Part 4: What I need to focus on

Auditor-General’s mid-term review.

I am satisfied that the Office has made good progress against the Office's strategy and in delivering on the investment Parliament has made since 2019. We now have broader capabilities, which we have used to:

  • broaden the focus and approach of our performance audits, inquiries, and other work;
  • refresh and expand our good practice material;
  • increase our use of data and analytics;
  • increase reporting from the Controller function;
  • better target our engagement with Parliament, public organisations, and other groups with an interest in our work;
  • increase our focus on performance reporting;
  • influence improvements in public accountability;
  • increase our staff capability; and
  • improve our information systems.

We have also given greater focus to our cultural capability.

However, some challenges still need to be addressed. These will be a focus for the remainder of my term as Auditor-General. I will need to focus on:

Strengthening our core assurance role, including clearing the current audit backlog

Auditing as a discipline and career choice is not as popular to students and those entering the workforce as it once was. There are currently fewer students studying accounting at New Zealand universities, and a tight labour market is giving graduates a wide range of opportunities. Historically, international recruitment and short-term supplementation during peak work periods could make up for the reduced number of people entering the audit profession.

Some smaller chartered accounting practices are also choosing to no longer offer audit services.

Offsetting these trends is that private sector audit service providers often prefer public sector audit work to some private sector audits. This means that these firms, even those with limited capacity, are often willing to take on more public sector audit work.

Nevertheless, a key issue for the sustainability of public sector auditing will be securing enough auditors of the right quality to carry out public sector audits in the future.

To some extent, whether or not chartered accounting practices choose to offer audit services will depend on whether auditing continues to be a profitable activity. Therefore, audit fees need to be reasonable for public organisations and allow auditors to cover the cost of completing a high-quality audit, invest for the future, and get a reasonable return for their work.

Although the Office has periodically made changes to audit portfolios for particular audit service providers, we have not reconsidered the appropriateness of the allocation of work to auditors across the Auditor-General's entire portfolio for some time. During the last decade or more (until the recent reallocations related to the Covid-19 pandemic), most changes were related to a single entity and in response to specific circumstances that had arisen.

Audit New Zealand has a deep understanding of the requirements of public sector auditing, including in key areas such as audits of spending against appropriations, audits of performance information, audits of councils' long-term plans, and awareness for issues of waste and probity.

Audit New Zealand also needs exposure to auditing both public benefit entities (such as government departments) and for-profit entities (such as many council-controlled trading organisations and other public organisations with a commercial focus) given the prevalence of groups that include both public benefit entities and for-profit entities, including the financial statements of the Government.

In part, this is because it is important for Audit New Zealand to have a balanced portfolio of audits to sustain relevant capability and to provide the Auditor-General with a direct view of the costs of, and challenges with, auditing all types of public organisations.

We have made progress with some immediate areas of concern. For example, we have developed secondment programmes with international audit offices and allowed staff from outside the country to work on audits in a way that manages information security risks. However, we know that there is much more to be done to reposition Audit New Zealand for the future.

Within the broader sustainability challenges in the Auditor-General's audit portfolio, the school sector has particular risks. Although we might be able to continue to contract school auditors for most schools, this is becoming more challenging for the reasons described in paragraphs 3.58 and 3.59.

Priorities for our core assurance role

My immediate priority is to support Audit New Zealand in clearing its backlog of deferred audits as a result of the Covid-19 pandemic. The current backlog is affecting Audit New Zealand's reputation and increasing the stress on staff, who have been under sustained pressure since the pandemic began. The backlog is also diverting attention away from repositioning Audit New Zealand.

To ensure a sustainable audit portfolio, it is timely to review the allocation of public sector audits. I have begun work to determine the appropriate portfolio for each of my audit service providers. During the next three years, I will use this review to move audits to the audit service provider I consider best suited to carry out the work in the medium to long-term.

Reviewing the audit portfolio will provide an opportunity to test whether the Office is providing each audit service provider (including Audit New Zealand) with a portfolio of public organisations that reflects their particular skills, knowledge, and capacity.

A key consideration will be reconfirming what Audit New Zealand's best role is in delivering public sector audits. To this end, I have started a review of Audit New Zealand. This review is looking at what a sustainable business model for this part of the Office is, capturing the benefits of our investment in new technology for audit delivery and practice management, and considering the right level of integration for Audit New Zealand within the Office's broader work (for example, how Audit New Zealand staff might be deployed on other work of the Office when capacity allows).

As noted in paragraph 3.60, there is an opportunity to consider the appropriateness of the public accountability arrangements for schools and to work with the Ministry of Education during the remainder of my term on streamlining financial reporting for schools and audit processes.

Continuing to increase the impact of our work

To remain relevant to Parliament and the public, we need to continue to focus on matters of public interest, concern, and risk. To do this, we will need strong intelligence gathering, analysis, and insight to inform our discretionary work programme, areas of audit emphasis, and matters that lend themselves to guidance and/or research.

We will continue to build on the forums we have developed (such as the Audit and Risk Committee Chairs' forums) and, as we did this year, consider surveying the public directly on the areas of interest they may have to inform our work.

We will continue to have regular discussions with select committee chairpersons as a group (to supplement regular individual meetings) and continue to invite members of Parliament to briefings on our reports.

We need to enhance our data and analytics capability and apply this to our mandatory audit work more effectively. We also need to extract more insight from the information we collect.

During the Covid-19 pandemic, we saw that the public sector was understandably more focused on the immediate than the longer term. Although this was understandable, climate change, carbon emissions reduction, and many of the Government's social and environmental programmes need a long-term perspective. The Office is in a unique position to help Parliament and the public by shining a light on how well placed the public sector is to address these and other long-term challenges.

Higher government debt levels in recent years – as a result of responding to the Covid-19 pandemic – have been a matter of increased public interest. Similarly, we expect the Office's role in considering value for money to also be of increasing public interest.

Understanding the performance of the public sector will rely on how well it reports on its own performance. This has been an area of concern to the Office. We will need to continue to focus on it for the remainder of my term.

We will continue to maintain our focus on, and promote improvement in, matters related to trust and integrity. This will include broad-based integrity audits of public organisations.

Continuing to enhance our relationships with Māori

To remain relevant, the Office must continue to be seen as trustworthy. We need to make sure that public organisations are held to account in a way that Parliament, iwi, hapū, and whānau Māori, as well as the wider public, can have confidence in.

The Office has recently developed a te ao Māori strategy and appointed our first director-level position designed to lead our capability development internally and help us build deeper and richer relationships with Māori.

The Office will need to carry out a significant programme of work to build our capability and our relationships in this area. Making progress with this work and establishing a basis for long-term relationships externally will be a key focus for me.

Building our influence

Although the Office has continued to produce work of significance and impact, the public generally does not have a good understanding of our role and what we stand for.

Declining public trust in governments around the world and an increase in widespread misinformation highlights the need for the Office's independent, authoritative, and trusted voice.

This does not mean that we need a high public profile. However, we must continue to be seen as a source of truth in a setting where there is an overload of information and increasing amounts of misinformation.

To do this, we need to be clear about whom we wish to influence and how best to do this. The roles of the Auditor-General and Deputy Auditor-General in informing public debate need to be more specifically defined.

We also need to provide the information and reports we produce in a way that is relevant and easily accessible. Communicating clearly to the right people in the right ways will be a key area of focus for the Office.

Continuing to build our capability

To achieve these changes, we will need to continue to invest in our people, processes, tools, and technologies.

Given the nature of the Office's work, we need staff who can operate in multiple environments and often in complex and high-stress situations. They need sound judgement, analytical capabilities, and advanced interpersonal and communications skills. These staff are not easy to recruit.

As a consequence of the Covid-19 pandemic (which has increased workload) and the auditor shortage (which is driving increased salaries across the profession), staff turnover in Audit New Zealand has been unusually high in recent years. With borders re-opening, auditors are also taking the opportunity to travel and work overseas. We need to build strong staff capability by addressing, where we can, the reasons people might leave. We also need to continue to invest in people's training, development, and careers to retain staff for longer.

Doing all we can to build our workforce, retain the highly talented staff we have, and address our gender pay gap will continue to be a priority for me (see paragraphs 2.53 and 2.54). These will be key components of our new people strategy.

We also have well-developed plans to invest in technology and data and analytics to enhance the efficiency of how Audit New Zealand delivers audits. Key to many of the changes I have discussed in this Part will be implementing Audit New Zealand's new audit tool in 2023, replacing our audit contract management system (also in 2023), and developing more robust data and analytics capabilities.

All of these matters require a strong financial base for the Office. In the short term, although we have adequate Crown funding for our discretionary work, we are forecasting deficits in our memorandum account for our mandatory audit work. During the next five years, we will need to address these forecast deficits by improving the efficiency of how we carry out mandatory audits, increasing audit fees, and, where appropriate, seeking further direct investment from the Crown.