Current areas of change

Effective audit committees can provide objective advice and insights into the public entity’s strategic and organisational risk management framework. In doing so, they can identify potential improvements to governance, strategy, risk management, and control practices.

Many experienced board members understand that the audit committee is where the board can gain real insight into the entity's main drivers and how the organisation is performing.

Audit committees need to constantly scan their operating environment to know what is coming and how different players in their sector and the public sector are being influenced by changes in the wider environment. They need to bring insight to understand how all this affects their organisation’s ability to add value and achieve its purpose.

We set out below what governors have told us are current areas of change that create risks and opportunities. Audit committees can provide insight for the public sector and its entities because they can have a useful view on the risks and opportunities presented by these trends.

How do you see the issues and risks changing – are the things that you work to understand and manage with your audit committee covered here? If there are other things, let us know.

Global forces affecting our public sector

A wide range of global forces are affecting the New Zealand public sector, including:

Demographics: Demographic change, particularly the ageing population, is a challenge (as it is for many governments). It cannot be controlled or prevented, but its effects can be anticipated, managed, and planned for.
Productivity: New Zealand's productivity has been increasing but not as quickly as in other countries, and our income growth has been slower.
Technology and digital disruption: There have been "waves of creative destruction wrought by technological innovation" and competency-destroying technology transitions. Digital innovation has positive and threatening effects on the strategy and operations of public entities and their ability to sustainably deliver future value. Significant disruption of public sector computer networks or systems can negatively affect service delivery, reputations, and trust in individual entities and sectors.
Public-centricity: Public entities are becoming more customer-oriented. Electronic government is shaping services to be more customer-oriented, and those ideas extend to how services are designed and managed. However, a range of factors undermine the achievement of the public sector's results, leading to underuse of resources and value creation opportunities. These factors include fragmentation between and within agencies, incompatibility of business strategies, resources deployment, and the quality of implementation. The challenges of co-operation mean some duplication and wasting of resources.
Austerity: Public entities are grappling with the pressures of financial austerity, which includes freezes or cuts in public spending when demand for services is growing. Entity reinvestment rates (both financial and non-financial) in core capabilities reach a point where they are not enough to sustain service delivery at expected levels for the foreseeable future. This puts entity reputations and public confidence at risk. In some cases, there is concern that "safety margins" have been lost or eroded.
Changing business models: Public services are being delivered through a broader and changing mix of delivery models (including public-private models), driven by a combination of public sector austerity and innovation. The public sector is feeling the effects of increasing internal and external competition. Choice-based and competition-dependent models of public service provision are aimed at improving quality, efficiency, and value for money for a range of public services.
Capability: The wider environment of public sector pressure and change can result in transformation fatigue and failure risks. Public sector employees can become cynical and exhausted from transformation and change. There are accompanying feelings of increased anxiety, uncertainty, and job insecurity. When "transformation" does not occur as planned, it puts transformation objectives, and wider entity and Government outcomes, in doubt. The public sector's ability to attract and retain a highly skilled and capable workforce is paramount in enabling it to meet the current and future needs of the Government and the population. The public sector needs to attract, develop, and retain the capability and capacity to manage large projects and long-term services.
Crisis preparation and management: Governors and managers need to be aware of and understand emerging threats and opportunities, and identify symptoms of wider problems. Some of our reports have identified the need to strengthen the planning for low-probability but high-impact events, whether entity-specific or systemic (such as natural disasters or substantive changes in market demand or supply).
Accountability: Traditional accountability practices are under pressure by developments in public management and governance, including increased focus on getting results, using partnering arrangements between government agencies and with other stakeholders, and developing a flexible and innovative public service. These pressures increase the risk of, for instance:

Transparency loss: Restricted information disclosure and opaque practices that prevent people from accessing information to make better decisions (such as reducing risk exposures or protecting personal interests) and undermine entity and public sector effectiveness and accountability.
Erosion of integrity: Significant impairment of the integrity and trust in the public sector through wrongdoing (such as a breach of law, codes, policies, or rules, misuse of funds, gross mismanagement, or a serious breach of a code of conduct) that is detrimental to the public interest.

Managing changes in the way public services are operated and delivered is complex, demanding, and time-consuming. It can result in conflicting priorities and leave little time for other needs.

Audit committees need to ask themselves: How is the environment of the entity changing? Do these changes raise any risks, issues, or concerns for the entity? Does the audit committee change its focus because of the changing environment? If so, how does the audit committee communicate this change in focus and manage the expectations that management or other stakeholders might have? Does it balance its focus on success with its focus on risk?

We see that the least effective audit committees tend to work in isolation and therefore have difficulty influencing governors and other stakeholders. This suggests that audit committees might benefit from knowing strategic risks and the future of the public entity. They might also benefit from making dedicated time for discussing and considering these as they carry out their advisory work.