Part 3: The Controller function
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;
- borrow money; 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.
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 Cabinet authority in 2017/18; and
- how much public expenditure was incurred without prior Cabinet authority in 2017/18.
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, 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. 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 the expenses and capital expenditure incurred by the department against the appropriation or other statutory authority provided. The first report for the financial year is provided in October (covering the previous July to September period) and then monthly after that.
3.11
The Treasury is then required to compile reports to the Controller and Auditor-General in October (for July to September) and then monthly after that. The Treasury's reports set out all expenditure incurred compared with the appropriation (or other authority) 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. To check and verify the spending, the Controller and Auditor-General's Controller team:
- reviews the Treasury's monthly reports;
- carries out some tests on the financial information (provided by the Treasury from the Crown Financial Information System);
- reports back to the Treasury highlighting any issues (including unappropriated expenditure), comments on actions needed to confirm or validate any unappropriated expenditure, and advises on any further action that the Treasury or the department needs to take to resolve outstanding issues; and
- informs 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).
3.14
Through the appropriation audit, our auditors look at systems and some transactions to check that public money was spent as intended by Parliament. If an appointed auditor 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 Controller and Auditor-General. The appointed auditor will also check whether the department properly reports the matter in its financial statements.
Expenditure above or beyond the appropriation limits
3.15
The state sector financial management system provides flexibility to enable lawful spending above or beyond the limits specified by each appropriation in some circumstances. Those limits comprise the type of expenditure, the scope of what the expenditure can cover, the amount, and the timing.
3.16
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. To remain lawful, any expenditure incurred under imprest supply must be appropriated by Parliament within that financial year (usually under an Appropriation Act).
3.17
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 by Cabinet before the event and authorised by Parliament in an Appropriation (Supplementary Estimates) Act.
3.18
However, some expenditure is unexpected and would not be anticipated when the main Budget is put together; for example, the expenses incurred for the Northcote by-election on 9 June 2018.
3.19
When government departments do not get approval for unappropriated expenditure before it is incurred, it is unlawful. Ministers need to report the matter to Parliament, and they must seek Parliament's retrospective approval of the expenditure through an Appropriation (Confirmation and Validation) Act.
3.20
Expenditure outside the bounds of the appropriations tends to be relatively small. In 2017/18, it was less than 0.13% of the Government's budgeted expenditure for 2017/18 as set out in Budget 2017 (2016/17: less than 0.14%).
How much unappropriated expenditure was incurred in 2017/18?
3.21
The Government's financial statements report 18 instances of unappropriated expenditure (2016/17: 15). Expenditure incurred without appropriation in 2017/18 was $119 million (2016/17: $124 million).
3.22
Figure 1 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. Less than half of that was reported in 2015/16 and 2016/17. And, although the number of instances increased slightly in 2017/18, the dollar amount decreased (See Figure 2).
Figure 1
Instances of unappropriated expenditure, from 2009/10 to 2017/18
3.23
The dollar amount of unappropriated expenditure since 2009/10 is shown in Figure 2. 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 four years (2014/15 to 2017/18), unappropriated expenditure has averaged less than $100 million.
Figure 2
Dollar amount of unappropriated expenditure, from 2009/10 to 2017/18
Note: The upper limit shown in Figure 2 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.
Unappropriated expenditure incurred with authority
3.24
As mentioned in paragraphs 3.15 and 3.16, the Public Finance Act 1989 provides for some flexibility in how public expenditure is authorised. This is necessary to allow the 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. Such flexibility is provided by sections 26A and 26B of the Public Finance Act and the Imprest Supply Act provisions under sections 4A and 12B of the Public Finance Act.
3.25
In 2017/18, prior authority was obtained for eight instances of unappropriated expenditure (2016/17: seven instances), and the Government's financial statements reported $50 million of unappropriated expenditure incurred with authority, compared with $34 million in 2016/17 (the dark green areas in Figures 1 and 2).
3.26
Section 26B of the Act provides final authority for unappropriated expenditure approved by the Minister. Expenditure authorised under imprest supply is authorised temporarily; it needs to be appropriated before the end of the financial year to secure lawful authority. Figure 3 provides a breakdown of unappropriated expenditure that was incurred with prior authority to do so.
Figure 3
Unappropriated expenditure incurred with prior authority during the year ended 30 June 2018
| Unappropriated expenditure by category | 2017/18 Number | 2017/18 $million* | 2017/18 Votes |
|---|---|---|---|
| Expenses and capital expenditure incurred in excess of existing appropriation and approved by the Minister of Finance under section 26B of the Public Finance Act 1989 | 3 | 16 | Health, Justice, Social Development |
| Expenses and capital expenditure incurred with Cabinet authority to use imprest supply but in excess of appropriation prior to the end of the financial year | 4 | 11 | Business, Science and Innovation; Primary Industries and Food Safety (2); Transport |
| Expenses and capital expenditure incurred with Cabinet authority to use imprest supply but without appropriation prior to the end of the financial year | 1 | 23 | Health |
| Total | 8 | 50 |
* Figures are rounded to the nearest million dollars.
3.27
During 2017/18, the Minister of Finance used his powers under the Public Finance Act 1989 to authorise three instances of unappropriated expenditure for a total of $16 million. The three instances related to Vote Health, Vote Justice, and Vote Social Development with unappropriated expenditure of $12.85 million, $0.898 million, and $2.33 million respectively.
3.28
The unappropriated expenditure by the Ministry of Health was a result of increasing demand for individualised funding services and additional claims for equipment and residential care services. The Ministry of Justice incurred additional expenditure to fund the Northcote byelection, which was announced after the Supplementary Estimates had been finalised. The Ministry of Social Development forecast an increase in the number of payments that would be granted under the Recoverable Assistance programme; however, the dollar value of the payments was greater than expected, exceeding the appropriation by $2.33 million. All three of these instances of unappropriated expenditure were lawful under section 26B of the Public Finance Act but will need to be confirmed by Parliament in a subsequent Appropriation Act.
3.29
There were four instances in which Cabinet had granted authority to use imprest supply to increase expenditure for which expenditure (about $11 million) remained above the spending limit appropriated for the year.9 These related to Vote Primary Industries and Food Safety (two appropriations) and one appropriation each in Vote Business, Science and Innovation and Vote Transport.
3.30
Cabinet agreed to approve expenditure to enable cattle culling on properties affected by mycoplasma bovis. An additional $8 million was approved for the Ministry for Primary Industry's management of the outbreak. The expenditure incurred in excess of the original appropriation was $2.64 million. An additional $100 million was approved for compensation and voluntary payments. The amount incurred in excess of the original appropriation was $6.11 million. The expenditure incurred was within Cabinet-approved limits but was over the appropriation limit because Cabinet approved the extra funding after the Supplementary Estimates had been finalised. Therefore, the spending remained unappropriated at 30 June 2018.
3.31
The Ministry of Business, Innovation and Employment received Cabinet approval to use imprest supply for an additional $1.2 million for emergency telecommunications services under Vote Business, Science and Innovation. This approval was given after the Supplementary Estimates had been finalised, resulting in the Ministry incurring $1.2 million of unappropriated expenditure. (A further $66,000 of unappropriated expenditure was incurred without Cabinet authority.)
3.32
The Ministry of Transport is responsible for the Crown's share of costs incurred by joint venture airports.10 The Ministry received claims dating back several years, and Cabinet approved up to $700,000 of extra funding from imprest supply to meet those claims. The amount of these claims exceeded the authority provided in the Supplementary Estimates by $597,000.
3.33
The unappropriated expenditure incurred with Cabinet authority but without appropriation during the year, amounting to $23.5 million, was under Vote Health. The settlement for the Mental Health and Addictions Support Workers Pay Equity Claim was agreed after the Supplementary Estimates had been finalised, and Cabinet agreed that the funding would be met from imprest supply. However, there was no existing appropriation authorising the payment. Because the decision was too late in the year to obtain appropriation through the Supplementary Estimates, the $23.5 million remained unappropriated.
How much unappropriated expenditure was incurred without prior authority?
3.34
The Government's financial statements report 10 instances of unappropriated expenditure incurred in 2017/18 outside the bounds of an appropriation and without prior Cabinet authority to use imprest supply (2016/17: eight instances). The amount of expenditure incurred without prior authority was $69 million (2016/17: $90 million). This was 0.07% of the Government's budgeted expenditure for 2017/18 as set out in Budget 2017 (2016/17: 0.1%).
3.35
Figure 4 provides a breakdown of public expenditure that was not only unappropriated but also incurred without prior Cabinet authority.
Figure 4
Unappropriated expenditure incurred without prior Cabinet authority during the year ended 30 June 2018
| Unauthorised expenditure by category | 2017/18 Number | 2017/18 $million* | 2017/18 Votes |
|---|---|---|---|
| Expenses and capital expenditure incurred in excess of appropriation and without prior Cabinet authority to use imprest supply | 5 | 6 | Building and Housing; Business, Science and Innovation (2); Health; Prime Minister and Cabinet |
| Expenses and capital expenditure incurred outside the scope of an appropriation and without prior Cabinet authority to use imprest supply | 2 | 46 | Business, Science and Innovation; Internal Affairs |
| Expenses and capital expenditure incurred without appropriation and without prior Cabinet authority to use imprest supply | 3 | 17 | Building and Housing, Internal Affairs, Transport |
| Total | 10 | 69 |
* Figures are rounded to the nearest million dollars.
3.36
In four of the 10 instances shown in Figure 4, the Government spent less than $1 million more than the amount that was authorised by existing appropriations. A further four instances were between $1 million and $3.5 million above the existing appropriations.
3.37
The more significant instances of unauthorised expenditure reported in the Government's financial statements, in terms of the amounts involved, were in Votes Building and Housing; Business, Science and Innovation; and Transport. Between them, they accounted for $62.8 million of the $68.7 million of unappropriated expenditure incurred without prior Cabinet authority.
Vote Building and Housing
3.38
In August 2017, the Ministry of Business, Innovation and Employment received approval for three in-principle expense transfers from 2016/17 to 2017/18, totalling $1.25 million to the Temporary Accommodation Services appropriation.
3.39
Approval for a fourth expense transfer to Temporary Accommodation Services was not obtained initially. The Ministry obtained authority in March 2018, but $3.34 million in expenses incurred up to that point was unauthorised.
Vote Business, Science and Innovation
3.40
In September 2017, Crown Fibre Holdings Limited changed its name to Crown Infrastructure Partners Limited. The Ministry of Business, Innovation and Employment paid $45 million to Crown Infrastructure Partners Limited in December 2017 for the rollout of ultra-fast broadband. This payment was considered to be outside the appropriation because the scoping statement limited expenditure to the company under its previous name (Crown Fibre Holdings Limited) and not the company under its name at the time the payment was made (Crown Infrastructure Partners Limited).
3.41
This is the largest instance of unappropriated expenditure reported in the Government's financial statements, and accounts for 38% of the total unappropriated expenditure for the year. The expenditure was budgeted for and was paid to the correct company. However, because of the company's name change, the expenditure was deemed to be outside the scope of the appropriation.
Vote Transport
3.42
The Crown and Auckland Council are joint sponsors of the Auckland City Rail Link. Vote Transport includes an appropriation for the Government's share of capital expenditure on the project ($436 million for 2017/18). In 2017/18, the Ministry of Transport paid $14.45 million to Auckland Council in finance costs for stage 1 works and interim funding. These finance costs did not meet the criteria for being capitalised and have been accounted for as operating costs. Vote Transport had no appropriation for operating costs for the City Rail Link, so the finance cost expense was unappropriated.
3.43
Although the finance cost expense was unappropriated, it was not additional to the total funding under the Vote for the City Rail Link. The Ministry's total expenditure on the City Rail Link was within the spending limit authorised by Parliament and committed by the Crown; the issue was one of the correct accounting treatment of some of the expenditure and the implications of that for the necessary appropriation category.
Trend in unauthorised expenditure
3.44
Figure 1 shows that the number of times that expenditure was incurred without prior Cabinet authority has declined overall in recent years. In 2017/18, there were 10 instances of expenditure incurred without prior authority, slightly more than a third of the number that occurred in 2009/10 (27 instances).
3.45
Figure 2 shows the dollar amount of unappropriated expenditure incurred without prior Cabinet authority from 2009/10 to 2017/18. There appears to be no discernible pattern to the dollar amount of unauthorised expenditure in the past nine years. However, in the last four years, the sum of money involved has been significantly lower than over the preceding four years, and the $69 million incurred in 2017/18 is the lowest since 2014/15.
Summary for 2017/18
Lawful but requiring confirmation
3.46
The three instances of unappropriated expenditure totalling $16 million that were incurred under section 26B were incurred lawfully (see paragraphs 3.27 and 3.28). That section of the Public Finance Act provides authority for expenditure to exceed appropriations by a limited amount in the last three months of the financial year, with the Minister of Finance's approval. This is desirable for providing flexibility when the extra spending is too late to be included in that year's Appropriation (Supplementary Estimates) Act.
3.47
Some of this extra expenditure was driven by demand. The unappropriated expenditure will need to be confirmed in the next Appropriation (Confirmation and Validation) Act.
Unlawful and requiring validation
3.48
The remaining 15 instances (totalling $103 million) are unlawful because either (a) the department obtained Cabinet's prior approval but the expenditure was not appropriated for in the Supplementary Estimates process or (b) the department incurred the expenditure without first getting Cabinet approval. This expenditure will need to be validated in the next Appropriation (Confirmation and Validation) Act.
3.49
There are many reasons why the Government incurs expenditure that has not been appropriated for, or otherwise authorised by, Parliament. Some of those reasons include oversights, inaccurate forecasting, poor planning, or poor management. But many other reasons are unavoidable or, at least, understandable. Examples include the three particular events described in the following paragraph, which accounted for 77% ($78.6 million) of the $103 million of expenditure requiring validation.
3.50
The Ministry for Primary Industries incurred 8.5% of this amount ($8.7 million) to deal with the mycoplasma bovis outbreak. The Ministry of Health incurred 24% of this amount ($24.8 million) settling the Mental Health and Addictions Support Workers Pay Equity Claim. And the Ministry of Business, Innovation and Employment incurred a further 44% of this amount ($45 million) because of a company name change.
3.51
In our view, most expenditure that was unlawful and therefore in need of Parliament's validation was incurred in reasonable circumstances. We consider that the public finance authorisation and accountability system generally continues to work well, and the transparency of disclosures in the Government's financial statements (and in government departments' annual reports) provide transparency to Parliament and the New Zealand public about expenditure when it is incurred above or beyond the appropriation limits.
3.52
Nonetheless, we expect improvements to be made in those instances where departments can better manage their appropriations, better anticipate events (and their financial reporting treatment and related appropriation implications), and make better use of the flexibility provisions provided in the Public Finance Act 1989.
9: Imprest Supply Acts allow the Government to incur expenses or capital expenditure in advance of gaining further appropriation from Parliament. But this authority is granted only if that further appropriation is obtained during the same financial year (that is, in the annual Appropriation (Supplementary Estimates) Act). If expenditure incurred under imprest supply is not appropriated during the financial year, it remains unappropriated and is unlawful until it is validated by Parliament.
10: Airports in which the Government is a joint venture partner.