Part 1: Governance and accountability

Reflections from our audits: Governance and accountability.

1.1
Every year, we audit those public entities that are required to publicly report (about 3700) and prepare 20-30 in-depth reports on specific matters. This work brings us into direct and regular contact with the governors, managers, and staff of public entities.

1.2
Much of our work involves auditing the financial and performance information reported by public entities to Parliament and the public. They, in turn, hold these entities to account.

1.3
Our unique view of the public sector and, in particular, of matters relating to the governance and accountability of public entities, provides an opportunity to highlight and share examples of good and poor practice to help the public sector to improve.

1.4
This report reflects on the findings from my Office's work in 2014/15 that focused on governance and accountability. We chose this theme for three main reasons:

  • Changes arising from ongoing fiscal constraints, a strong focus on better public sector performance, and structural changes have resulted in an increasing need for high-quality governance.
  • Accountability is fundamental to our system of government.
  • There have been changes to financial reporting and public sector accountability legislation that took effect from 1 July 2014.

1.5
We also note the increasing emphasis on governance and accountability arrangements beyond traditional organisational boundaries, which makes our focus timely.

What is public sector governance?

Public sector governance is different

1.6
Governance refers to the systems and processes for leading and guiding an organisation. It is about the arrangements and practices that allow an entity to set its direction and manage its operations to achieve its outcomes and to fulfil its accountability obligations.

1.7
There are a number of factors that make governance in the public sector complex and challenging. Some of the essential elements needed for effective governance are not always clearly present in the public sector:

  • public entities sometimes do not have a conventional company/board structure (for example, government departments and statutory officers);
  • some public entities are statutory bodies required to operate within a particular legal framework – they can do only what their founding/enabling legislation permits;
  • there can be conflicting objectives – profit or public good; risk or return;
  • some public entities are established to achieve only a particular purpose – for example, Treaty settlements that give rise to co-governance (and co-management) arrangements;
  • governors can be elected, appointed, or a mixture of both – creating the possibility of capability issues, and/or mixed obligations to one or more constituencies;
  • there are understandably greater expectations of accountability and transparency for those using public resources, meaning governors are usually operating in the public eye; and
  • public entities are often subject to strict expectations and rules for conflicts of interest.

1.8
In Part 2, we use the findings from our work to identify the elements of governance that work in the public sector and we highlight examples of good – and not so good – practice.

What is accountability?

Accountability enables trust in government and needs constant attention

1.9
Developing and maintaining citizens' trust in government is vital to maintaining a healthy democracy. It requires credible and reliable information about the performance of public institutions and their future intentions. Public trust depends on, among other things, good governance and accountability and they can be a catalyst for it; governance and accountability need and support each other.

1.10
With the trust of its citizens, a government is better able to move beyond short-term, reactive approaches to governing to a more holistic, strategic, and longer-term vision. Trust in public institutions is driven, in large part, by:

  • the way policies are designed and implemented; and
  • the way policy-makers comply with standards to ensure that their behaviour is in the interest of citizens.1

1.11
Public accountability enables citizens to see how their taxes and rates have been used. It should also provide an insight into what has been achieved by the public sector. Those responsible for governance need to be accountable for the decisions that they make and the basis on which they are made. Their decision-making processes need to be legitimate and be seen to be so.

1.12
Increasingly, they also need to be accountable for the stewardship of the organisations and assets they govern. This gives a forward-looking as well as backward-looking dimension to governance and accountability responsibilities.

1.13
Good government requires that those in power, and the public entities that work for those in power, be held publicly accountable – for what they do, and what they omit to do.

1.14
In a report on a recent inquiry, we noted:

It is … fundamental that public entities should be able to demonstrate what they are doing and why, when that is questioned. Public entities should expect to be tested, whether by members of the public, the media, or the courts. This is accountability in action, and public entities need to be ready to explain themselves. That has implications for how public entities operate on a daily basis: they need full and proper records of their work that show what decisions were made, who made them, and the basis on which they were made.2

1.15
A public entity's processes must not only be right, but be seen to be right. Without accountability and transparency, allegations of bad practice and corruption can flourish.

1.16
In essence, public accountability is necessary for the public to be able to see that public resources – the taxes and rates that most of us pay – are being used appropriately and effectively.

What accountability arrangements have changed?

Changes to state sector and public finance legislation

1.17
The State Sector and Public Finance Reform Bill 2013 amended the three main Acts that govern how the State sector and the finances of public sector entities are managed. These Acts are the State Sector Act 1988, Public Finance Act 1989, and Crown Entities Act 2004.

1.18
The Acts were changed to:

  • improve the focus on results;
  • encourage improved service levels and value for money;
  • support meaningful reporting so that Parliament and the public can more easily see what has been achieved; and
  • strengthen leadership at the "system", sector, and agency levels.

Changes to local government legislation

1.19
Section 39 of the Local Government Act 2002 outlines the governance principles that local authorities must act in keeping with. In August 2014, the Act was amended. The changes have shaped how local authorities are now required to consult with their communities on long-term plans and introduced new requirements for infrastructure strategies. We consider that these changes should enhance the accountability of local authorities to their communities.

Amendments to other relevant legislation

1.20
There have also been recent changes to the Financial Reporting Act 1993 and the Companies Act 1993. In 2013, the Financial Reporting Act 1993 was replaced by the Financial Reporting Act 2013, and the reporting requirements for companies are now set out in the amended Companies Act 1993.

1.21
The broad aims of the changes were to introduce the new accounting standards framework, reduce compliance costs, and streamline reporting by companies and their subsidiaries.

Changes in financial reporting standards

1.22
In our recent report, Improving financial reporting in the public sector, we described the positive changes made to accounting standards in the public sector. These changes include adopting accounting standards in New Zealand based on International Public Sector Accounting Standards (IPSAS) for most public entities.

1.23
The framework uses tiers so that financial reporting requirements reflect the different size and nature of reporting entities. The tiered structure is likely to help smaller entities achieve a better balance between the costs and benefits of general purpose financial reporting.

1.24
We encourage all public entities to take full advantage of any financial reporting concessions that are available to them in the tiered reporting structure.

1.25
The changes have better positioned the public sector to report in a manner that better meets user needs. Public entities now need to take advantage of the flexibility within the new framework by focusing on users' information needs and reporting what matters most.

1.26
The way is open for public entities to change the focus of their reporting from complying with specific accounting standard requirements to better communication with users of their financial statements. This should enhance accountability.

1.27
The setter of accounting standards in New Zealand, the External Reporting Board, also has an important ongoing role in helping to resolve some of the more challenging areas of general purpose financial reporting.

1.28
In Part 5, we highlight our observations about how well the public accountability system is working.

1: Organisation for Economic Co-operation and Development (2014), Partners for Good Governance: Mapping the role of Supreme Audit Institutions.

2: Controller and Auditor-General (2013), Inquiry into the Mangawhai community wastewater scheme, Wellington, page 16.