Part 4: The Controller function and the appropriation audit

Central government: Results of the 2009/10 audits (volume 1).

The Controller function and appropriation audit are important aspects of the Auditor-General's work. They support the fundamental principle of Parliamentary control over government expenditure.

In this Part, we briefly outline the public finance principles underpinning this work and the work's main features. We also discuss unappropriated expenditure in 2009/10 and for the early parts of 2010/11, and report on some other matters we have had to consider recently.


The primary authority for any expenditure comes from an Appropriation Act. The first Appropriation Bill, setting out the detailed Estimates of Appropriation, is introduced with the Budget in May and is usually passed into law in August each year. A second Appropriation Bill, containing supplementary Estimates of Appropriation that update the original estimates, is introduced with the following year's Budget, and is passed by the end of the financial year.

There are several approval mechanisms in place to provide some flexibility for the Executive in responding to change through revised expenditure between Appropriation Acts:

  • Section 26A of the Public Finance Act 1989 (the Act) enables the Governor-General to approve the transfer of small amounts between output expense appropriations within the same Vote during the year.
  • Section 26B of the Act enables the Minister of Finance to approve expenses or capital expenditure that exceed an existing appropriation in the last three months of the year. To be approved under section 26B, the expenses or capital expenditure need to be within the scope of the appropriation and below the greater of $10,000 or 2% of the total appropriation.
  • Imprest Supply Acts give conditional authority to the Crown to incur expenses or capital expenditure before an appropriation, up to a global maximum and subject to later incorporation in an Appropriation Act. In practice, the Crown controls the use of this authority by requiring Cabinet to approve any particular use of it.

In addition to these mechanisms, section 25 of the Act provides additional powers to the Minister of Finance to approve expenses and capital expenditure in the event of an emergency.

We continue to see instances where departments incur expenditure without the authority of any of these mechanisms. Any expenses or capital expenditure incurred without authority is unauthorised expenditure, and is therefore unlawful. Under section 26C of the Act, any unappropriated and unlawful expenditure has to be separately reported and validated in the Appropriation (Financial Review) Act that is passed after each financial year.

During 2009/10, there were:

  • 27 identified instances of expenditure exceeding appropriation without authority, with the excess amounting to more than $234 million (2008/09: 39 instances amounting to excess expenditure of more than $927 million). Some of these instances related to prior years; and
  • 2 instances of net assets exceeding the approved limited, the excess amounting to more than $2 million.

This represents a decrease from the previous year in both number and value of such instances, and represents a small part of total government expenditure.

However, departments need to understand the importance of appropriation and lawfulness, and the processes within the Act that support them.

We continue to emphasise the need for departments, with support from the Treasury, to have effective procedures to ensure that all public expenditure is within the appropriate bounds, and to seek relevant expenditure authority or approval promptly.

Unappropriated expenditure in 2009/10

Most government expenditure during 2009/10 was authorised by appropriations in the usual way.

There were four instances of expenditure exceeding appropriation (with the excess amounting to $10.509 million) that were approved under section 26B.

There were also two instances of expenditure exceeding appropriation (the excess amounting to $10.941 million) but with authority of an Imprest Supply Act.5

There were 27 instances of expenditure that exceeded appropriation (the excess amounting to $234.844 million) without the authority of any of the approval processes provided by the Act.

In 13 of the 27 instances, expenditure was within the scope of an appropriation but more than the amount authorised by Parliament.6 Total expenditure in excess of authority was more than $199 million. Some of these instances related to expenditure that is subject to fluctuations in demand.

The other 14 instances7 involved expenditure that was outside the scope or without appropriation. The total expenditure in these instances was more than $35 million. Ten of these instances related to previous years, following reviews of the appropriation scope, and the associated accounting treatment, in the 2009/10 financial year.

Expenditure in excess of appropriation and without authority is a relatively small proportion of overall government expenditure.

However, it is still a concern when government agencies incur expenditure without the necessary authority from Parliament. We were disappointed to note a number of instances where Departments should have been more pro-active in forecasting demand-driven expenditure. It was also disappointing to note a number of instances where the full accounting costs of contracts, and their appropriation impacts, had not been fully understood before they were entered into.

We continue to encourage departments to pay closer attention to ensuring that they have authority before incurring any expenditure. We also continue to work with the Treasury to provide better guidance and support through the administrative systems that support the Crown's financial management.

Net asset holdings

The Act sets a limit on the net assets that departments may hold. Section 22(3) states:

The amount of net asset holding in a department must not exceed the most recent projected balance of net assets for that department at the end of the financial year, as set out in an Appropriation Act in accordance with section 23(1)(c).

A breach of a department's net asset limit is treated as a breach of appropriation.

Two departments breached their net asset limits during 2009/10,8 the same number as in the previous year. These breaches (amounting to $2.285 million) were without the authority of an Imprest Supply Act.

This aspect of appropriations is complex, from both a legal and an accounting perspective. Accordingly, Departments need to continue taking care in applying the net asset requirements of the Act.

Unappropriated expenditure in 2010/11

In the first four months of the 2010/11 financial year, and at the time of writing this Part several other potential instances of unappropriated expenditure were being investigated.

These potential instances of unappropriated expenditure in the early part of 2010/11 do not suggest any features that are significantly different from those reflected in the instances for 2009/10.

Public expenditure principles

Two important principles govern public expenditure:

  • appropriation; and
  • lawfulness of purpose.

The Act defines the system of appropriation, which is the primary means by which Parliament authorises the Executive to use public resources. Under this system, expenses and capital expenditure should be incurred only within an appropriation or other statutory authority. Departments' net assets should not exceed the limits for which they have authority from Parliament.

Lawfulness of purpose includes, but is wider than, the principle of appropriation. To be lawful, expenses and capital expenditure must be incurred not only within an appropriation but also within the legal authority or capacity that enables the department to carry out the activity concerned.

Departments must pay particular attention to ensuring that all expenses and capital expenditure are lawful on both counts. They must have effective systems and processes in place to support this aim.

The Treasury provides useful guidance on the system of appropriations on its website ( This guidance includes:

  • Guide to the Public Finance Act;
  • Guide to Appropriations;
  • Treasury Circular 2007/05: Multi-Year, Revenue Dependent and Department to Department Appropriations;
  • Treasury Circular 2006/04: Unappropriated Expenditure – Avoiding Unintended Breaches; and
  • Treasury Instructions.

Operating the Controller function

Sections 65Y to 65ZA of the Act set out the legislative provisions for the Controller function. Its main features are:

  • Departments provide information to the Treasury about the expenses and capital expenditure incurred against the authorities available. The Treasury collates and monitors this information throughout the year.
  • The Treasury supplies monthly reports9 to enable the Controller to fulfil the role (section 65Y).
  • Throughout the financial year (usually each month), the Office of the Auditor-General and departments' appointed auditors perform the Controller function using standard procedures. They carry out these procedures in keeping with the Auditor-General's Auditing Standard 2: The Appropriation Audit and the Controller Function and a Memorandum of Understanding10 between the Treasury and the Office of the Auditor-General.
  • The Controller can direct a Minister to report to the House of Representatives if the Controller has reason to believe that expenditure has been incurred that is unlawful or not within the scope, amount, or period of any appropriation or other authority (section 65Z).
  • The Controller can stop payments from a Crown or departmental bank account, to prevent money being paid out if the Controller believes the payments may be applied for a purpose that is not lawful or is not within the scope, amount, or period of any appropriation or other authority (section 65ZA).

Audit work carried out on appropriations supports the formal operation of the Controller function. Section 15(2) of the Public Audit Act 2001 now explicitly recognises this audit work as part of the basic functions of the Auditor-General.

The Auditor-General's appointed auditors must carry out an appropriation audit in conjunction with the annual audit of each department, to confirm that:

  • expenses and capital expenditure have been incurred within the amount, scope, and period of an appropriation or other statutory authority;
  • expenses incurred have been for lawful purposes; and
  • any unappropriated expenditure is reported in the financial statements.


The Act provides for remeasurements. These are financial transactions that are defined to be excluded from the meaning of expenses used in the Act. Therefore, unlike other expenses, they do not require an appropriation.

The Act also provides authority for a department's net asset level to increase beyond its authorised limit, after the remeasurement of an asset or liability. In these cases, the excess will not be treated as a breach of appropriation. An example of a remeasurement is the revaluation of land and buildings.

Section 2 of the Act defines remeasurements as "revisions of prices or estimates that result from revised expectations of future economic benefits or obligations that change the carrying amount of assets or liabilities". Section 2 also sets out what remeasurements do not include. For example, they do not include revisions that result from transactions or events directly attributable to the Crown's actions or decisions. Thus, revaluing student loan receivables after a policy decision to change the applicable interest rate is not a remeasurement, and is therefore subject to appropriation limits in the usual way.

In July 2006, the Treasury issued Measuring Remeasurements to provide guidance on the subject.

In our Controller function and appropriation audit work, we frequently have to consider whether transactions or events result in a remeasurement. This requires careful judgement, and the legal and accounting issues are not straightforward.

Departments therefore need to take care when assessing transactions as remeasurements, and refer to the guidance available from the Treasury in doing so. We also encourage early discussion between departments and appointed auditors, where appropriate.

5: These are listed on page 155 of Financial Statements of the Government of New Zealand for the Year Ended 30 June 2010.

6: These are listed on page 156 of Financial Statements of the Government of New Zealand for the Year Ended 30 June 2010.

7: These are listed on page 157 of the Financial Statements of the Government of New Zealand for the Year Ended 30 June 2010.

8: These are listed on page 158 of the Financial Statements of the Government of New Zealand for the Year Ended 30 June 2010.

9: Monthly reporting is not required for July and August.

10: The joint understanding and expectations about the role and procedures associated with the Controller function are set out in the Memorandum of Understanding between the Treasury and the Office of the Auditor-General.

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