Part 3: The Controller function

Central government: Results of the 2016/17 audits

3.1
The Controller function is an important aspect of the Auditor-General's work. It supports the fundamental principle of Parliamentary control over government expenditure.

3.2
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.

3.3
Parliament's approval to incur expenditure is mainly provided through appropriations, which are authorised in advance through the annual Budget process and annual Acts of Parliament. Expenditure can also be authorised in advance through "permanent" legislation and can also be approved retrospectively.

3.4
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.¹²

3.5
Our discussion in this Part includes:

why the Controller work is important;
who is responsible for ensuring that public money is spent correctly;
how much unappropriated expenditure was incurred with authority in 2016/17; and
how much public expenditure was incurred without prior authority in 2016/17.

Why is the Controller work important?

3.6
In their role as Controller, the Controller and Auditor-General helps maintain the transparency and legitimacy of the State sector financial management system. The Controller provides an important check on the system on behalf of Parliament, taxpayers, and the New Zealand public.

3.7
The appropriation part of the State sector financial management system ensures that Parliament, on behalf of New Zealanders, has adequate control over how the Government uses public resources. It also ensures that the Government can be held to account for how it has used those resources.

3.8
Most of the Crown's funding is obtained through taxes. New Zealanders want assurance that the Government is spending public money as intended.

Who is responsible for ensuring that public money is spent correctly?

3.9
Departmental chief executives are responsible under the Public Finance Act 1989 for the financial management and performance of their department.¹³ This includes ensuring that they have both the funds and the necessary legal authority before incurring expenses or capital expenditure.

3.10
Departments are required to report to the Treasury (monthly from September to June) the expenses and capital expenditure incurred by the department against the appropriation or other statutory authority provided.

3.11
The Treasury is then required to compile a monthly report (from September to June) to the Controller and Auditor-General that sets out all expenditure incurred compared with the appropriation (or other authority)¹⁴ and all expenditure incurred without authority or in excess of the authority given.

Who checks whether departments are spending money lawfully and responsibly?

3.12
This is where the function of the Controller comes in.¹⁵ To check and verify the spending, the Controller and Auditor-General's appointed auditors:

review the Treasury's monthly reports;
carry out some tests on the financial information (provided by the Treasury from the Crown Financial Information System);
report back to the Treasury highlighting any issues (including any breaches), comment on actions needed to confirm or validate any unappropriated expenditure, and advise on any further action that the Treasury or the department needs to take to resolve outstanding issues; and
inform relevant auditors of the issues affecting the departments they audit.

3.13
For government departments, as well as auditing the financial statements, the Controller and Auditor-General is responsible for auditing the appropriations administered by each department (the appropriation audit).¹⁶

3.14
Through the appropriation audit, our auditors look at systems and some transactions to ensure that public money was spent as intended by Parliament. If an auditor appointed by the Controller and Auditor-General detects spending outside authority through the appropriation audit work, then the auditor will discuss the matter with the department's chief executive, advise the department about reporting the matter and taking corrective action, and inform the Auditor-General. The auditor will also check whether the department properly reports the matter in its financial statements.¹⁷

3.15
The appropriation audit for 2016/17 was carried out as part of the audit of the financial statements of all government departments on behalf of the Controller and Auditor-General. The Controller and Auditor-General's staff have also carried out assurance work on the data underlying the Government's appropriation reports for 2016/17. This was carried out in conjunction with the Treasury and helped to identify whether any unappropriated expenditure had been incurred during the year.

Expenditure above or beyond the appropriation limits

3.16
The State sector financial management system provides flexibility to enable lawful spending above or beyond the limits specified by each appropriation. (Those limits comprise the type of expenditure, the scope of what the expenditure can cover, the amount, and the timing.)

3.17
In limited circumstances, expenditure can be legally incurred outside the bounds authorised by the Appropriation (Main Estimates) Act or the Appropriation (Supplementary Estimates) Act. For example, there is flexibility in the Public Finance Act 1989 for small amounts of expenditure (sections 26A and 26B) and for emergencies (section 25). Imprest Supply Acts also provide flexibility to enable the Government to incur expenditure not covered at the time by Appropriation Acts. In practice, Cabinet approval is required to incur expenditure under the provisions of an Imprest Supply Act.

3.18
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 appropriation can be authorised before the event.

3.19
However, some events cannot be anticipated, such as expenses incurred from damage to assets caused by the Kaikōura earthquake in November 2016.

3.20
When approval for unappropriated expenditure is not obtained before the event, it is unlawful. Ministers need to report the matter to Parliament, and they must seek Parliament's retrospective approval of the expenditure through the Appropriation (Confirmation and Validation) Act.

3.21
Expenditure outside the bounds of the appropriations tends to be relatively small. In 2016/17, it was less than 0.14% of the Government's budgeted expenditure for 2016/17 as set out in the Main Budget 2016 (2015/16: less than 0.10%).

How much unappropriated expenditure was incurred in 2016/17?

3.22
The Government's financial statements report 15 instances of unappropriated expenditure. Expenditure incurred without appropriation in 2016/17 was $124 million (2015/16: $78 million).

3.23
Figure 3 shows that the number of times that government departments have incurred unappropriated expenditure has fluctuated in recent years. However, since 2009/10, there has been an overall downward trend in incidences of unappropriated expenditure. More than 30 instances were reported in 2009/10 and 2010/11. By contrast, less than half of that has been reported in the last two years (14 in 2015/16 and 15 in 2016/17).

Figure 3
Instances of unappropriated expenditure, from 2009/10 to 2016/17

3.24
The dollar amount of unappropriated expenditure since 2009/10 is shown in Figure 4. After the extraordinary circumstances in 2010/11, in which unappropriated expenditure exceeded $1.2 billion (a figure that is literally off the chart) because of the Canterbury earthquakes, unappropriated expenditure fell to $298 million in 2011/12 and has fallen further still since then. In the last three years (2014/15 to 2016/17), unappropriated expenditure has averaged less than $100 million.

Figure 4
Dollar amount of unappropriated expenditure, from 2009/10 to 2016/17

Note: The upper limit shown in Figure 4 is $400 million. Actual unappropriated expenditure for 2010/11 was more than $1.2 billion; most of this was authorised expenditure for the purchase of residential red zone properties in Canterbury after the February 2011 earthquake.

How much unappropriated expenditure was incurred with authority?

3.25
As mentioned in paragraph 3.17, the Public Finance Act 1989 provides for some flexibility in how public expenditure is authorised. This is necessary to allow Government to function in the new financial year before the Appropriation (Main Estimates) Bill has been enacted, to allow for unanticipated expenditure during the year as circumstances change, to allow for immediate expenditure in emergencies, and to provide for the approval of relatively small amounts of expenditure in excess of appropriation without needing prior approval from Parliament.

3.26
In 2016/17, prior authority was obtained for seven instances of unappropriated expenditure (2015/16: two instances). Figure 5 shows the relatively low number of times in recent years that expenditure not covered by appropriations has been incurred with authority.

Figure 5
Instances of authorised expenditure beyond appropriation limits, from 2009/10 to 2016/17

3.27
The dollar amounts involved for the instances shown in Figure 5 are shown in Figure 6. In 2016/17, the Government's financial statements reported $34 million of unappropriated expenditure incurred with authority, compared with $5 million in 2015/16.¹⁸ (As with Figure 4, the amount involved in 2010/11 is not fully represented here because, at over $1 billion, it is literally off the chart.)

3.28
During 2016/17, the Minister of Finance used his powers under the Public Finance Act 1989 to authorise six instances of unappropriated expenditure for a total of $4 million. All six instances related to Vote Police. The excess expenditure resulted from the New Zealand Police correcting a previously understated employee leave liability.¹⁹ Six approvals were required because the increase in the liability exceeded the spending limit of six different appropriations. This expenditure is lawful but will need to be confirmed by Parliament in a subsequent Appropriation Act.

3.29
The unappropriated expenditure incurred with Cabinet authority during the year, amounting to $30 million, was under Vote Transport. The Main North Line (rail) between Picton and Christchurch was damaged during the Kaikōura earthquake. The cost to replace the Line was expected to be mainly funded by KiwiRail Limited's insurers; however, as part of Budget 2017, a tagged capital contingency was established to fund the costs of reinstating the Line that are not covered by insurance.

3.30
The contingency funding was forecast to be used in 2017/18. However, $30 million of the funding was approved for use in late June 2017 and, therefore, constituted unappropriated expenditure in 2016/17.

Figure 6
Dollar amount of authorised expenditure beyond appropriation limits, from 2009/10 to 2016/17

Note: The upper limit shown in Figure 6 is $400 million. Actual authorised expenditure beyond appropriation limits for 2010/11 was more than $1.2 billion; most of this was spent on purchasing residential red zone properties in Canterbury after the February 2011 earthquake.

How much unappropriated expenditure was incurred without prior authority?

3.31
All unappropriated expenditure incurred without prior Cabinet authority is unlawful unless and until it is validated by Parliament through a subsequent Appropriation Act.

3.32
The Government's financial statements report eight instances of unappropriated expenditure incurred without prior Cabinet authority in 2016/17 (2015/16: 12 instances). The amount of expenditure incurred without prior authority was $90 million (2015/16: $73 million).²⁰ This was 0.10% of the Government's budgeted expenditure for 2016/17 as set out in the Main Budget 2016 (2015/16: 0.08%).

3.33
Figure 7 provides a breakdown of public expenditure that was not only unappropriated but also incurred without prior Cabinet authority.²¹

Figure 7
Unappropriated expenditure incurred without prior Cabinet authority during the year ended 30 June 2017

Unauthorised expenditure by category	2016/17 Number	2016/17 $million*	2016/17 Votes
Expenses and capital expenditure incurred in excess of appropriation and without prior Cabinet authority to use imprest supply	4	12	Arts, Culture and Heritage; Building and Housing; Conservation; Labour Market
Expenses and capital expenditure incurred outside the scope of an appropriation and without prior Cabinet authority to use imprest supply	2	5	Internal Affairs
Expenses and capital expenditure incurred without appropriation and without prior Cabinet authority to use imprest supply	2	73	Business, Science and Innovation; Transport
Total	8	90

* Figures are rounded to the nearest $million.

3.34
In four of the eight instances shown in Figure 7, the Government spent $12 million more than the amount that was authorised by existing appropriations. In other instances (Vote Internal Affairs), expenditure of $5 million was outside the scope of existing appropriations. In two further instances, expenditure totalling $73 million was not covered by any of the appropriations in the two Votes concerned (Business, Science and Innovation; and Transport).

3.35
The more significant instances of unauthorised expenditure reported in the Government's financial statements, in terms of the amounts involved, were in Votes Arts, Culture and Heritage; Internal Affairs; and Transport. Between them, they constitute more than $86 million of the $90 million of unappropriated expenditure incurred without authority.

Vote Arts, Culture and Heritage

3.36
The Ministry for Culture and Heritage has leased the Dominion Museum Building to house the Great War Exhibition. The Ministry has recognised an expense for decommissioning costs of $8.9 million to reflect its obligations should the exhibition be discontinued. The expense for the possible future expenditure was not anticipated in 2016/17, and this has resulted in the Ministry incurring expenditure in excess of appropriation and without prior authority of $8.6 million.²²

Vote Internal Affairs

3.37
In Budget 2015, the scope of the appropriation for Members of the Executive – Travel was changed. One of the effects of the change was to exclude ministerial office staff's travel expenses from the scope of the appropriation. However, the Department of Internal Affairs continued to charge ministerial staff travel against this appropriation in 2015/16 and 2016/17. This resulted in unappropriated and unauthorised expenditure of $5.1 million over the two years.²³ In its annual report, the Department describes the effect as an unintended consequence of the change in the scope wording.²⁴

Vote Transport

3.38
Of the $90 million of unappropriated expenditure incurred without authority in 2016/17, $72.7 million was incurred by the Ministry of Transport.

3.39
In response to damage caused by the Kaikōura earthquake to State Highway 1 between Picton and Christchurch, Cabinet approved $812 million in capital expenditure for its restoration.²⁵ For 2016/17, $69 million of capital expenditure had been authorised through the Supplementary Estimates.²⁶ The total amount incurred during 2016/17 on the restoration of State Highway 1 was $93 million, most of which was outside the scope of appropriation because the nature of the expenditure was operating expenditure.²⁷

3.40
Appropriations that are strictly for capital expenditure (that is, for purchasing or developing assets) cannot be used for operating expenditure (that is, for expenses). However, after the project started, a large portion of the expenditure was determined to be operating expenditure and outside the scope of the appropriation.²⁸ The Ministry of Transport sought and received Cabinet approval in June 2017 for a change in appropriation so that it now covers operating expenditure.

3.41
The Ministry of Transport notes in its annual report that it has re-examined the appropriations required for future years to ensure that they are split correctly between operating expenses and capital expenditure. A new, multi-category appropriation has been approved by Cabinet to ensure that this problem will not recur.

Trend in unauthorised expenditure

3.42
Figure 8 shows that the number of times that expenditure was incurred without authority has declined overall in recent years. In 2016/17, there were only eight instances of expenditure incurred without prior authority, less than a third of the number that occurred in 2009/10 (27 instances).

Figure 8
Instances of unappropriated expenditure incurred without authority, from 2009/10 to 2016/17

3.43
Figure 9 shows the dollar amount of unappropriated expenditure incurred without authority from 2009/10 to 2016/17. There appears to be no discernible pattern to the dollar amount of unauthorised expenditure in the past eight years.

3.44
We certainly expect the number of instances of unauthorised expenditure to decrease as government departments improve their budgeting and become better at anticipating the accounting implications of near-future events and their consequences for appropriations. Whether that translates into a decrease in the dollar amount of unauthorised expenditure is yet to be seen.

3.45
Over time, we might expect to see a loose correlation between the number of instances and the dollar amount of unauthorised expenditure as departments improve their management of appropriations, better anticipate events, and make better use of the flexibility provisions already provided in the Public Finance Act 1989. But the very nature of unanticipated expenditure might also see fluctuations between years in the dollar amount of unauthorised expenditure.

Figure 9
Dollar amount of unappropriated expenditure incurred without authority, from 2009/10 to 2016/17

Effects of the Kaikōura earthquake

3.46
The town of Kaikōura and the surrounding region were significantly affected by the earthquake in November 2016. The effects spread further, as trade and travel were affected by damage to State Highway 1 and the Main North Rail Line between Picton and Christchurch.

3.47
The earthquake's effects extended to Wellington, which suffered significant damage. Several central government agencies' offices were affected by the earthquake and incurred unplanned expenditure as a result. Unplanned expenditure included the cost of alternative accommodation, hiring temporary office equipment, other costs incidental to working offsite, and the write-off of assets that were damaged or unable to be recovered from damaged property.

3.48
Because unexpected events such as earthquakes can lead to unplanned expenditure, there is a risk that government departments might incur expenditure over and above the budgeted appropriations. Two such examples are discussed in paragraph 3.29 and 3.38-3.39.

3.49
Not all unplanned expenditure leads to unappropriated expenditure. In most instances, expenses relating to asset write-offs and additional costs resulting from the earthquake were covered by existing appropriations or through imprest supply. Because the earthquake was in November, affected departments were able to seek appropriations for some costs through the Government's budget revision exercise, known as the Supplementary Estimates, which passed into law as the Appropriation (2016/17 Supplementary Estimates) Act 2017. New appropriations were provided through the Supplementary Estimates for writing off, or making good the damage to, departmental assets and re-establishing departmental operations after the earthquake.

3.50
The Public Finance Act 1989 has additional provisions that could be used in some instances for incurring unplanned expenditure outside appropriation. For example, if the Government declares an emergency, the Minister of Finance may then approve expenditure to be incurred to meet the costs of responding to the emergency or disaster under section 25 of the Public Finance Act 1989. However, no expenditure was incurred under this provision of the Act in response to the Kaikōura earthquake or for any other reason during 2016/17.²⁹

3.51
It is also possible that some unplanned expenses could be exempted from requiring any express authority from Parliament. Under section 4(2)(a) of the Public Finance Act 1989, expenses that meet the definition of a "remeasurement" can be incurred without requiring any further Parliamentary authority. Although no earthquake-related expenses were treated as remeasurements for 2016/17, the Controller and the Treasury agreed in September 2017 that some expenses resulting directly from earthquake damage might, in future, qualify for treatment as remeasurements. Because remeasurements avoid the need to be expressly authorised by appropriation or other legislated authority, it is important that they are clearly identified and disclosed in departments' annual reports.

12: See Central government: Results of the 2014/15 audits, Part 3, and About the Controller and Auditor-General, Part 3. Available at oag.govt.nz.

13: Section 34(1)(a) of the Public Finance Act 1989.

14: Such as imprest supply and Cabinet or ministerial decisions made within delegated authorities.

15: The Auditor-General exercises the Controller function under sections 65Y to 65ZA of the Public Finance Act 1989.

16: Section 15(2) of the Public Audit Act 2001.

17: Within the Statements of Appropriations and Statement of Unappropriated Expenses and Capital Expenditure.

18: The Treasury (2017), Financial Statements of the Government of New Zealand for the year ended 30 June 2017, Wellington, page 118.

19: The Treasury (2017), Financial Statements of the Government of New Zealand for the year ended 30 June 2017, Wellington, page 119.

20: The Treasury (2017), Financial Statements of the Government of New Zealand for the year ended 30 June 2017, Wellington, page 118.

21: The Treasury (2017), Financial Statements of the Government of New Zealand for the year ended 30 June 2017, Wellington, page 118.

22: The Treasury (2017), Financial Statements of the Government of New Zealand for the year ended 30 June 2017, Wellington, page 120; Ministry for Culture and Heritage (2017), 2016/17 Annual Report, Wellington, page 94.

23: The Treasury (2017), Financial Statements of the Government of New Zealand for the year ended 30 June 2017, Wellington, page 121.

24: Department of Internal Affairs (2017), 2016-2017 Annual Report, Wellington, page 128.

25: The Treasury (2017), Financial Statements of the Government of New Zealand for the year ended 30 June 2017, Wellington, page 121.

26: The Supplementary Estimates of Appropriations 2016/17, B7, page 692. Available at www.treasury.govt.nz.

27: Ministry of Transport (2017), Annual Report 2016/17, Wellington, page 53.

28: The Treasury (2017), Financial Statements of the Government of New Zealand for the year ended 30 June 2017, Wellington, page 121.

29: The Treasury (2017), Financial Statements of the Government of New Zealand for the year ended 30 June 2017, Wellington, page 122.