Auditor-General's overview

Improving financial reporting in the public sector.

Since International Financial Reporting Standards were implemented in New Zealand, my Office has been calling for changes in how the accounting standards that affect most of our public entities are set.

My predecessor, Kevin Brady, was concerned that the International Financial Reporting Standards – designed for commercial companies listed on stock exchanges – were not suitable for much of our public sector. In 2009, he published a discussion paper, The Auditor-General's views on setting financial reporting standards for the public sector, to inform Parliament of his concerns.

In this report, I reflect on the concerns raised at that time, set out my views about how well those concerns have been addressed, and provide some insight into the future of financial reporting.

I am pleased to report positive changes to accounting standards during the last six to seven years, which I expect to lead to improvements in financial reporting. The changes mean that we now have a tailored approach to financial reporting in the public sector and a foundation for much better reporting in future.

The positive changes include setting up an independent body to set accounting standards, the External Reporting Board (XRB), and adopting a new Accounting Standards Framework for all reporting entities.

The new Accounting Standards Framework is designed so that financial reports will better meet the needs of users. The Framework distinguishes between accounting standards for public benefit entities and those for commercially focused entities, both of which are applicable to the public sector.

The Framework also uses tiers so that financial reporting requirements reflect the different size and nature of reporting entities in New Zealand. The tiered structure is likely to help smaller entities achieve a better balance between the costs and benefits of general purpose financial reporting. I encourage all public entities to take full advantage of any financial reporting concessions that are available in the new tiered structure.

During the same period, there have also been legislative changes designed to make financial reporting by public entities more useful and more relevant, with a view to improving accountability and decision-making.

Overall, I am encouraged by the changes that have occurred since 2009. These changes better position the public sector to report more meaningfully in the future. However, public entities need to take advantage of the flexibility available within the new Accounting Standards Framework by focusing on users' information needs and what matters most.

The way is open for public entities to change the focus of their reporting from complying with specific accounting standard requirements to communicating better through their financial reports. During the last six years, I have strongly supported the "decluttering" of financial statements. Those who prepare financial statements need to think about and include only the information that is necessary for users' understanding.

The XRB also has an important ongoing role in helping to resolve some of the more challenging areas in general purpose financial reporting.

I hope that this discussion paper will promote further constructive debate about the future of financial reporting in the public sector, so that reporting by public entities can continue to evolve to better meet the information needs of users.

Signature - LP

Lyn Provost
Controller and Auditor-General

24 February 2016