1.5 Council-controlled organisations

Local government: Results of the 2004-05 audits.

1.501
The Local Government Act 2002 (the 2002 Act) extended the accountability regime for council-controlled organisations (CCOs) to include non-profit entities such as charitable trusts and incorporated societies associated with local authorities. Formerly, only local authority trading enterprises were covered. This affected the accountability regime for about 100 trusts and incorporated societies associated with local authorities.

1.502
Since 1 July 2003, these entities have had to comply with the accountability and reporting requirements for CCOs under the 2002 Act, which are generally more complex than those that applied under their trust deeds or rules.

1.503
The Auditor-General is currently the auditor of 103 council-controlled trading organisations and 95 non-profit CCOs. This article comments on issues and developments in the non-profit CCO sector for the year ended 30 June 2005, including:

  • reporting non-financial performance; and
  • auditing exempt CCOs.

Reporting on performance of council-controlled organisations

1.504
An important part of the accountability framework for CCOs in the 2002 Act is the requirement to prepare a statement of intent at the start of the reporting period. The purpose of the statement of intent is to provide:

  • a public statement of the activities and intentions of the CCO for the year, and the objectives to which those activities will contribute;
  • an opportunity for the council to influence the direction of the entity; and
  • a basis for the entity’s governing body to be accountable to the council for the entity’s performance.

1.505
A CCO must include information in its annual report about its achievements against that statement of intent, including:

  • a comparison of the performance of the entity with the statement of intent; and
  • an explanation of any material variances between that performance and the statement of intent.

1.506
As well as auditing the financial statements of a CCO, we are required to report on the performance targets and other measures by which performance was judged against the entity’s objectives. In other words, the audit opinion must cover the entity’s report on its non-financial performance, measured against its statement of intent (performance information).

1.507
These are new requirements for many non-profit CCOs. Such organisations had a one-year exemption from these requirements under transitional provisions in the 2002 Act. This covered the period beginning on 1 July 2003 and ending on 30 June 2004.

1.508
All CCOs had to have a statement of intent in place for the year beginning on 1 July 2004. They were also required to include performance information in their annual reports for the year ended 30 June 2005, unless the council had exempted the CCO under section 7 of the 2002 Act (exemptions are discussed below in paragraphs 1.516 to 1.521).

1.509
While many CCOs met the new requirements, several did not include performance information in their annual reports because they did not have a statement of intent in place for the year beginning on 1 July 2004. In some cases, the CCOs were inactive (for example, name protection companies). While there may be little point in such entities producing a statement of intent, the requirement applies unless the council has exempted the CCO.

1.510
We are required to audit performance information in the annual reports of CCOs. We issued qualified audit opinions for several active CCOs for their failure to include performance information in their annual reports. This was because they did not have a statement of intent in place to report against. We were particularly concerned where active CCOs also did not have a statement of intent in place for the following period beginning on 1 July 2005.

1.511
In the case of inactive CCOs (such as name protection companies or dormant companies that were not engaged in any activity during the year), we did not qualify the audit report,15provided the entity had disclosed the breach of law in its financial statements.

1.512
A small number of CCOs were established part way through the financial year and did not prepare statements of intent. They therefore did not include performance information in their annual reports.

1.513
In the case of CCOs established or acquired during the financial year, we have suggested to the Department of Internal Affairs that the 2002 Act be amended to provide that:

  • a CCO established in the first 6 months of a financial year should prepare a statement of intent; but
  • a CCO established in the latter 6 months of a financial year should not have to prepare a statement of intent for that period.

1.514
Overall, we found mixed compliance by the CCO sector with this new requirement for the year ended 30 June 2005. Our perception is that some councils and CCOs have not yet come to grips with the new accountability requirements for CCOs.

1.515
We were surprised that councils were not using the power in the 2002 Act to exempt small non-profit CCOs from the accountability regime more actively. We have asked our appointed auditors to discuss this option with councils. We discuss the exemption power further below.

Exemptions for council-controlled organisations

1.516
Section 7 of the 2002 Act provides for certain entities to be exempted from the requirements for CCOs. There are 2 ways in which a CCO may be exempted. For instance:

  • A CCO that is already subject to appropriate accountability under its own Act can be exempted by the Governor-General on a recommendation from the Minister of Local Government. The Minister must be satisfied that the entity’s accountability under its own Act is appropriate for the purposes of the 2002 Act.16
  • Small non-profit CCOs can be exempted by a local authority. The 2002 Act does not define “small”, but a local authority cannot exempt a council-controlled trading organisation. When exempting a non-profit CCO, the local authority must consider the nature and scope of the activities provided by the CCO, and the costs and benefits, if an exemption is granted, to the local authority, the CCO, and the community.

1.517
A council may revoke an exemption at any time and must review any exemption every 3 years.

1.518
The power for councils to exempt small CCOs from the requirements was included in the 2002 Act to address concerns raised about compliance costs for small nonprofit entities. Once exempted under section 7 of the 2002 Act, an entity is not subject to any of the accountability requirements of that Act.

1.519
However, an exemption under the 2002 Act does not affect accountability requirements in other legislation, such as the Incorporated Societies Act 1908 or the Charities Act 2005, or provisions in an entity’s own trust deed or rules.

1.520
We are aware that local authorities have made some use of the exemption power in section 7 of the 2002 Act. However, there is scope for greater use of this power, especially in the case of small inactive entities. This would avoid the need for us to qualify future audit reports in respect of failure to provide performance information.

1.521
We have asked our appointed auditors to report to us, as part of the 2005-06 audit, on the extent to which local authorities have used the exemption power in section 7 of the 2002 Act. We intend to report in the future to Parliament on the financial position and activities of the CCO sector, including the extent to which councils are using the exemption power in section 7.

15: See paragraph 1.706 for an explanation of a qualified opinion.

16: The Otago Museum Trust Board and the Museum of Transport and Technology Trust Board have been exempted by this procedure.

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