Part 3: The audit reports we issued

Insights into local government: 2020.

3.1
Each year, auditors give an independent report on each council's financial statements and performance information (statements of service performance). This information is an important part of the council's annual report and its accountability to its community.

3.2
The auditor's report lets a reader know whether they can rely on the audited information in the council's annual report.

3.3
In this Part, we discuss when councils adopted their 30 June 2020 annual reports and whether they met the deadline for doing so, the types of audit reports we issued, and the effect of Covid-19 on our audits.

When the audit reports were issued

3.4
The Local Government Act 2002 requires councils to:

  • complete and adopt an annual report that contains audited financial statements and service performance information within four months after the end of the financial year;
  • make the audited annual report publicly available within one month of adopting it; and
  • make an audited summary of the annual report publicly available within one month of adopting the annual report.

3.5
In response to Covid-19, Parliament passed legislation on 5 August 2020 to extend the statutory reporting time frames for councils (amongst other public entities) by two months. For councils, this moved the statutory deadline from 31 October to 31 December 2020. The statutory time frames were extended so that council staff and auditors could ensure that there was no reduction in the quality of financial and performance reporting because of the impact of Covid-19.

3.6
Five councils missed the revised deadline to complete and adopt their audited annual report.

3.7
There has been a 10% decline to 86% in the number of councils making their annual report publicly available within a month of adoption and a 10% decline to 82% in the number of councils releasing their summary annual reports within a month of adopting their annual report.

3.8
We consider that this is likely because the statutory deadline was extended until the end of December 2020. This meant that the deadlines for making the summary and the annual reports available often occurred during the holiday period.

3.9
Appendix 2 provides more detail on when councils adopted and publicly released their annual reports and summary annual reports.

The types of audit report we issued

3.10
At the end of December 2020 (the revised statutory deadline), audit reports had been issued on 73 councils' financial statements and performance information for the financial year ended 30 June 2020. All of the council audit reports issued included an emphasis of matter paragraph. We explain this in more detail in paragraph 3.14.

3.11
If a material aspect of a council's financial statements or performance information does not comply with accounting standards or the organisation cannot provide us with the evidence needed to support that information, we issue a "qualified audit opinion".15

3.12
We issued 21 qualified audit opinions on councils' financial statements and performance information. Many of the qualified audit opinions related to issues arising in the performance information reported by councils. We explain this in more detail in paragraphs 3.15-3.27.

Emphasis of matter paragraphs – impact of Covid-19

3.13
The World Health Organisation declared Covid-19 a pandemic on 11 March 2020. In response, we considered what effects the pandemic, including the potential economic impact and possible effects of the nationwide lockdown,16 would have on public entities and their accountability documents. We determined that it would be prudent to refer to this in the audit reports that we issued for all public entities for the year ended 30 June 2020.

3.14
As a result, we included emphasis of matter paragraphs in all council audit reports17 to draw attention to the relevant disclosures about the impact of Covid-19 that each entity made in its financial statements and performance information.

Qualified opinions – statement of service performance information

3.15
The statement of service performance contains important information about what a council achieved during the year. The performance that a council reports should tell a story about the services it delivers, why it delivers them, what standards it is looking to meet in delivering those services, and what difference it intends to make for the community it delivers services to.

3.16
Good quality reporting, of both non-financial and financial information, allows informed consideration by readers – particularly those from the communities affected – about what is happening and what could be done better. Of the audit opinions we issued for the year ended 30 June 2020, 20 (27%) included qualifications on the council's non-financial information. For the 30 June 2019 financial year, we issued seven qualified opinions on non-financial information repeated in the statement of service performance.

3.17
Ten of the performance information qualifications were related to the measures that councils are required to report as set out in the Non-Financial Performance Measure Rules 2013 (the Rules) made by the Secretary for Local Government. This included measures that include the number of complaints (per 1,000 properties connected) received about:

  • drinking water clarity, taste, odour, pressure or flow, continuity of supply, and the council's response to any of these issues;
  • sewage odour, sewerage system faults and blockages, and the council's response to issues with the sewerage system; and
  • the performance of the stormwater system.

3.18
The Department of Internal Affairs has issued guidance to help councils apply the Rules. This includes guidance on how to count complaints.

3.19
Our audits found that the 10 councils had not counted complaints in keeping with the Department of Internal Affairs' guidance. We also found that the method of counting these councils used was likely to have understated the actual number of complaints received in the current year and in comparative years.

3.20
In some cases, complete records were not available and auditors were unable to determine whether the councils' reported results for these performance measures were materially correct.

3.21
These measures are important because the number of complaints are indicative of the quality of services received by ratepayers as well as the scale of the issues that are the subject of the complaints.

3.22
Further, we also identified that four of those councils had deficient systems for classifying complaints against each of the three measures of water performance listed in paragraph 3.17.

3.23
Four of the qualifications on performance information related to councils who used information provided by Wellington Water Limited.18 Auditors identified issues with the following performance measures:

  • fault response times for water supply, wastewater, and stormwater; 19
  • number of dry weather sewerage overflows;20
  • maintenance of the reticulation network – water supply;21 and
  • total number of complaints received.22

3.24
Wellington Water Limited was unable to provide reliable information for these performance measures for the following reasons:

  • inaccurate inputs – for example, attendance and resolution times for fault service requests were not always recorded at the point in time that they occurred;
  • system faults – for example, the system used to record dry weather sewerage overflows incorrectly included other events; and
  • limited input information – for example, there were a limited number of water meters across the reticulation network to reliably report the water loss percentage for each shareholding council and the information was reported at a regional level.

3.25
For four statement of service performance qualifications, auditors found that the supporting evidence for the performance measures being reported was unreliable. The reasons for this varied, for example:

  • For one council, the performance measures for its water supply and wastewater services were considered unreliable as a result of implementing a new customer service request system. The system was successfully implemented but this was six months after it was introduced, so the council was unable to provide accurate supporting evidence for the first six months of the financial year.
  • One council received a qualification on its performance information for fault resolution times for water-related call outs. The data used to generate the results contained several irregularities, such as negative response and resolution times, and requests dated before the current year. The way the data was recorded meant that there was not sufficient evidence to support the measures.
  • One council received a qualification on its performance information for resource consent processing times in 2018/19. In this case, it was because auditors were unable to determine whether the council's comparative year information was materially correct for this performance measure. The council had resolved the issues with recorded consent processing times for the 2019/20 audit, but the limitation for comparative year data could not be resolved.
  • One qualification on performance information was directly related to Covid-19. The measure was of customer satisfaction for public transport services. This is an important aspect of transport and urban development performance because it indicates the quality of the service provided. In this instance, a customer survey to determine passenger satisfaction levels could not be completed because of the nationwide lockdown. As a result, the council could not report on customer satisfaction.

3.26
The increase in the number of qualifications on council's non-financial information indicates that, increasingly, councils' performance systems are not robust or, in some cases, not fit for purpose, resulting in poor performance reporting. Communities want to know that the levels of service they are receiving for the rates they pay. This is a critical part of ensuring that the community can have trust and confidence in their council.

3.27
To produce reliable data, councils need robust performance management systems. Otherwise, it is difficult for a council to clearly understand its performance and where it needs to focus its finite resources to maintain the appropriate levels of service for its communities.

Other qualified opinions

Kaikōura District Council

3.28
Kaikōura District Council received a qualified opinion on both its financial and performance information.

3.29
Complexities created by the earthquake in November 2016 mean that Kaikōura District Council has continued to receive qualified audit opinions because of limitations and uncertainties supporting the value of certain assets reported in its financial statements.

3.30
In 2019, Kaikōura District Council was able to revalue its infrastructure assets and buildings. We were satisfied that the revalued carrying amount was fairly reflected at 30 June 2019 in the financial statements. However, we still issued a qualification on the financial information because there was a limitation relating to impairment and revaluation movements in the figures for the previous year. We were satisfied that property, plant, and equipment was appropriately accounted for in the year ended 30 June 2020.

3.31
We also issued a qualification on Kaikōura District Council's performance information because the Council does not have sufficiently reliable systems and processes to accurately report a number of performance measures. For just under half of the performance measures, the Council either was not able to report on any performance for the year or had reported performance as incomplete.

Taranaki Regional Council

3.32
We issued a qualification on Taranaki Regional Council's financial information because there were limited audit procedures that our auditor could adopt to independently confirm the reasonableness of the carrying value of earthquake-prone stands at Yarrow Stadium.

The effect of Covid-19 on our audits

3.33
Covid-19 significantly affected the way auditors completed their 2019/20 audits. There were also additional uncertainties and complexities that auditors needed to consider in carrying out their audit work. In many cases, this resulted in extra audit work and additional audit fees.

3.34
Our priority was to maintain the health and well-being of our staff while responding to Covid-19 and during the lockdowns in Alert Levels 3 and 4.

3.35
There were logistical impacts. For example, audit teams were required to work remotely in many cases and often at late notice, particularly as parts of the country moved in and out of alert levels. At times, this meant the audit work was not carried out as efficiently as it could have been and took longer to complete than would normally be the case.

3.36
Covid-19 also added uncertainty and complexity to our audit work, which increased the risk of material misstatement in financial statements. For example, the assumptions used in asset valuations, including investment properties, were more uncertain with a wider range of possible outcomes than in previous years.

3.37
Councils with investments in airports and other council-controlled organisations significantly affected by the disruption created by Covid-19 required additional audit work to gain assurance that the value of the investment was accounted for correctly and councils were making the appropriate level of disclosures in their annual reports.

15: For definitions of audit reports, see Office of the Auditor-General (2014), The Kiwi guide to audit reports.

16: On 21 March 2020, the New Zealand Government introduced a four-tiered alert-level system in response to Covid-19. On the 25 March, New Zealand moved into Alert Level 4 and a nationwide lockdown. A state of emergency was declared. More information on this timeline is available at www.covid19.govt.nz.

17: The Auckland Council audit report did not include an emphasis of matter paragraph in their audit report, as they are issued with a key audit matters opinion. However, the Auckland Council audit report still refers to the effects of Covid-19 and makes reference to the relevant disclosures where they are relevant to our key audit matters.

18: Wellington Water Limited manages the water assets and services of six councils and provides performance information in respect of those services to all six councils, which are then required to report that information in their respective statements of service. The limitations in scope affecting the four council's that received qualifications were not considered significant in the other two council's because they did not report the same performance information because of how they deliver water services.

19: All four councils that received a qualification had an issue with this measure.

20: All four councils that received a qualification had an issue with this measure.

21: Three of the councils that received a qualification had an issue with this measure.

22: Three of the councils that received a qualification had an issue with this measure.