Controller update: January to June 2019
We have decided to provide regular updates because the Controller role is one of the more important roles that we carry out. It is also one of the less well known. This update covers the second six months of 2018/19. An update in April covered the first six months of 2018/19.
The Controller and Auditor-General is often referred to as a “watchdog” on Government spending. An important part of the watchdog aspect is the Controller role.
In the Controller role, we provide assurance to Parliament and New Zealanders that the Government has spent public money in line with Parliament’s authority.
The Controller and Auditor-General carries out his Controller role throughout the year, and reports more fully to Parliament after the end of the financial year to 30 June.
We have a strong interest in New Zealanders’ trust and confidence in the public sector. A key element in that is our role in helping to ensure that all government spending is properly authorised and within the law.
What did we find during the second half of 2018/19?
Most government spending for the second six months of 2018/19 was properly authorised and within the law. However, since January 2019 we have confirmed several instances of unauthorised expenditure.
Unauthorised expenditure
For the months January to June 2019, we confirmed several instances where departments had spent public money without the correct authority. We found these during our monthly monitoring work (which we do in partnership with the Treasury) and during our end-of-year audit work of government departments.
1. Ministry of Education
Since 1991, the Ministry of Education has operated an insurance activities scheme for some schools. It retains a small portion of the schools’ operational grants to buy collective insurance cover and manage the scheme. The accounting treatment adopted for this activity meant that insurance expenses were unappropriated.
Early in 2019, the Ministry contacted the Treasury and the Controller to clarify the correct accounting treatment. The Treasury and the Controller told the Ministry that insurance expenses needed to be accounted for in a new appropriation because the scope of the existing appropriations was not wide enough to cover the insurance expenses. The Ministry then corrected its accounting treatment. The unauthorised spending for 2018/19 was $2.401 million. After the problem was identified, a new appropriation was approved, in April 2019, to provide authority for insurance expenses for the rest of 2018/19. We have also confirmed unauthorised spending for the previous four years.1
2. New Zealand Defence Force
The New Zealand Defence Force (NZDF) has changed the way it accounts for cost recoveries (mainly rent received for service housing and barracks) and the related expenses. With the change in accounting practice, the reported expenses are now higher than before and exceed some of NZDF’s appropriations.
Since NZDF’s formation in 1990, it had offset cost recoveries (rent revenue) against the related expenses. NZDF states that it received advice from independent advisors that accounting for the expenses on a net basis was valid.
The cost recoveries are now correctly accounted for as revenue, and this has meant that the related expenses are now reported at a higher amount (that is, with no offsetting cost recoveries). The unappropriated spending for 2018/19 was $8.591 million. We have also confirmed unappropriated spending for the previous four years.2
3. Ministry of Health
During year end, the Ministry of Health reviewed several health-related items on the Crown balance sheet that had been accounted for as investments. It concluded that they needed to be written off. These investments included a joint initiative that did not proceed, payments made for housing modifications, and some other costs that should have been treated as operating expenses.
The expense caused by the write-offs ($22.588 million) was not covered by an existing appropriation under Vote Health, resulting in an unappropriated expense.
4. Ministry of Business, Innovation and Employment
With the right approvals, government departments can move money between appropriations and between years. The Ministry of Business Innovation and Employment (MBIE) got the timing wrong when it incurred expenditure prior to the granting of authority.
MBIE had asked for a transfer from 2017/18 to 2018/19 for fixing the facades and parapets of unreinforced masonry buildings. But it incurred spending of $926,000 before the transfer had been approved.
MBIE also reported unappropriated expenditure of $151.9 million, which resulted from the timing of an accounting adjustment for interest-free loan facilities provided to local authorities from the Housing Infrastructure Fund. MBIE had Cabinet approval for an expense appropriation to cover the effect of writing down interest-free loans to their fair value. However, the accounting adjustment was made after the appropriation had been transferred to the Ministry of Housing and Urban Development. Therefore, there was no longer an appropriation in MBIE’s Vote Building and Housing to cover the expense.
5. Ministry for the Environment and Department of the Prime Minister and Cabinet
Some expenses are more challenging than others to manage within appropriations, as two agencies found in 2018/19.
The Ministry for the Environment paid $489,000 more to councils than it had authority to do. But there was a Crown obligation to do so, and the Ministry had little choice. The payment to Councils was tied to revenue collected from the Waste Disposal Levy – because revenue collected was higher than expected, the obligation to pay the councils was higher than the amount that was authorised.
The Department of the Prime Minister and Cabinet settled a legal dispute, which it inherited from the Canterbury Earthquake Recovery Authority. The Department considered the $500,000 cost to be a “departmental” expense; that is, an expense incurred in carrying out its operations. However, the Controller determined it to be a “non-departmental” expense. There was no non-departmental expense appropriation to authorise the expense, once reclassified, and so the expenditure was unappropriated.
The importance of thinking ahead and careful management
Several of the above cases of unappropriated expenditure could have been avoided. We have been encouraging departments to try to anticipate when costs might be higher than expected and plan for that. Often, thinking ahead and careful management can help ensure that spending not expected at Budget time can be incurred lawfully. And departments need to manage their finances carefully to avoid spending before that spending has been authorised.
Unappropriated spending approved by the Minister
The Public Finance Act lets the Minister of Finance approve excess spending of up to the greater of $10,000 or 2% of the appropriation if the spending happens between April and June. Under this provision, the Ministry of Health received approval to exceed its appropriations to meet increased costs and growing demand for national disability support services. The Department of Conservation likewise received approval to cover unexpected costs from the write off of storm-damaged assets. And the Ministry of Foreign Affairs and Trade gained approval to cover excess expenses from its increased liability under the Holidays Act 2003.
Other matters worth noting
The Treasury has been looking for ways to add more flexibility to, and reduce the perceived compliance burden of, the appropriation system.
Appropriations are specific areas for expenditure authorised by Parliament; they are usually restricted by type (the nature of the spending), by scope (what the money can be spent on), by dollar amount (the maximum that can be spent), and by period (the time frame for which the authority is given).
Recently the Treasury introduced two changes aimed at increasing flexibility and/or reducing compliance: a new appropriation category with flexibility across types of spending and the time period3 and the ability to combine small appropriations in some instances. More flexibility makes compliance easier because it becomes harder to overstep the spending boundaries.
The Treasury consulted closely with us before making these changes. We agree in principle with moves to make the public finance system achieve its objectives more smoothly and at lower cost. However, removing restrictions can reduce the level of control Parliament has over government expenditure. That can also lead to less transparency when reporting what was done with the money, if the reported information is aggregated and not as broken down as it used to be. Transparency in reporting is important to accountability.
We are mindful that any reforms should preserve Parliament’s ability to authorise spending and to hold the Government accountable for that spending, at an appropriate level of detail. Just what the best level of detail is will be a matter of judgement. As Parliament’s “watchdog”, we will watch developments closely to help ensure that the transparency of, and accountability for, public spending is not unduly diminished.
For more information
Every year, the Government reports on unappropriated expenditure in the Financial Statements of the Government of New Zealand (the Government’s financial statements). On 8 October 2019, the Treasury published the Government’s financial statements for 2018/19. The financial statements include a Statement of Unappropriated Expenditure on pages 141 to 148.
In December of every year, the Auditor-General's report on our audits of public organisations that are part of central government is tabled in Parliament. In our report for 2018/19, we will provide a more detailed explanation of, and observations about, the public money spent without appropriation during 2018/19. We will also cover how 2018/19 compares with previous years.
1: Unappropriated expenditure for prior years will be validated, along with unappropriated expenditure from 2018/19, in the next Appropriation (Confirmation and Validation) Act.
2: Unappropriated expenditure for prior years will be validated, along with unappropriated expenditure from 2018/19, in the next Appropriation (Confirmation and Validation) Act.
3: Known as multi-category multi-year appropriations.