Insights and challenges: The Auditor-General's vision for the public sector

31 March 2017

Letter sent on 30 March 2017 to State sector chief executives by Martin Matthews, the Controller and Auditor-General about his vision for the public sector.

Tēnā koe

Insights and challenges: My vision for the public sector

I would like to use this letter, my first to you as Controller and Auditor-General, to initiate a discussion on how we can best ensure that our system of public management and accountability serves us well now and in the future. I am also sharing some observations from my Office’s work, including our annual audits for 2015/16 of over 130 central government organisations. Of course, my thoughts are informed by my recent experience as a chief executive and by the day-to-day challenges in a public sector environment that is rapidly changing.

A public sector fit for the modern world

I want my Office to play its part in shaping the public sector to operate and be accountable in ways that are fit for purpose for the future. Our financial management and accountability system was state of the art in 1989, but that was nearly 30 years ago. I believe we need to start thinking now about what a 2025 model might need to be like to allow us to deliver the required results for citizens and to preserve public trust and confidence for the next few decades of the 21st century. This means that we also need to be open to new and different thinking and approaches.

I want to use the unique and independent perspective my Office has to help shape this future thinking. As the auditor of the entire public sector, I believe we have a vantage point from which to view and influence the future to ensure we support a stronger public sector that has the trust and confidence of citizens. I am looking forward to working with you in this regard, and encourage you to engage with my Office as we pursue this challenge.

As I meet with you over the next few months, I will be keen to hear your thinking about how we might respond to the challenges ahead of us. I would also like to hear from you about how we could work together. I think of my Office as a key partner in improving the public sector management system as well as individual entities. Our independence allows us to act as a sounding board while carrying out our statutory role as auditors of the public sector. I expect my staff to join the dots and to share good practice. This includes helping with suggestions on who you could contact for advice or for sharing experiences when you encounter particular challenges.

Transparency and accountability are critical for maintaining trust

Protecting our reputation for transparency and accountability is everyone’s responsibility. New Zealand’s reputation for transparency is hard earned and is one of our greatest assets.

One key to transparency, and to building public trust in government, is to gather and present sound information. As my predecessor Lyn Provost commented in her report, Inquiry into the Saudi Arabia Food Security Partnership, “Transparency is the best foil for corruption.”

It is also important that we all maintain the best internal controls for sensitive expenditure and conflicts of interest, with robust, workable policies and processes for documenting and dealing with conflicts.

Understanding and managing risk

Reflecting on my own recent experience, I want to reinforce the importance of understanding and managing risks to organisational resilience. This includes fraud.

Effective risk management requires analysing, mitigating, monitoring, and reporting. For all of us, it starts with the basics. For example, lapses in basic “hygiene”, such as weak user access management and password settings, expose organisations to unnecessary risk.

However, one of the main insights I have gained is the importance of constantly reinforcing the right culture. A culture of risk awareness, from governance to frontline delivery, is of vital importance to defend against poor performance, waste, and corrupt behaviour.

All employees have a role in fraud awareness, prevention, and detection as part of their day-to-day practice, not just staff in finance and procurement. Fraudsters, especially those in trusted, senior positions, are often sophisticated, skilful, and hard to detect. Strong internal controls are very important, but even they can be circumvented if someone is determined enough. That is why it is important to foster a strong culture of vigilance. This is especially true in the current environment of increasingly sophisticated cyber fraud.

Observations from our 2015/16 central government audits

My auditors are observing that the fundamentals are being done well. Overall, our 2015/16 annual audits of central government entities indicate that, in the context of the current public financial system, the right fundamentals appear to be in place. Most agencies have sound management and financial systems and control environments although, from a Controller perspective, I will continue to watch how organisations manage their spending against appropriations.

A focus on governance is leading to improvements. In our 2016 report, Reflections from our audits: Governance and accountability, we outlined some thoughts on good practice. Generally, a focus on good governance practice is making a difference, evident in appropriate governance structures and the effective use of audit committees and of external and independent quality assurance.

Significant change projects appear to be generally managed well. Several complex and large-scale organisational changes and transformation projects were completed or were making substantial progress at the time of last year’s audits. Change projects that focus on better client management are important to give effect to a greater citizen focus, but tend to be complex and potentially risk prone, especially when they affect ICT systems or frontline operations. We can all learn from agencies that have managed change successfully. They routinely use tools such as external reviews, independent quality control, and, importantly, regular reviews of the effectiveness of internal controls. It is also important that we are all prepared for when things go wrong.

Basic procurement and contract management processes are run well but challenges remain around value for money. Agencies are generally good at running basic procurement processes but are grappling with the challenge of assessing value for money. The increasing complexity of procurement and commissioning is one reason why we are intending to focus on this area as part of our work in the future. Another reason is the importance of third-party services for delivering the best possible services to New Zealanders. This requires agencies to work with their partners, whether other agencies or contracted third parties, on co-design, lifting the capability of service providers, or shaping the market of suppliers. I encourage you to share your thoughts on the challenges you face.

Investment and asset management practice would benefit from a greater strategic focus. Essential practices are sound, but across the public sector we are not giving best effect to stewardship expectations. Our auditors also noticed that agencies need to improve their approaches to asset valuations. We are currently preparing this year’s reflections report, which will summarise the findings and observations from our work under the 2015/16 theme of Investment and asset management. I am looking forward to engaging with you later this year on our insights from this work.

Telling a performance story relies on sound information. Having the right information is key to our ability to tell a clear performance story and convey how effectively our organisations are making a difference. In my view, performance reporting needs to continue to evolve as part of an accountability system that is fit for purpose.

I want to work with you and your organisations to make sure we all contribute to a resilient public sector that responds to the needs of New Zealanders now and in the future.

To sum up, here are some initial thoughts on how we can all support a stronger public sector management system:

  • Look beyond our own organisations to consider the system.
  • Embed a staff culture of accountability and risk awareness.
  • Maintain the public’s trust by being transparent and managing sensitive expenditure and conflicts of interest.
  • Support our organisations to be ready for change by being clear upfront about the purpose of, and expected result of, the change and how we will measure success.
  • Focus on lifting our relationship management ability to work more smartly with partners.

As the chief executive of an organisation that strives to be a role model for others, I will be considering these matters in respect of my own Office.

I look forward to meeting you in the near future, and to discussing with you the matters I have covered in this letter and also my thoughts on how I see my Office contributing to a world-class public sector management system that is fit for purpose for the next quarter of the 21st century.

Noho ora mai

Signature MM

Martin Matthews
Controller and Auditor-General