Part 3: The audit reports we issued

Insights into local government: 2021

Each year, our auditors issue an independent opinion 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.

The audit opinion lets the reader know whether they can rely on the audited information in the council's annual report (including whether the council's reported performance in the annual report fairly reflects their actual performance for the year).

In this Part, we discuss:

When councils adopted their 2020/21 annual reports

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 of 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.

In response to the Covid-19 pandemic, Parliament passed legislation to extend the statutory reporting time frames for councils (as well as other public entities) by two months. For councils, this moved the statutory reporting deadline from 31 October to 31 December 2021. The statutory time frames were extended so that council staff and auditors could ensure that the quality of financial and performance reporting was not affected by the impacts of the Covid-19 pandemic.

Twelve councils had their audit opinions signed after the reporting deadline. This was because there were delays both in councils providing information to auditors and in audits being completed (because of an auditor shortage in New Zealand and the consequential effects of the Covid-19 pandemic, including lockdowns). This meant that some of our audits were completed later than required by the Local Government Act 2002.

Seventy-two councils (92%) made their annual reports publicly available within a month of adoption, and 64 councils (82%) released their summary annual reports within a month of adopting their annual report.

We consider that this is likely because the statutory reporting deadline was extended until the end of December 2021. This meant that the deadlines for making the annual reports and the summaries available often occurred during the holiday period.

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

The types of audit reports we issued

Audit reports were issued for 76 councils' financial statements and performance information for the financial year ended 30 June 2021.

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".38

We issued 23 qualified audit opinions on councils' financial statements and performance information for 2020/21.

Qualified opinions – statement of service performance information 

Of the 23 qualified audit opinions, 19 (82%) related to issues with the performance information that councils reported.

The statement of service performance contains important information about the services a council has provided and what the council has achieved. The performance information that a council reports should tell a coherent 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.

Good quality reporting of both non-financial and financial information allows informed consideration by readers of what has been implemented and what could be improved further. Of the audit opinions we issued for the year ended 30 June 2021, 19 of 76 (25%) included qualifications about aspects of the non-financial information reported by councils. This is a decrease from 27% in 2019/20.

Eighteen of the performance information qualifications we issued were related to the measures that councils are required to report, as set out in the Non-Financial Performance Measures Rules 2013 (the Rules) provided by the Secretary for Local Government.

These mandatory performance measures include the total number of complaints (per 1000 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.

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

In some instances, councils had incomplete records of complaints, so we were unable to determine whether the results the council reported for these performance measures were materially correct.

These measures are important because numbers 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 complaint.

Five of the qualifications on performance information (excluding the one for Greater Wellington Regional Council) related to councils who used information provided by Wellington Water Limited.39 Our auditors identified issues with the following performance measures:

  • maintenance of the reticulation network (for water supply);40
  • total number of complaints received (for water supply, wastewater, and stormwater);41
  • fault response time (for water supply and wastewater); and 42
  • number of dry weather sewerage overflows (for wastewater).43

For the five councils where we issued qualified audit opinions, Wellington Water was unable to provide reliable information on the performance measures because:

  • it was unable to report reliable water loss percentage because the percentage is estimated using information obtained from water meters throughout the reticulation network; 
  • the complete records of complaints were not available, and it did not classify complaints; and 
  • it was unable to accurately report on the three waters fault response time and the number of dry weather wastewater overflows. 

Kaikōura District Council did not have reliable systems and processes in place during the year to accurately report on several performance measures. For just under half of the performance measures, the Council was either not able to report any performance for the year or has reported performance as incomplete. As a result, we were unable to obtain sufficient appropriate evidence over the reported performance against these performance measures.

The large number of qualifications on councils' non-financial information indicates that many performance systems are not robust or, in some instances, not fit for purpose, resulting in poor performance reporting.

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. It also means that councils are not clearly demonstrating their performance to their communities, which undermines public accountability.

Six councils received a qualified opinion on their financial statements 

Asset revaluations (Kaikōura District Council, Invercargill City Council, Dunedin City Council, and Taranaki Regional Council)

Kaikōura District Council and Invercargill City Council received qualifications relating to their asset revaluations.

Councils that measure their assets at fair value are required to carry out regular revaluations to identify any differences between the revalued amounts and the carrying amounts of the assets. Where there are significant differences, councils are required to carry out an updated revaluation and show the revalued amounts for those assets in their financial statements.

Market and cost information available since the previous revaluation indicated that there could have been a significant difference between the revalued amounts and the carrying amounts of the assets. These indications would normally trigger a revaluation. However, because Kaikōura District Council and Invercargill City Council did not carry out revaluations as at 30 June 2021, it was not practical for the auditors to determine the amount of any adjustments needed.

Dunedin City Council received a qualified opinion on its financial statements with respect to the valuation of its three waters infrastructure assets. There was some evidence that the methodology that the Council applied might have resulted in the valuation being based on replacement costs that were significantly lower than the recent contract rates incurred by the Council for renewing these assets.

Dunedin City Council disclosed that it intended to engage experts to review its current valuation methodology to determine whether it is still appropriate. This review could lead to a different approach that might materially alter the carrying values of the assets. Because this review had not been carried out, the scope of the audit was limited.

We issued a qualified opinion on Taranaki Regional Council's financial information because there was limited information available to assess the accuracy of the carrying value of the Eastern and Western Stands of Yarrow Stadium.

The auditor's work was limited over the comparative year financial information relating to a related entity (West Coast Regional Council)

In their annual reports, councils are required to disclose comparative financial and non-financial information so that current year results can be compared with the previous year's results. In 2020/21, we issued a qualified audit opinion on West Coast Regional Council's comparative (2019/20) financial information. The results for 2020/21 were not qualified.

In its 2019/20 financial statements, West Coast Regional Council included information relating to a former investment in an associate44 where the council was able to exercise significant influence. The auditor for the associate was unable to obtain appropriate audit evidence to form an opinion on the going concern assumption in the associate's financial statements. Therefore, the auditor issued a disclaimer of opinion on the financial statements of the associate for the year ended 31 March 2020.

Because of this, we were also unable to obtain sufficient audit evidence to support the financial information relating to the associate for the year ended 30 June 2020. Any misstatement of this financial information could affect the regional council's comparative year statement of financial position and statement of comprehensive revenue and expense.

Post-balance date clarification of tax position (Greater Wellington Regional Council)

Greater Wellington Regional Council's subsidiary company, CentrePort Limited, received formal communication from Inland Revenue that resolved the uncertainties associated with estimating the tax expense and deferred tax liability after the reporting date.

Events after the reporting date considered to be an adjusting event should result in adjustments to the financial statements. Therefore, the financial statements of the Group should have been adjusted to reflect the clarified taxation position. However, the Council did not make the required adjustments to the subsidiary companies' financial statements. Therefore, the Group tax expense and deferred tax liability were overstated, and the financial statements did not comply with generally accepted accounting practice in relation to this matter.

Emphasis of matter paragraphs

Of the 76 audit reports we issued, 54 reports (71%) included an emphasis of matter paragraph. Emphasis of matter paragraphs are included in audit reports to draw readers' attention to a matter that, in the appointed auditor's professional judgement, is fundamental to readers' understanding of the audited information.

Three waters reform

In 2020, the Government announced the Three Waters Reform Programme (the three waters reform) to establish four publicly owned water services entities to take over responsibilities of service delivery and infrastructure from local authorities from 1 July 2024. If these reforms are legislated as proposed, councils will no longer provide three waters services and will no longer own three waters assets.

As a response to the three waters reform, we included emphasis of matter paragraphs in 53 council audit reports to draw attention to the relevant disclosures about the effects of the reform that each entity made in its financial statements and performance information.

In July 2022, the Office provided a submission to the Finance and Expenditure Committee on the Waters Services Entities Bill.45

We highlighted the importance of clear accountability arrangements through good performance reporting, independent assurance of performance, and engaging with respective communities. These factors will be key to maintaining public accountability and transparency of the proposed water services entities.

Significant valuation uncertainty due to Covid-19 (Queenstown Lakes District Council and Mackenzie District Council)

Because of the continuing impact of the Covid-19 pandemic, the auditor of Queenstown Lakes District Council highlighted a significant valuation uncertainty over specific infrastructure, including land, building, and taxiways.

The auditor of Mackenzie District Council noted significant valuation uncertainties related to estimating the fair value of the council's investment properties.

Adjustment to fair value of operational port land (Greater Wellington Regional Council)

For the Greater Wellington Regional Council, fair value of operational port land was adjusted for the remaining resilience work required to support the land after the Kaikōura earthquake. The cost of completing the land resilience work has been estimated with reference to the cost of completed work and third-party estimates, which are sensitive to change.

Key audit matters

The auditor of Auckland Council reported on key audit matters. This is because Auckland Council is a Financial Markets Conduct reporting entity.

Key audit matters are matters that are considered complex, have a high degree of uncertainty, or are important to the public because of their size or nature. Auditors include them in audit reports to assist readers to understand the key matters that attracted the auditor's attention during the audit.

The auditor of Auckland Council included the following key audit matters in their audit report:

  • valuation of property, plant, and equipment;
  • valuation of the weathertightness and associated building defect claims provision;
  • valuation of derivatives; and
  • reporting performance on three waters, transport, and housing in response to population growth.

The impact of the Covid-19 pandemic on our audits

The Covid-19 pandemic significantly affected the way auditors completed their 2020/21 audits. There were also additional uncertainties and complexities that auditors needed to consider in carrying out their work. In many instances, this resulted in extra audit work and, sometimes, in additional audit fees, although audit inefficiencies were not recovered. 

The Covid-19 pandemic also affected logistics. For example, audit teams were frequently required to work remotely and often at late notice, particularly as parts of the country moved in and out of alert levels. At times, this meant that 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. 

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

In 2020/21, only two councils received audit reports containing emphasis of matter paragraphs related to the Covid-19 pandemic and its impact on assumptions used in asset valuations, including investment properties.

38: Office of the Auditor-General (2014), "The Kiwi guide to audit reports", at

39: Six councils, including Wellington City Council, are joint shareholders in Wellington Water Limited. Wellington Water reports its performance in providing water services to the six councils. The six councils are also required to report this performance in their respective statements of service performance.

40: Four councils that received a qualification had an issue with this measure.

41: Four councils that received a qualification had an issue with this measure.

42: One council that received a qualification had an issue with this measure.

43: One council that received a qualification had an issue with this measure.

44: An associate is an entity over which the investor (council) has significant influence. Examples of significant influence include representation on the board, participation in policy-making processes, material transactions between the two entities, interchange of managerial personnel, or provision of essential technical information.

45: Office of the Auditor-General (2022), Submission on the Water Services Entities Bill, at