Part 2: Government Departments - Results of the 2002-03 Audits
- Introduction
- Audit opinions issued
- Qualified audit opinions
- Financial and service performance management
Introduction
2.1
This article reports on the results of the 2002-03 audits of 43 government
departments.1 Its purpose is to inform Parliament of the assurance given by
the audits in relation to:
- the quality of financial reports; and
- the financial and performance management of departments.
Audit Opinions Issued
2.2
The Public Finance Act 1989 (the Act) specifies departments’ responsibilities
in fulfilling the requirements for general purpose financial reporting.
Sections 34A(3) and 35(3) of the Act require departments to prepare their
financial statements in accordance with generally accepted accounting
practice (GAAP).2
2.3
Section 38(1) of the Act and section 15 of the Public Audit Act 2001 set out
the responsibility of the Auditor-General to issue an audit opinion on the
financial statements of each department.
2.4
To form an opinion on the financial statements of departments, our audits
are conducted in accordance with Auditing Standards published by the
Auditor-General under section 23 of the Public Audit Act, which incorporate
the auditing standards issued by the Institute of Chartered Accountants of
New Zealand. The audits are planned and performed so as to obtain all the
information and explanations considered necessary in order to provide
sufficient evidence to give reasonable assurance that the financial statements
are free from material mis-statements, whether caused by fraud or error.
In forming our opinion, we also evaluate the overall adequacy of the
presentation of information in the financial statements.
2.5
Of the 43 government departments audited, 41 received audit reports
containing an unqualified audit opinion, as shown in Figure 2.1 on the next
page.
Figure 2.1
Analysis of Audit Opinions 1999-2003
| Year Ended 30 June | 2003 | 2002 | 2001 | 2000 | 1999 |
|---|---|---|---|---|---|
| Unqualified opinions | 41 | 42 | 44 | 43 | 42 |
| Qualified opinions | 2 | 1 | - | - | - |
| Total audit opinions issued | 43 | 43 | 44 | 43 | 42 |
The total number of departments reduced to 43 in 2002 with the amalgamation of the Department of Work and Income into the Ministry for Social Development.
Qualified Audit Opinions
2.6
As shown in Figure 2.1 above, qualified audit opinions were issued on the
financial statements for two departments. They were the Department of
Conservation and the Ministry for the Environment.
Department of Conservation
2.7
The Department of Conservation received a qualified audit opinion for the
previous year, in respect of its valuation of visitor assets and recognition of
fencing assets.3 Those matters were corrected in the financial statements
for the year ended 30 June 2003, and the qualification for the 2003 year
related only to the comparative information shown, i.e. the figures for the
previous year. See also paragraphs 1.50-1.51 on page 20.
Ministry for the Environment
2.8
When the Ministry of Works and Development was disestablished in 1988,
the Ministry for the Environment (MfE) inherited the function of being the
land-holding department for about 860 land parcels totalling about 4300
hectares. The land includes river control reserves located on river and canal
banks taken for flood protection purposes, and six soil conservation
reserves. Except for one former soil conservation reserve for which the
MfE has direct responsibility, the reserves are controlled and managed by
Regional Councils.
2.9
The holding of this land on behalf of the Crown constitutes a non-departmental
activity by the MfE, and the Treasury instructed departments
to disclose non-departmental activities in the form of schedules to their
annual financial statements from the year ended 30 June 2003 onwards.
In preparing information on non-departmental activities for these
schedules, departments are required to comply with GAAP.
2.10
The Ministry did not recognise the value of the land referred to in
paragraph 2.8 in its non-departmental schedule of assets. Nor did it
recognise the value of any obligations it has in respect of those landholdings
in the non-departmental schedule of liabilities. These failures resulted in
non-compliance with two financial reporting standards (FRS) that are part
of GAAP.
2.11
Non-recognition of the landholdings was a departure from Financial
Reporting Standard No. 3: Accounting for Property, Plant and Equipment.
Not providing for any obligations that have arisen in respect of the
landholdings was a departure from Financial Reporting Standard No. 15:
Provisions, Contingent Liabilities and Contingent Assets.
2.12
The effect of these departures was to mis-state the schedules of non-departmental
assets and liabilities. Any adjustment to those schedules
would have a consequential effect on the schedules of non-departmental
revenue and expenditure.
2.13
Our audit opinion accordingly included a qualification relating to the effect
of not recognising the value of landholdings and any associated obligations
in the non-departmental schedules. See also paragraphs 1.28-1.31 on
page 16.
Financial and Service Performance Management
2.14
Since 1994, we have reported our assessments of certain aspects of
management to the chief executive and to stakeholders in each department
(such as the responsible minister, and the select committee which conducts
the financial review of the department).
2.15
While conducting the annual audit, our auditors examine five aspects
of financial management and service performance management. The purpose
of this exercise is to identify specific areas of management where there
are weaknesses, and to make recommendations to eliminate those
weaknesses.
Financial Management
2.16
We assess the following aspects of financial management:
- Financial control systems – the systems for monitoring expenditure and the management of assets.
- Financial management information systems – the systems for recording, reporting, and protecting financial information.
- Financial management control environment – management’s attitude, policies, and practices for overseeing and controlling financial performance.
Service Performance Management
2.17
Aspects of the management of service performance that we assess and
report fall into two broad areas:
- Service performance information and information systems – this covers the adequacy of monitoring and control systems for service performance information, the accuracy of the information produced by those systems, and whether the performance measures in the statement of service performance are being used as a management tool.
- Service performance management control environment – this covers the existence of quality assurance procedures, the adequacy of operational policies and decisions, and the extent to which self-review of non-financial performance is taking place.
The Rating System
2.18
The rating system we use for the five management aspects is as follows:
| Assessment Term | Further Explanation |
|---|---|
| Excellent | Works very well. No scope for cost-beneficial improvement identified. |
| Good | Works well; few or minor improvements only needed to rate as excellent. We would have recommended improvements only where benefits exceeded costs. |
| Satisfactory | Works well enough, but improvements desirable. We would have recommended improvements (while having regard for costs and benefits) to be made during the coming year. |
| Just Adequate | Does work, but not at all well. We would have recommended improvements to be made as soon as possible. |
| Not Adequate | Does not work; needs complete review. We would have recommended major improvements to be made urgently. |
| Not Applicable | Not examined or assessed. Comments should explain why. |
The Results
2.19
We assessed financial management and service performance management
in each of the 43 departments. A summary of the assessments (215 in total –
5 for each department) is given in Figure 2.2 on the next page.
2.20
The 90 assessments of “excellent” (41.9%) show a further level of
improvement in the latest year, and the combined total of 188 assessments
(87.4%) that were either “excellent” or “good” show a similar improvement
from the previous year. This indicates commendable achievement by the
departments concerned.
2.21
No assessments of “just adequate” were issued in 2003, compared with one
in 2002.
2.22
By way of further analysis, we compared our assessments for 2002-03 and
2001-02 for each of the 43 departments. The overall results are summarised
in Figure 2.3 on page 31.
Figure 2.2
Summary of Assessments of Aspects of Financial Management and Service
Performance Management in Departments for 2002-03
| Aspect Assessed | Excellent | Good | Satisfactory | Just Adequate | Not Adequate No. | Total No. | ||||
|---|---|---|---|---|---|---|---|---|---|---|
| No. | % | No. | % | No. | % | No. | % | |||
| FCS | 20 | 47 | 17 | 40 | 6 | 14 | 0 | 0 | 0 | 43 |
| FMIS | 19 | 44 | 20 | 47 | 4 | 9 | 0 | 0 | 0 | 43 |
| FMCE | 20 | 47 | 17 | 40 | 6 | 14 | 0 | 0 | 0 | 43 |
| SPIS | 12 | 28 | 24 | 56 | 7 | 16 | 0 | 0 | 0 | 43 |
| SPMCE | 19 | 44 | 20 | 47 | 4 | 9 | 0 | 0 | 0 | 43 |
| Totals 2003 | 90 | 42 | 98 | 46 | 27 | 13 | 0 | 0 | 0 | 215 |
| 2002 | 85 | 40 | 97 | 45 | 32 | 15 | 1 | 0 | 0 | 215 |
| 2001 | 85 | 39 | 101 | 46 | 30 | 14 | 4 | 2 | 0 | 220 |
| Key FCS - Financial Control Systems FMIS - Financial Management Information Systems FMCE - Financial Management Control Environment SPIS - Service Performance Information Systems SPMCE - Service Performance Management Control Environment |
||||||||||
Figure 2.3
Assessments for 2002-03 compared to 2001-02
| Aspects Assessed* | Higher | Same | Lower | Total |
|---|---|---|---|---|
| FCS | 3 | 39 | 1 | 43 |
| FMIS | 1 | 41 | 1 | 43 |
| FMCE | 3 | 39 | 1 | 43 |
| SPIS | 4 | 39 | 0 | 43 |
| SPMCE | 2 | 41 | 0 | 43 |
| Totals | 13 | 199 | 3 | 215 |
| % | 6.0 | 92.6 | 1.4 | 100.0 |
* See Figure 2.2 for key to abbreviations.
2.23
The noteworthy features of the results shown in Figure 2.3 are:
- A very high proportion (92.6%) of the assessments were maintained at the level of the previous year.
- 13 of the assessments (6.0%) were higher in 2002-03 than in 2001-02.
- 3 of the assessments (1.4%) were lower than in 2001-02.
2.24
The fact that 13 assessments were higher than in the 2001-02 year,
compared with only 3 that were lower, confirms continuing overall
improvement among departments. As we have observed previously, the
trend to higher assessments restricts the scope for improvements of the
same magnitude as in earlier years.
2.25
While theoretically possible, it is in practice difficult, for a variety of
reasons, for all departments to attain a rating of “Excellent” for all aspects
assessed. The reasons may include:
- periodic restructuring;
- complexity of departmental operations; and
- sheer size of operations.
2.26
Our auditors will nevertheless be continuing to assist and encourage
departments to make improvements, principally through the management
letter issued at the end of an audit. For their part, chief executives and
their staff will no doubt be motivated to continue striving for improvements.
2.27
We have now reported our assessments of management performance to
Parliament and its select committees for each of the past 10 years.
Our assessments have often been of considerable interest and are perceived
as having high value to select committees when conducting their financial
reviews of departments.
2.28
However, departments vary greatly in size and organisational structure.
When we first reported results of the assessments to select committees, we
took care to alert committees to those differences and urged them not to
make comparisons between departments without being mindful of
considerations (such as those mentioned in paragraph 2.26 above) which
could explain reported differences in performance. Caution should
continue to be exercised in using the assessments.
2.29
We have identified the need to refresh the five management aspects and
consider the possibility of applying them in other sectors in the future.
This is a specific area of research and development that we plan to
undertake in 2004-05.
1: Comprising the 43 departments listed on page 96 of the Financial Statements, plus the Office of the Ombudsmen and the Commissioner for the Environment, but excluding the two Security and Intelligence departments, and the Auditor-General.
2: Generally accepted accounting practice is defined in section 2(1) of the Public Finance Act 1989.
3: See our detailed explanation in Central Government: Results of the 2001-02 Audits, parliamentary paper B.29[03a], pages 26-27.
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