993. The XRB issues accounting standards in New Zealand. These standards apply to the information that public entities are required to report on.1
2.12
In April 2012, the XRB issued a new framework for accounting standards. The new framework is being rolled out between 2012 and 2015. The accounting standards were reviewed to place greater focus on the needs of users of accountability documents such as annual reports.
2.13
The new framework consists of different suites of standards for for-profit entities and public-benefit entities. It also provides for different tiers within those categories of entity, depending on the size of the entity and the nature of the entity's activities.2
When is an audit required?
2.14
Section 15 of the Public Audit Act sets out that the Auditor-General must audit any information that a public entity is required to have audited.
2.15
As with reporting requirements, legislation or the entity's founding document will generally determine whether an audit is needed.
2.16
Most public entities must prepare financial statements and have them audited.
Auditing standards for public entities
2.17
The Auditor-General sets the auditing standards that apply to audits of public entities. These standards are based on auditing and assurance standards issued by the XRB. They also cover matters that are of particular concern to the Auditor-General in auditing the public sector.
2.18
A public sector audit is generally broader than a private sector audit. There are different requirements for different types of public entities. As a general rule, a public sector audit will cover:
- financial information;
- performance information (if this is required);
- compliance with statutory obligations, particularly where those obligations have a material (that is, significant) effect on the financial statements; and
- other risks and concerns specific to the public sector, such as sensitive expenditure (spending on travel, accommodation, or gifts and hospitality), waste, and a lack of probity or financial prudence.
1: In most instances, legislation requires financial statements to be prepared in keeping with GAAP, which means the accrual-based accounting standards set by the XRB.
2: We expect to publish a report on the new accounting standards early in 2016.