Part 1: Statement of intent

Annual plan 2006-07.

What the Office does

Role and functions of the Auditor-General

The Controller and Auditor-General (Auditor-General) is an Officer of Parliament. His mandate and responsibilities are set out in the Public Audit Act 2001.

The Auditor-General is independent of executive government1 and Parliament in discharging the functions of the statutory office, but is answerable to Parliament for his stewardship of the public resources entrusted to him.

Parliament seeks independent assurance that public sector organisations are operating, and accounting for their performance in accordance with Parliament’s intentions. There is also a need for independent assurance of local government – local authorities are accountable to the public for the activities they fund through locally raised revenue. As an Officer of Parliament, the Auditor-General provides this independent assurance to both Parliament and the public.

Our operating model

The Auditor-General’s staff are organised into 2 business units – the Office of the Auditor-General and Audit New Zealand.

The Office of the Auditor-General undertakes strategic audit planning, sets policy and standards, appoints auditors and oversees their performance, carries out performance audits, provides reports and advice to Parliament, and undertakes inquiries and other special studies.

Audit New Zealand is the operating arm, and carries out annual audits allocated by the Auditor-General. It also provides other assurance services to public entities, within the Auditor-General’s mandate and in accordance with the Auditor-General’s Auditing Standard relating to the independence of auditors.

The Auditor-General also engages private sector auditing firms (audit service providers) to carry out his statutory functions in relation to public entities.

For the majority of public entities (other than schools), the Auditor-General allocates annual audits to auditors. He chooses from a pool of audit service providers – which includes Audit New Zealand, the 4 major chartered accountancy firms, and a range of smaller firms. The appointments of auditors of schools and some public entities that have a strong commercial focus are subject to a contestable regime.

Size and scale of our operations

The Auditor-General has a statutory duty to conduct an annual audit of the financial reports of about 4000 public entities,2 of which 3000 are schools and other very small enterprises.

The Office of the Auditor-General undertakes between 17 and 21 performance audits each year, and responds to between 150 and 300 requests for inquiries each year from taxpayers, ratepayers, and members of Parliament. A few of these requests lead to the Auditor-General undertaking a major inquiry.

The Office of the Auditor-General provides reports and advice to Select Committees and portfolio Ministers. There are about 140 reports prepared for financial reviews of public entities and Estimates examinations, and about 120 reports on the results of annual financial audits.

The Office of the Auditor-General also administers the provisions of the Local Authorities (Members’ Interests) Act 1968. There are 80-100 enquiries each year in relation to this Act.

Our current staff and contracted resource base

The Office employs about 250 staff in 8 locations throughout New Zealand. We also engage about 70 audit service providers as well as Audit New Zealand staff to carry out annual audits of public entities.

Our strategic direction

Our Strategic Plan states the Auditor-General’s vision to “set the benchmark for design and delivery of independent assurance services”. This means we want the Office to be acknowledged as the innovator in designing independent assurance services for the public sector, and to be a high quality deliverer of such services.

We have 3 key business strategies to advance our vision:

  • shaping our services to anticipate and respond to Parliament’s and other stakeholders’ needs and our changing environment;
  • building our capability to create and deliver our services; and
  • fostering relationships and ways of working that support our Strategic Plan.

Outcomes and impacts

Our desired outcome

Through our work, we seek to “maintain and enhance trust in an effective and efficient public sector”.

We define our desired outcome further, as:

  • “Trust” is where Parliament and the public know whether public entities (including central and local government entities are –
  • carrying out their activities effectively, efficiently, and appropriately;
  • using public funds wisely; and
  • reporting their performance accurately –

and know that if this is not the case we will tell them.

“An effective and efficient public sector” is one in which public entities operate effectively and efficiently, and with a focus on continual improvement and innovation.

Our impacts

To contribute to achieving our desired outcome, we seek to directly create the following impacts:

  • independent assurance that public entities are acting legally and with probity; and
  • advice that improves public entity operations.
  • We do this through 3 outputs:
  • parliamentary services;
  • performance audits and inquiries; and
  • provision of audit and other assurance services.

Our outputs are defined further in Part 3.

We undertake the following activities within these 3 outputs:

  • annual audits;
  • the Controller function and the appropriation audit;
  • advice to Parliament;
  • inquiries;
  • advice and liaison;
  • working with the accounting and auditing profession;
  • wider assurance work;
  • performance audits and other studies; and
  • international liaison and involvement.

Our operating intentions

Major changes influencing our work in the next 3 years

Our Strategic Plan discusses the significant and ongoing changes occurring in the accounting and auditing profession, in the legislative and operating environments of public entities, and in information and reporting requirements and methods.

Key changes

We see the following key changes as continuing to have a major effect on our work, primarily in relation to annual audits:

  • The adoption of New Zealand equivalents to International Financial Reporting Standards (NZ IFRS) in the public sector for periods starting on or after 1 January 2007. The local government sector has decided to comply earlier, for the year starting 1 July 2006, which means 1 July 2005 marked the start of the comparative year in which opening balances need to be re-stated using NZ IFRS.
  • The new public sector management legislation passed by Parliament in December 2004 – with the most significant implications being that all the provisions under the Public Finance Amendment Act 2004 (including reforms to the Controller function) have taken effect from the 2005-06 financial year. The provisions relating to Crown entities’ financial powers under the Crown Entities Act 2004 took effect from 1 April 2005, and the new accountability arrangements take effect from the 2006-07 financial year.
  • The audits of Long-Term Council Community Plans (LTCCPs) and summary reports in the local government sector.
  • The adoption of New Zealand equivalents to International Standards on Auditing, which may necessitate a complete review and update of the Auditor-General’s Auditing Standards.

Our progress to prepare our auditors and support sector readiness to respond to these changes is outlined in our Annual Report 2004-053 on pages 27-29.

In addition, we are starting to enhance annual audits to include stronger emphasis on non-financial, waste, probity, and accountability matters. This will have an effect on how audits are carried out.

Other changes

The Public Finance Amendment Act 2004 made a number of significant changes to the Controller function which took effect from 1 July 2005 (see our article Changes to the Controller Function). The changes have introduced a significant new level of discipline in the management of appropriations. We will continue to refine our processes for managing the Controller function and appropriation audit during 2006-07.

We have experienced significant increases in the volume and complexity of requests for inquiries from Parliament and the public (ratepayers and taxpayers) during the past few years. We expect these high levels to continue during 2006-07.

Strategic risks

We have recently completed our annual review of the key strategic risks facing the Office. In this review, we considered the ongoing relevance and completeness of our identified strategic risks. We also reassessed the likelihood of occurrence, and the significance if realised, of each strategic risk.

We consider the following to be key strategic risks to the achievement of our Strategy and our desired outcome:

  • serious product failure;
  • not maintaining our credibility and reputation;
  • not meeting our stakeholders’ expectations;
  • not maintaining and building our capability;
  • failure to successfully implement our Strategic Plan; and
  • not maintaining our independence.

Serious product failure

This is the risk that the Office issues an incorrect audit opinion with material impact, or a report that is significantly wrong in nature or process.

Our existing key mitigation practices include:

  • professional standards and policies;
  • quality assurance regimes;
  • audit methodologies;
  • the quality and training of our people;
  • peer review and substantiation; and
  • professional indemnity insurance and related audit engagement agreement indemnities with audit service providers.

We propose to take the following actions to further mitigate this risk:

  • research and development into enhancing our annual audits in non-financial and other probity areas; and
  • implementation throughout the Office (and all our audit service providers) of the New Zealand Institute of Chartered Accountants’ revised quality control standards.

Not maintaining our credibility and reputation

Our existing key mitigation actions include:

  • our internal audit activity; and
  • Office-wide corporate policies and procedures, including those relating to employee fraud.

Not meeting our stakeholders’ expectations

We mitigate this risk currently by:

  • ongoing stakeholder communication and relationship management activity; and
  • stakeholder feedback studies.

Not maintaining and building our capability

Our existing mitigation actions include:

  • talent/capability management;
  • professional development programmes;
  • leadership development initiatives; and
  • recruitment strategies and processes, including for graduates and technical specialist positions.

Failure to successfully implement our Strategic Plan

We intend to continue to mitigate this risk by:

  • our governance of the Strategic Plan and related accountability processes;
  • our project management disciplines; and
  • our annual and business planning processes.

Another action we propose to take to further mitigate this risk is:

  • the design and implementation of an evaluation framework (to be agreed by the Officers of Parliament Committee) for assessing the implementation of our Strategic Plan.

Not maintaining our independence

We intend to continue to mitigate this risk through:

  • the Auditor-General’s independence standards;
  • monitoring independence of statutory officers, employees, and audit service providers;
  • our internal independence review committee; and
  • the Office of the Auditor-General and Audit New Zealand’s audit independence processes and procedures.

Major evaluation activity – planned or undertaken

We regularly seek assessment and validation of our activities and outcomes – using both internal and external reviewers. This includes:

  • our evaluation framework agreed with the Officers of Parliament Committee for assessing the impact of performance audits;
  • an annual independent evaluation of our audit tendering and allocation processes;
  • our Audit and Risk Management Committee, comprising 3 external members and the Deputy Controller and Auditor-General;
  • the independent external review of 2 performance audits each year;
  • stakeholder feedback studies; and
  • our internal processes of quality assurance, review committees, peer review, and substantiation.

From this evaluation activity, we have learnt that:

  • there is still further work required to be done to ensure that our Strategic Audit Planning process identifies the “right” topics for further examination by the Office by way of performance audits, and to ensure that we deploy the full range of our assurance interventions around the key issues and risks facing public entities;
  • we need to continue to improve our timeliness of performance audits and inquiries;
  • although we have made significant gains in terms of research and development, and product development in relation to major legislative and professional changes, our stakeholders are looking for more; and
  • while independent evaluation of our audit tendering and allocation processes confirms the strength and integrity of these processes, there is a need to provide a more strategic independent assessment of the impact, effectiveness, and efficiency of the Auditor-General’s audit resourcing model.

Planned evaluation activity

During the next 3 years, we intend to carry out additional evaluation activities:

  • an independent assessment of the impact, effectiveness, and efficiency of the Auditor-General’s audit resourcing model.
  • an external peer review of the Office conducted by a team of our international counterparts. We would also undertake our own internal review in preparation for this.
  • the design and implementation of an evaluation framework (to be agreed by the Officers of Parliament Committee) for assessing the implementation of our Strategic Plan.

Responding to issues in our environment

In our Strategic Plan, we set out how we intend to respond to the significant and ongoing changes in our environment.

For the next 3 years, our key internal operating strategic areas of focus remain as:

  • ongoing research and development, product development, and innovation;
  • changes to the breadth and depth of our assurance services;
  • enhancement of our Strategic Audit Planning process and deployment of the full range of our assurance interventions around key issues and risks; and
  • continual adaptation of our organisation.

Performance measures and standards

Outcome and impacts

We intend to measure how, as a result of our work, we are contributing to our desired outcome of “maintaining and enhancing trust in an effective and efficient public sector”. We will do this by considering improvements over time in Parliament’s and the public’s perceptions of public sector performance and trustworthiness.

The key performance measures and standards we will use are:

  • over time, an increase, or no reduction, in Parliament’s and other key stakeholders’ perceptions of any change to the trustworthiness of public entities, and their effectiveness and efficiency (as measured through our stakeholder feedback study); and
  • New Zealand maintaining or improving its Transparency International ranking.

We intend to measure the impact of our specific outputs of:

  • parliamentary services;
  • performance audits and inquiries; and
  • provision of audit and other assurance services.

We will do this by considering whether:

  • Parliament and other key stakeholders perceive the reports and advice provided by the Auditor-General as being relevant and timely, and adding value; and
  • there are improvements over time in public entity operations.

The key performance measures and standards we will use are:

  • over time, an increase, or no reduction, in Parliament’s and other key stakeholders’ perceptions of the relevance of, and value added by, our reports and advice, and their timeliness (as measured through our stakeholder feedback study);
  • improvements over time in aspects of public entity management (as measured by our assessments); and
  • the trends in types of non-standard audit reports issued.

In addition, we will continue to measure and report using the evaluation framework agreed with the Officers of Parliament Committee to assess the impact of our performance audits.

Cost effectiveness of interventions

In determining how to measure the cost effectiveness of our interventions, we have considered how to demonstrate, over the medium to long term, whether the Auditor-General is doing the “right work” at the “right time”, and for the “right price”.

The inclusion of measures of cost-effectiveness of interventions is a requirement under the new public sector management legislation passed by Parliament in 2004. We intend to do further work in this area during 2006-07.

Demonstrating that we do the “right work” at the “right time”

The Auditor-General uses his Strategic Audit Planning (SAP) process to determine what discretionary work should be done, its priority, and the relative mix between his range of assurance interventions.

We already have an agreed evaluation framework for measuring the impact of performance audits. This includes independently acquired, qualitative feedback from Parliament on the relevance, timeliness and quality of our performance audits and studies.

In addition to this, to demonstrate cost effectiveness, we propose to measure:

  • the transparency of our SAP process; and
  • the efficiency of our interventions.

The intervention logic we apply to assess the transparency of our SAP process is:

If Parliament endorses the Auditor-General’s proposed work programme, then it is more likely that the performance audits and studies completed by the Office will be relevant and timely, and perceived as the “right” issues to address.

The measure we will use to assess this is:

  • Number of changes requested by Select Committees/members of Parliament to the proposed work programme is less than 5%.

We apply the following intervention logic to assess the efficiency of our interventions:

If the Office has a similar ratio of parliamentary services to performance audits and inquiries to financial audits and other assurance services as our international counterparts (for example, the United Kingdom, Australia and Canada), then it is more likely that our product mix is cost-effective.

The measure we will use to assess this is:

  • We will investigate whether international benchmarks of product mix can be established.

Demonstrating that we do our work at the “right price”

We already measure the efficiency of the core outputs of the Office, that is, annual audits, performance audits and inquiries, and parliamentary services.

Annual Audits

Fees for annual audits are negotiated with public sector entities. Audit New Zealand and other audit service providers therefore need to deliver their work efficiently and to the standards required within the negotiated fee.

Audit New Zealand has other internal measures of efficiency, for example, productivity, and the ratio of senior to junior staff hours.

The Officers of Parliament Committee has also asked the Office to consider measures of efficiency such as:

  • average time taken to complete an annual audit; and
  • average cost for each audit.

We will investigate these measures further during 2006-07.

Performance Audits and Inquiries

We monitor the cost and time taken to complete performance audits and inquiries. Over the past 2 years, we have been establishing internal benchmarks for these products. We intend to continue enhancing these measures.

In addition, we may look at establishing international and/or industry benchmarks.

The draft intervention logic is:

If the Office spends similar hours and costs on delivering its key outputs as its international counterparts or industry peers (for example, the United Kingdom, Australia and Canada, and chartered accountancy firms) then it is more likely that the services of the Office are delivered for the right price.

The measure we will use to assess this is:

  • We will investigate whether benchmarks of efficiency of our core outputs can be established with our international counterparts and/or industry peers.

Parliamentary Services

Measures of efficiency are included in our statement of service performance for the services we deliver to Parliament. Again, we may establish international benchmarks to assess the efficiency of these services.

Organisational health

Our current capability to respond

Since receiving Parliament’s support in 2004 to increase the Office’s capability, we have applied this additional funding to create better access to the people, resources, and systems we need to deliver our Strategic Plan and reach our desired outcome.

We have made good gains in relation to:

  • building up our capability to undertake performance audits;
  • implementing our project office approach;
  • addressing the backlog of research and development around our 3 major projects; and
  • Improving the management and conduct of inquiries.

However, we continue to face capability challenges, specifically:

  • We experience ongoing difficulties in recruiting suitably qualified staff because of industry and labour market shortages, particularly for Audit New Zealand and technical roles.
  • There are further opportunities for operational and corporate efficiencies.
  • We need to continue to invest in staff development.

We propose the following areas of emphasis in relation to capability during 2006-07:

  • ongoing leadership and capability development of our people;
  • embedding our shared services model for corporate services; and
  • implementing Audit New Zealand’s national practice and its professional practices group.

Measuring capability

We already have an extensive framework to measure our capability. The framework looks at:

  • trends in the size and distribution (function, gender, and ethnicity) of our staff resources;
  • trends in our ability to attract, develop, and retain suitably qualified staff; and
  • trends in staff perceptions about the way we work, the implementation of our Strategic Plan, and the usefulness and accessibility of our systems and processes.

In addition, for the past few years, we have sought to draw conclusions from this data on the adequacy, effectiveness, and quality of our capability. We propose to continue to use a similar framework to measure and report on capability.

The key measures we will use for 2006-07 in relation to our capability are:

Trends in the size and distribution (function, gender, and ethnicity) of our staff resources:

  • staff numbers (permanent and contracted), including changes from previous years; and
  • distribution of staff resources by function, gender, and ethnicity, including changes from previous years.

Trends in our ability to attract, develop, and retain suitably qualified staff:

  • average numbers of applicants for operationally important positions, including changes from previous years;
  • actual number of internal promotions to senior positions, including changes from previous years;
  • average time and money spent for each employee on training and development, including changes from previous years;
  • data on staff tenure, experience levels, and qualifications, including changes from previous years;
  • staff turnover, including changes from previous years;
  • average sick leave taken by each employee, including changes from previous years; and
  • progress in the implementation of our Equal Employment Opportunities and Effectiveness for Māori initiatives.

Trends in staff perceptions:

  • staff satisfaction, including changes from previous years;
  • staff assessment of the implementation of our Strategy, including changes from previous years; and
  • staff assessment of the quality and usefulness of business processes and systems.

1: The term “executive government” means the Government comprising the Prime Minister and other Ministers. In the local government context it means, for example, the council as governing body of a local authority.

2: Under the Public Audit Act 2001, the Auditor-General is the auditor of every public entity, and the entities they control.

3: Available on www.oag.govt.nz.

4: Central Government: Results of the 2003-04 audits, parliamentary paper B.29[05a], pages 51-57.

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