Part 1: The operating environment for central government
1.1
In this Part, we describe the central government operating environment, including:
1.2
We also briefly summarise the scope of our annual audit work in central government.
A changing economic and fiscal context
1.3
Disruption of production and international trade patterns associated with the Covid-19 pandemic were a feature of the reporting period. This contributed to sharp increases in global fuel and food costs. These factors arguably exacerbated long-standing global economic and political challenges. Central banks in many countries, including New Zealand, responded to inflationary pressure by increasing interest rates.
1.4
Although New Zealand’s borders have reopened, the country continues to experience labour shortages in key sectors.
1.5
In March 2022, we noted in our commentary on the Treasury’s long-term fiscal statement that:
During the next 40 years, New Zealanders will face a wide range of complex challenges and opportunities. Understanding what challenges and opportunities could significantly affect the government’s long-term financial sustainability is critical to supporting and informing the government’s strategic decisions in the Budget. It is also important for improving the quality and depth of public information and engagement.1
1.6
As well as the Covid-19 pandemic, other challenges that increase uncertainty and risk range from climate change, biosecurity risks, changing demographics, increasing prevalence of misinformation, to international tensions.
Challenges facing the public sector
The Covid-19 response
1.7
The pandemic is likely to have lasting effects on the public sector. These include:
- the challenge of continuing to provide key services while clearing the backlogs that result from the Covid-19 response (such as we have experienced in the audit profession);
- existing service issues that the Covid-19 pandemic has exacerbated, such as school attendance; and
- more general operating issues, such as staff turnover, supply chain constraints, and inflationary pressures.
Public sector reforms
1.8
Several major reforms are under way across the public sector, including in health, tertiary education, broadcasting, water management, and resource management. The Government is also considering the findings from the Ministerial review into the future for local government.
1.9
At the same time, there is considerable increased investment in responding to, and adapting to, climate change. In Part 2, we discuss the Treasury’s approach to accounting for the Government’s commitments made as part of the Paris Agreement. The commitments that have been made are potentially financially significant.
1.10
These reforms may increase the pressure on core services, given the context of general operating issues such as staff turnover. This is likely to continue for some time. The reforms also affect our work. For example, the health sector reforms require the Auditor-General to audit both the New Zealand Health Plan and the reporting of progress against it.
1.11
The Public Service Act 2020 changed the way that public organisations are expected to work together through formal structures such as cross-government initiatives and interdepartmental executive boards.2 It also set new expectations for the public service – in particular, for its stewardship responsibilities and its support for the Māori–Crown relationship. New joint arrangements present additional reporting opportunities to ensure that there is appropriate accountability over both spending and the progress being made in improved outcomes.
1.12
The operating environment of central government is complex, with a range of organisations involved in achieving inter-related outcomes. That complexity increases as new outcomes and additional organisational and governance arrangements are added. This makes clear reporting and accountabilities even more important. There have also been changes to the public finance system through the introduction of “clusters”.3 These are intended to support inter-agency collaboration, help Ministers to collectively direct spending and make trade-offs between related areas, support medium-term planning, and put a greater focus on value for money.
1.13
We expect the costs and benefits of these reforms will face increased attention from Parliament and the public as they are implemented in the coming years.
1.14
There are opportunities for the reforms to improve accountability and reporting arrangements, especially if those arrangements are established early in the reform process.
1.15
The success of the reforms will likely affect public confidence in the public sector and in the Government. High-quality information about the effects of the reforms will be important, which is why we will be looking at performance information in sectors undergoing major change in 2022/23.
Greater inclusion of Māori perspectives
1.16
Central government agencies have invested significant resources in how to include Māori perspectives in their decision-making. This has affected how the public sector operates.4
1.17
Te ao Māori is an integral part of our national identity, and New Zealand is now entering a post-settlement phase. About 90 Treaty settlements have been signed in the last three decades, and many of the reports of the Waitangi Tribunal are now moving to address contemporary issues.
1.18
This means that almost any aspect of government could come under the Waitangi Tribunal’s scrutiny. Those inquiries will likely centre on outcomes for Māori and Māori–Crown relations.
1.19
The principle of partnership that underpins the relationship between Māori and the Crown has evolved over time, along with the principles of participation and protection. Some parts of the public sector have applied these principles for many years.
1.20
Many public organisations are working out how to incorporate, or have already incorporated, tikanga and Māori values into their management systems. Several public organisations have cultural capability as part of their strategic planning and have established senior positions or cultural perspective units in their organisations as a way of including Māori perspectives in their decision-making.
Addressing climate change
1.21
Our audit of the Financial Statements of the Government of New Zealand for the Year Ended 30 June 2022 (the Government’s financial statements) included a focus on the Government’s climate change commitments.5 New Zealand has made significant commitments to reducing carbon emissions, which could have significant financial implications for the Government. Under the Paris Agreement, the Government has a commitment to reduce net greenhouse emissions to 50% below gross 2005 levels by 2030.
1.22
To meet these commitments, central government agencies are changing policy and legislative settings, regulatory interventions, and leadership practices. At the same time, there are planning, funding, and investing activities to reduce the public sector’s own carbon emissions and environmental impact.
1.23
We also have new responsibilities in relation to public organisations’ climate reporting. These responsibilities include auditing disclosures about greenhouse gas emissions in climate statements prepared by the public organisations with climate reporting obligations. We have an important role in providing an independent view on the reliability of the disclosures made.
1.24
We note the additional disclosure included in the Government’s financial statements this year, as well as the separate note disclosures about the Emissions Trading Scheme. As changes might be made quickly or with short notice, strong system leadership will be needed to help public organisations to use consistent financial, service performance, and other reporting practices.
The rise of the use of misinformation
1.25
New Zealanders are relying more on online platforms, including social media, for news, information, and social interaction.
1.26
These platforms can improve access to information, make it easier to connect with people, and raise awareness of issues. However, the amount of information online and the range of possible sources of information can make it harder for people to judge its quality or accuracy.
1.27
By providing transparent, accurate, and accessible information, the public sector can play an important role in this online environment. This is a message we have included in recent reports, such as those on public accountability, our commentary on He Tirohanga Mokopuna 2021, and on the cost of living payment, where we highlighted the importance of high-quality information and the good stewardship of public funds.
1.28
The importance of our role as a source of trustworthy information is also more apparent. Our work supports Parliament and the public to understand how the public sector is performing and whether it is operating with integrity. We will continue to provide resources to support good practice in the public sector. We will also be promoting the guidance we released in June 2022 to support public sector leaders in building and maintaining a culture of integrity in their organisations.
Our central government audit work
1.29
The Covid-19 pandemic compounded many of the challenges that the audit profession already faced. In particular, the response to Covid-19 restricted the international flow of auditors (who the New Zealand audit profession had relied on during peak workload periods), reduced staff availability to carry out audits, and made audits more complex. It also created significant challenges for those who prepare financial statements and performance information to complete the work in a timely manner and provide auditors with good quality information to audit.
1.30
In 2021, Parliament passed a bill to extend by two months the statutory reporting time frames in the Crown Entities Act 2004, applying until the end of 2022. This enabled us to better manage the effects of the auditor shortage and Covid-19 without compromising audit quality.
1.31
Our central government audits involve about 450 public organisations, including large government departments such as the Ministry of Education and the Department of Corrections, Crown entities such as the Civil Aviation Authority, State-owned enterprises such as New Zealand Post, and a range of others, such as Crown companies and membership organisations like the Chiropractic Board. This work calls on the professional expertise of our appointed auditors from Audit New Zealand and other contracted audit service providers.
1.32
We completed all significant 30 June year-end audits by the statutory reporting deadline of 30 September 2022.
1.33
The number of non-standard audit reports issued in 2022 was similar to 2021.6 Eighteen non-standard audit reports had been issued by the middle of November in 2021 and 17 in 2022.
1.34
Normally, non-standard audit reports are issued when there are uncertainties or other matters that our auditor has chosen to highlight about a public organisation’s information, for example, a lack of controls or limitations of scope over asset valuations.
1.35
Our most significant central government audit is our audit of the Government’s financial statements, which we discuss in Part 2.
1: Office of the Auditor-General (2022), Commentary on He Tirohanga Mokopuna 2021, Part 3, oag.parliament.nz.
2: This is a new model of public service agency that brings chief executives together to collaborate on complex, multi-agency issues.
3: The Government is piloting the establishment of two clusters of agencies in the justice and natural resources sectors.
4: See, for example, section 14 of the Public Service Act 2020.
5: The Treasury (2022), Financial Statements of the Government of New Zealand for the year ended 30 June 2022, Wellington.
6: A non-standard audit report is one that contains a qualified audit opinion and/or an explanatory paragraph.