Part 4: The Controller function and the appropriation audit
4.1
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.
4.2
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.
4.3
Parliament's approval can be given in advance or retrospectively.
4.4
We have explained in previous years what the Controller and Auditor-General does to help ensure that government spending stays within the limits approved by Parliament.20
4.5
Our discussion covers:
- How much unappropriated expenditure was authorised in 2015/16?
- How much public expenditure was incurred without prior authority in 2015/16?
- A seven-year overview of appropriation issues.
4.6
Details of how the Controller function works can be found in Part 3 of our 2015 report, Central government: Results of the 2014/15 audits.
Expenditure above or beyond the appropriation limits
4.7
We have explained in past reports that the public finance system provides flexibility to enable lawful spending above or beyond the limits specified by each appropriation (that is, type of expenditure, scope, amount, and timing).
4.8
In limited circumstances, expenditure can be incurred outside the bounds authorised by the Appropriation (Main Estimates) Act or the Appropriation (Supplementary Estimates) Act. For example, flexibility is provided by the Public Finance Act 1989 for small amounts of expenditure (sections 26A and 26B) and for emergencies (section 25). Imprest Supply Acts, which delegate approvals to Cabinet, also provide flexibility to enable the Government to incur expenditure not covered at the time by Appropriation Acts.
4.9
We have urged government departments to seek early approval as soon as they have identified the need for previously unanticipated expenditure, so that any expenditure over and above the appropriations can be authorised before the event.
4.10
When authority for unappropriated spending is not obtained before the event, it is unlawful. Ministers need to report the matter to Parliament21 and seek retrospective approval of the expenditure from Parliament, through the Appropriation (Confirmation and Validation) Act.
4.11
Expenditure outside the bounds of the appropriations tends to be relatively small. In 2015/16, it was less than 0.1% of the Government's total budget (2014/15: less than 0.1%).
How much unappropriated expenditure was authorised in 2015/16?
4.12
In both of the following instances, expenditure beyond the appropriation limits was approved through the correct channels.
4.13
The Minister of Finance used his powers under section 26B of the Public Finance Act to authorise one instance of unappropriated expenditure of $2.2 million during 2015/16.22 The overspending was in Vote Social Development for recoverable assistance payments to low-income earners and beneficiaries. The level of spending is driven by demand, and in 2015/16 the number of grant recipients exceeded what was initially budgeted.
4.14
In 2015/16, Cabinet provided authority to the Ministry of Justice to use imprest supply for a $2.5 million "ex gratia" payment for wrongful conviction and imprisonment. This was necessary because the timing of the payment lay outside the time frame for inclusion in Vote Justice appropriations approved by Parliament in that year.
How much expenditure was incurred without prior authority in 2015/16?
4.15
Figure 9 shows the number of instances for which public expenditure was not only unappropriated but also spent without the authority to do so.23
4.16
In 2015/16, there were 12 reported cases of unauthorised expenditure, compared with 19 in 2014/15. The total amount of unauthorised expenditure reported in the Government's financial statements was $72.5 million (2014/15: $55.8 million).24 Unauthorised expenditure reported in 2015/16 was 0.08% of the total appropriations for all Votes authorised through the Budget 2015 process25 (2014/15: 0.07%).
Figure 9
Unappropriated expenditure incurred without authority during the year ended 30 June 2016
| Unauthorised expenditure by category | 2015/16 Number | 2015/16 $million | 2015/16 Votes |
|---|---|---|---|
| Expenses and capital expenditure incurred in excess of appropriation and without prior Cabinet authority to use imprest supply | 6 | 51.7 | Conservation; Business, Science and Innovation; Arts, Culture and Heritage; Education; Social Development; Finance |
| Expenses and capital expenditure incurred outside scope of an appropriation and without prior Cabinet authority to use imprest supply | 1 | 10.8 | Justice |
| Expenses and capital expenditure incurred without appropriation and without prior Cabinet approval to use imprest supply | 5 | 10.0 | Business, Science and Innovation; Health |
| Total | 12 | 72.5 |
4.17
For six of the 12 instances in 2015/16, the Government spent $51.7 million more than the amount that was authorised within existing appropriations. In another (in Vote Justice), expenditure of $10.8 million was outside the scope of existing appropriations. In five instances, expenditure totalling $10 million was not covered by any of the appropriations in the two Votes concerned (Business, Science and Innovation; and Health).
4.18
The most significant instances of unauthorised expenditure in 2015/16, in terms of the amounts involved, were in Votes Education, Social Development, and Justice. Between them, they constitute $57.4 million of the $72.5 million of unappropriated expenditure incurred without authority.
Vote Education
4.19
In the Government's financial statements for 2014/15, the Government reported unappropriated expenditure of just over $16 million. This was due to the demand for early childhood education exceeding forecast. This excess spending was authorised by the Minister of Finance under section 26B of the Public Finance Act.26
4.20
However, during 2015/16, the Ministry of Education identified a further $23.4 million of expenditure incurred under the Early Childhood Education appropriation. The Ministry identified an accounting classification error that, when corrected, increased further the expense under the appropriation for 2014/15.
4.21
With the appropriation limit already exceeded for 2014/15, the addition to expenses identified during 2015/16 increased the excess even further. The total amount in excess for 2014/15 rose to $39.4 million, with the more recently identified amount of $23.4 million also being unauthorised.27
Vote Social Development
4.22
In 2015/16, the Ministry of Social Development discovered a miscalculation error that dated back to 1993. The error related to the assessment and payment system for Accommodation Assistance payments. At the end of the financial year, the Ministry of Social Development recognised a $29 million expense to account for the underpayments, which resulted in $23 million of expenditure in excess of the appropriation limit for 2015/16.28
Vote Justice
4.23
Another instance of unauthorised expenditure from past years came to light in 2015/16 in Vote Justice. In 2011, the Ministry of Justice created a provision for expenses against the Recovery from February 2011 Christchurch Earthquake appropriation. During 2015/16, and after a detailed review of the earthquake provision following an earthquake-related settlement, we and the Treasury advised the Ministry of Justice that the expenditure was compensatory in nature and therefore outside the scope of the appropriation. The Ministry has sought approval for the payment. The expenditure outside scope amounted to $10.8 million.29
4.24
Further details of other unauthorised and unappropriated expenditure are provided in the annual reports of the departments responsible for administering their Votes and in the Government's financial statements for 2015/16.
How did the Controller address the issues that arose during 2015/16?
4.25
The auditors for the affected departments carried out the actions necessary to provide assurance that unauthorised expenditure was accurately reported. Those actions included discussing the matter with the departments and agreeing the facts and the corrective action required. This involved confirming that the expenditure was unappropriated, the amount of the unappropriated expenditure, and the amount to be disclosed in the Government's and individual departments' financial statements, as well as reviewing the explanation given for the unappropriated expenditure.
A seven-year overview of appropriation issues
4.26
In the last seven years, we have seen a decline in the frequency of unappropriated expenditure. At the beginning of the period shown in Figure 10, there were 33 instances of unappropriated expenditure reported in the financial statements. There have been fewer instances of unappropriated expenditure every year since then.
4.27
The number of unappropriated expenditure items incurred with prior authority (the top section of the bars in Figure 10) has fluctuated in the last seven years. In 2015/16, in two instances departments obtained prior authority for the expenditure, despite that expenditure not being covered by the appropriation as described in the Budget or Supplementary Estimates.
Figure 10
Instances of unappropriated expenditure 2009/10 to 2015/16
4.28
By contrast, there has been an overall reduction in the number of instances of unappropriated spending without prior authority in the same period (the bottom section of the bars in Figure 10). The number has fallen from 27 in 2009/10 and 25 in 2010/11 to 12 in 2015/16.
4.29
Figure 11 shows the amount of unappropriated expenditure incurred in the last seven years with prior authority (the top section of the bars) and without prior authority (the bottom section of the bars), as reported in the financial statements.
Figure 11
Value of unappropriated expenditure 2009/10 to 2015/16
4.30
Figure 11 shows that, aside from 2010/11, the amount of unappropriated spending for which prior authority had been obtained (the top section of the bars) has ranged from $31 million (2013/14) to $4.7 million (2015/16). In 2010/11, more than $1 billion of expenditure was authorised for the purchase of residential red zone properties in Canterbury, after the February 2011 earthquake.
4.31
In each year except 2010/11, most unappropriated expenditure was unauthorised at the time it was incurred. Although Figure 10 shows the frequency of unauthorised expenditure trending down (the bottom section of the bars), Figure 11 shows no noticeable trend in the amount of unauthorised expenditure. The amount has fluctuated in the last seven years, and the values for three of the past four years are at the lower end. The value has decreased noticeably from $273.3 million in 2011/12 to $55.8 million in 2014/15 and $72.5 million in 2015/16.
4.32
A common cause of unappropriated expenditure was underestimating public expenditure in specific areas. A significant case was the expenditure required for the Canterbury earthquake recovery, most of which resulted from unpredictability of the costs involved.
4.33
Other reasons have related to underestimating the demand for services. Higher than expected uptake in early childhood education resulted in expenditure exceeding appropriation for Vote Education in several years. Similarly, in Vote Justice, the greater than forecast demand for legal aid services resulted in unappropriated expenditure in two instances.
4.34
In response to the number of unauthorised expenditure instances shown in Figure 10, the Controller and Auditor-General and the Secretary to the Treasury wrote to department chief executives in October 2014, encouraging them to ensure that their staff are familiar with any legislation that underpins the department's authority to incur public expenditure.
4.35
We have continued to urge departments to be more vigilant about their expenditure and the limits that Parliament has set for them. If there is an early indication that demand will exceed initial forecasts, then departments should act quickly to arrange prior authority to use imprest supply or seek adjustments through the supplementary estimates process.
4.36
We have also urged departments to anticipate and think through the possible accounting and appropriation implications of changed circumstances or unusual events. This will help ensure that they are not taken by surprise through incurring expenditure that is not yet authorised.
20: See Central government: Results of the 2014/15 audits, Part 3, and All about the Controller and Auditor-General, Part 3. Available at oag.govt.nz.
21: Section 26C of the Public Finance Act 1989. Section 26D requires that unauthorised expenditure is disclosed in the Government's financial statements, and government departments must disclose the unauthorised expenditure in their annual reports.
22: Financial Statements of the Government of New Zealand for the year ended 30 June 2016, page 143.
23: Financial Statements of the Government of New Zealand for the year ended 30 June 2016, pages 145-146.
24: The Treasury, (2015), Financial Statements of the Government of New Zealand for the year ended 30 June 2015, pages 141-143. Some of the unauthorised spending reported in 2015/16 related to previous years.
25: The Budget 2015 appropriations for all Votes totalled $88.9 billion.
26: Financial Statements of the Government of New Zealand for the year ended 30 June 2015, page 140.
27: Financial Statements of the Government of New Zealand for the year ended 30 June 2016, page 144, and Ministry of Education, Annual Report 2016, page 133.
28: Financial Statements of the Government of New Zealand for the year ended 30 June 2016, page 145, and Ministry of Social Development, Annual Report 2015/2016, page 142.
29: Financial Statements of the Government of New Zealand for the year ended 30 June 2016, page 145, and Ministry of Justice, Annual Report 1 July 2015 to 30 June 2016, page 107.