Auditor-General's overview

E ngā mana, e ngā reo, e ngā karangarangatanga maha o te motu, tēnā koutou.

Last year was extraordinary. Covid-19 caused significant disruption for most public organisations, including councils and the organisations they own. Despite this, councils continued to deliver essential services to their communities, as well as leading the local response when a state of national emergency was declared due to Covid-19.

It can be easy to overlook the wide range of services councils provide to their communities. However, there are many proposed changes on the horizon to the traditional roles and functions of local government. New regulatory requirements are being put in place or proposed (for example, new and updated national policy statements). Other areas for change are also being proposed, including the three waters and resource management reforms. The reform processes, and the information and engagement requirements these involve, have added to the stresses already evident in local government.

The proposed reforms have the potential to reshape New Zealand's system of local government. This has led to the recent announcement of a review into the future for local government. It is a difficult time for the local government sector, which needs to continue to deliver and develop core services at the same time as its future role is considered.

Providing affordable and sustainable services to communities has always been a challenge for councils, but it is becoming even harder. Previous Auditors-General and I have noted concerns that councils have not been adequately reinvesting in their assets. This trend continued in 2019/20. However, many councils have identified this matter in their 2021-31 long-term plan consultation documents. Within these documents, we saw some councils confront the infrastructure issues they are facing and propose to raise rates to provide sustainable services over the long term. My view is that well-planned, funded, and well-managed asset renewal programmes are critical to sustainable service delivery. Without this, communities can end up paying more for asset renewals and suffering unexpected disruptions to services because of asset failure.

Councils also need skilled staff. I acknowledge the difficulty many councils have in attracting and retaining qualified staff. The proposed changes for local government are likely exacerbating this. In the current environment, procurement strategies that acknowledge the tight contractor and consulting market are also critical.

Effective governance of councils is important. I am pleased to see that there has been a concerted effort across the sector to enhance the performance and function of audit and risk committees, including:

• establishing a committee when there was not one in place already;
• appointing one or more independent members with the required skills to consider and advise on risks, to support the council; and
• reviewing the committee's terms of reference to ensure that they are fit for purpose.

My Office will continue to support audit and risk committees by regularly sharing our insights and observations and updating our good practice guidance.

Governing bodies also have a role in assessing the design and effectiveness of councils' internal systems and controls. We recently released our revised good practice guides on conflicts of interest and sensitive expenditure. In a rapidly changing environment, it is important that councils' policies are reviewed regularly to ensure that they remain appropriate and that they continue to be followed. Effective governance also extends to oversight of organisations that councils have ownership interests in. The review of Auckland Council's council-controlled organisations by an independent panel includes information that should be useful for the wider sector.

This report explores in some detail the challenges faced by regional councils in managing conflicts of interest. This includes discussions about some of the conflict of interest issues and challenges we considered during the year, along with two examples from regional councils that we have considered previously to illustrate the points we discuss. Many regional councils have elected members from agricultural backgrounds, and the management of conflicting interests can be complicated as councils seek to make regulatory and planning decisions. This is further complicated by the fact that the Local Authorities (Members' Interests) Act 1968 is dated and is out of step with the approach other sectors take to managing conflicts of interest – it is timely for this legislation to be reviewed.

The preparation of councils' 2019/20 annual reports and our audits were severely disrupted by Covid-19. Our auditors needed considerably more time to complete the audits of the 2019/20 annual reports compared with a normal year. This has resulted in auditors seeking to recover additional audit fees from councils at a level that is unusual.

In response to Covid-19, Parliament extended the statutory reporting time frames for councils (among other public entities) by two months. This was an important step to ensure that the quality of reporting was not compromised at a time when robust financial and performance reporting was even more critical than usual.

Having said this, my auditors issued more qualified audit opinions on councils' annual reports than they have previously. Most qualifications were because the auditor was not able to obtain sufficient evidence to support non-financial performance reported by councils. The performance that a council reports should tell a story about the services it delivers, why it delivers them, and what difference it intends to make to its community. Councils need robust systems to collect and report performance, not only for their financial performance but for their non-financial performance as well. Ratepayers should know the levels of service they are receiving for the rates and charges they pay.

The delay in preparing councils' 2019/20 annual reports and the uncertainty and complexity caused by Covid-19 have proved challenging for both council staff and my auditors, especially as they moved immediately into the preparation and audit of 2021-31 long-term plans and the associated consultation documents. I expect that the 2020/21 financial year-end will also be a challenge as the impact of Covid-19, together with challenges of resourcing, affect both councils and my auditors.

Councils provide services that are important to all New Zealanders. In a challenging environment, council staff have continued to work tirelessly for the benefit of their communities.

Nāku noa, nā,

John Ryan
Controller and Auditor-General

22 June 2021