Part 3: The environment I expect the Office to work in for the remainder of my term

Auditor-General’s mid-term review.

This Part discusses:

The operating environment and implications for trust and confidence

Since my term began in mid-2018, the operating environment for the Office has been dominated by several significant matters, which I expect will affect the remainder of my term. These matters are:

The Covid-19 pandemic

The Covid-19 pandemic has had multiple effects on the Office, the public sector, and New Zealand as a whole.

The speed and scale of public spending (such as the wage subsidy scheme) and the criticality of the programmes of work led by the public sector (such as the Covid-19 vaccination roll-out) mean that the pandemic has also dominated the Office's discretionary work programme.

We know that the public sector will likely have to deal with the long-term effects of the pandemic. These include:

  • clearing backlogs in delivering key services;
  • addressing issues that have been exacerbated by the pandemic (such as school attendance); and
  • dealing with more general issues, such as staff shortages, supply-chain constraints, and cost pressures.

There has also been a significant increase in government debt and an increased focus on the value for money of public spending.

All of these issues are likely to continue, to some degree, for the remainder of my term. They will also put more pressure on an already pressured public sector, and are likely to continue to feature in our work.

Public sector reforms

Public sector reforms have involved significant changes to key public sector agencies and services. These changes include:

  • establishing Te Whatu Ora – Health New Zealand and Te Aka Whai Ora – Māori Health Authority;
  • merging institutes of technology and polytechnics into Te Pūkenga;
  • reforming three waters services; and
  • reforming the resource management system.

The Government is also concurrently considering the future for local government.

The reforms have, at least during the transition phase, increased risks to the affected sectors' delivery of core services. These risks are likely to continue for some time.

The reforms will affect our work. For example, the health sector reforms significantly extended the mandate of the Auditor-General to audit both the New Zealand Health Plan and the reporting against it.

The Public Service Act 2020 has changed the way that public organisations are expected to work together through formal structures such as cross-government initiatives and Interdepartmental Executive Boards.11 It also set new expectations for the public service – in particular, for its stewardship responsibilities and its support for the Māori–Crown relationship.

There have also been changes to the public finance system through the introduction of clusters of agencies.12 These are intended to support inter-agency collaboration, help Ministers to collectively direct spending and make trade-offs between related areas, support medium-term planning, and put a greater focus on value for money.

It is likely that the costs and benefits of all these reforms will face increased attention from Parliament and the public as they are implemented. How successful the reforms are will likely affect public confidence in the public sector and the Government. The Office will continue to pay close attention to the reforms.

Bringing Māori perspectives more into decision-making

The third area is the public sector's focus on bringing Māori perspectives more into decision-making. This has affected how the public sector operates and delivers its services.13

Te ao Māori is an integral part of our national identity. Knowledge of te reo Māori provides an opportunity to better understand and appreciate the cultural landscape of New Zealand. There has been an upsurge in the celebration of te ao Māori, and a revitalisation of te reo Māori across New Zealand, in recent years. Te reo Māori is now embraced as a taonga and a living language of New Zealand. This trend signals positive implications for race relations and the progress and achievement of Māori in New Zealand society.

The Treaty is New Zealand's founding document and part of our constitutional framework. The principle of partnership that underpins the relationship between Māori and the Crown has been evolving over a long period of time, along with the principles of participation and protection. Some areas of the public sector have applied these principles for many years.

New Zealand is now entering a post-settlement phase – about 90 Treaty settlements have been signed in the last three decades. At the same time, the Māori economy has continued to grow and is now a significant factor in the economy of New Zealand. The Treaty settlements, along with a strengthened Māori economy, provide a strong basis for the Māori–Crown relationship to mature – particularly in terms of partnerships between Māori and Crown agencies. Māori are also increasingly represented both in local and central government.14

Public organisations are increasingly mindful of their responsibilities, as well as the opportunities, to work more closely with Māori. Under the Public Service Act 2020, public service chief executives have responsibility for developing and maintaining the capability of the public service to engage with Māori and to understand Māori perspectives.

Public organisations are at different stages of developing the capability needed to effectively work with Māori. The Office will continue to enhance its relationships with Māori to better understand and plan its work about how the public sector works with Māori and the outcomes it achieves.

Many of the reports of the Waitangi Tribunal are now moving to address contemporary issues. This means that almost every aspect of government could come under the Tribunal's scrutiny. Those inquiries will likely centre on outcomes for Māori and Māori–Crown relations.

Addressing climate change

Although climate change is a pervasive issue, both central and local government have a key leadership role in addressing it. This includes policy and legislative settings, regulatory interventions, planning, funding, and investing activities, and leadership in reducing the public sector's own carbon emissions and environmental impact.

New Zealand has made significant commitments to reducing carbon emissions, including the Government's updated Paris Agreement commitment to reduce net greenhouse emissions to 50% below gross 2005 levels by 2030.

The Government has introduced various programmes and initiatives to meet these commitments. The public is concerned about progress to address climate change. Any failure to deliver on these commitments will likely be of strong public interest.

The Office also has new responsibilities. These include auditing disclosures about greenhouse gas emissions in climate statements prepared by public organisations, which are covered by mandatory climate reporting requirements. We have an important role in maintaining trust in the reliability of the disclosures.

The rise of misinformation

As we have seen during the pandemic and elsewhere, misinformation can undermine the trust that people have in the public sector and potentially in New Zealand's system of government as a whole.

New Zealanders have more access to information and are more connected on a real-time basis than ever before. People increasingly rely on digital tools, including social media, for news and information.

These tools can improve communications and access to knowledge. However, at the same time, they and the artificial intelligence systems they use have made it easier to disseminate false or misleading information.

How well the public sector connects with the public will be critical to preventing misinformation and a distrust of officials and experts becoming a dominant narrative in future debates. Misinformation in relation to public sector performance can best be countered by transparent, regular, accurate, and reliable performance reporting.

The Office's assurance function supports Parliament and the public to understand how the public sector is performing and whether it is operating with integrity. The factors described above mean that our role as a source of trustworthy information is now more important than ever.

To maintain and enhance trust in the work of the Auditor-General and the work of the Office, we need to protect the Office's independence, exercise the Office's duties and powers responsibly and effectively, carry out our work in a timely manner, and ensure that our work has relevance and impact.

The Office does not generally need to be a high-profile organisation, but we do need those who influence the system to understand our role and for New Zealanders to trust in the work of the Auditor-General.

Building capability for the future

Although many other changes could affect the Office's operating environment during the remainder of my term – for example, natural disasters or escalating international conflicts – the five significant contextual changes discussed above form a frame to build the capability that I consider will be helpful regardless of the context.

When my term began, it would have been difficult to predict the operating environment that I have faced as Auditor-General. We need to be ready for continuing change over the next few years. It will be important to continue to build a broad-based capability to respond to any future environment we might encounter. As we look to the future, the Office will need to attract staff with a wide range of relevant skills and experience to support its role in sustaining and strengthening democratic processes and key institutions in New Zealand's system of government.

The challenges facing the delivery of our mandatory audit work

Challenges in the auditing profession

When I started my term, mandatory audit work was largely completed on time to high quality. However, the audit profession faced clear challenges that needed to be addressed.

Several factors were changing the way an auditor completed their work and, increasingly, the nature of the information that needed to be audited. These factors included:

  • the volume and complexity of transactions carried out by organisations subject to audit;
  • increased use of difficult-to-audit technologies such as artificial intelligence; and
  • an increase in the complexity and number of laws, regulations, and standards governing how organisations report and the information to be audited.

There were also underlying vulnerabilities affecting the audit profession. These included:

  • relying on international recruitment and surge resources to have enough capacity to complete the necessary audit work;
  • a decline in the number of people majoring in accounting in New Zealand's universities;
  • long-term issues with under-recovery of the costs of some audits;
  • questions in the minds of investors and others about the value of an audit; and
  • questions about whether auditors were truly independent.

The effects of the Covid-19 pandemic crystalised many of the challenges that the audit profession already faced. It turned risks into issues that needed to be addressed urgently.

In particular, the border closures restricted the international flow of auditors (whom the New Zealand audit profession had relied on to help resource audits) and reduced staff availability to carry out audits.

The Covid-19 pandemic also meant that audits were more complex (in areas such as auditing valuations and the capitalisation of costs) and more inefficient (some organisations were unable to prepare information necessary for audits in time). This made it more challenging to complete audits in a timely manner. The pandemic also created significant challenges for preparers of financial statements and performance information in providing auditors with good-quality and timely information to audit.

The most significant challenge facing the profession is a severe and enduring global shortage of auditors at a time when audit work is increasing in volume and complexity.

To illustrate this, in April 2021, a survey of audit service providers by Chartered Accountants Australia and New Zealand revealed that the 13 major audit service providers in New Zealand had 206 senior auditor vacancies. By October 2021, this had increased to more than 260 vacancies.15

Audit delivery challenges for the Auditor-General


The Auditor-General is the auditor of all public organisations. This means that the Auditor-General has no discretion to change the number of public audits required each year. This contrasts with private sector audit firms. Private sector audit firms can, and have, relinquished audits from their audit portfolio when they do not have capacity.

In addition, the largest organisations in the public sector have a 30 June balance date. This means that most audit work is completed between July and November to meet statutory reporting deadlines.

During these peak periods, auditors routinely work long hours to meet deadlines. Historically, a significant amount of surge resourcing has been brought into the country to complete the work. In 2019, for example, Audit New Zealand added 252 weeks of additional resourcing between July and December. Other major firms report similar requirements.

These issues have resulted in some audit firms looking at alternative ways to resource audits. For example, most large audit service providers (particularly the "Big 4") have started to move audit work to so-called low-cost countries (for example, India, Philippines, China, and Vietnam).

Generally speaking, these firms send the audit tasks that need little auditor judgement offshore. However, as their approach matures, they are increasingly sending tasks that involve greater auditor judgement offshore as well.

Although this might create some audit efficiencies, it raises new questions about the protection of information and audit quality. Audits of many public organisations need to access sensitive or classified information. As a result, successive Auditors-General have limited the audit work that can be completed outside of New Zealand.

Sending work offshore can also remove training opportunities for junior auditors in New Zealand, who would be usually allocated this type of audit work.

Sustainable audit fees

The Public Audit Act 2001 (the Act) requires audit fees to be reasonable. In practice, this means that fees need to be reasonable for the public organisation being audited and provide a fair level of return to the auditor.16

However, audit fees have not always kept pace with the rising costs of providing audit services. This means that audit service providers have not consistently recovered what could be considered sustainable audit fees from public organisations.

The costs of completing an audit have increased for several reasons, including those mentioned in paragraph 3.36. However, the Auditor-General's guidance on setting fees within the model of audits being allocated to audit service providers, rather than being subject to contestable tendering, has historically been restrictive in relation to audit fee increases. This reflects a desire to keep downward pressure on fee increases in the absence of a market setting the price, as is the case for private sector audits.

Sustainable audit fees need to meet rising costs, allow appropriate new investment, enable audit service providers to retain and develop talent, and incentivise auditors to complete audits of appropriate quality.

Specific challenges within the Auditor-General's audit portfolio

Because of the nature of public sector auditing, and because the Auditor-General is required to audit a wide range of public organisations, there are several specific challenges in appointing auditors to complete all of the Auditor-General's audits. These include challenges in finding auditors who will meet the Auditor-General's quality standards and independence requirements.

Some small audit service providers have difficulty in retaining suitably qualified staff and investing in appropriate systems to carry out high-quality public sector audits.

The Auditor-General's Auditing Standards have strict independence requirements that auditors must comply with. This often limits the range of audit firms that can be appointed to complete an audit. For example, a firm providing tax advice to a public organisation would be prohibited from being that organisation's auditor.

Some public organisations expect their auditor to provide a particular skill that not all audit service providers have. For example, auditors of wānanga in the tertiary education sector should have an understanding of tikanga.

Each sector within the public sector also has its own unique challenges. This is particularly the case for the Auditor-General's school audit portfolio. Each of the more than 2400 schools in New Zealand is a Crown entity, and they are all required to be audited by the Auditor-General. Schools make up more than 70% of the total number of entities in the Auditor-General's audit portfolio.

There have historically been challenges in finding enough auditors to complete school audits. This has been because of auditors retiring from the profession or because auditors want to relinquish their audits, often because they do not consider the audit fees to be economic. In other cases, auditors have not been able to keep up with the continued increase in quality requirements.

It might be timely to consider the public accountability arrangements for schools, including the nature of independent assurance over that reporting. We are continuing to work with the Ministry of Education on streamlining the financial reporting and audit process for schools.

The effects of the Covid-19 pandemic

The Covid-19 pandemic has created several challenges for audit firms, including more complex audits and staff shortages (as a result of New Zealand's borders being closed).

Different audit firms have addressed these challenges in different ways. For example, many audit firms reduced their private sector audit portfolios to match their available audit staff. Anecdotally, the larger firms have reduced the size of their overall audit portfolios by about 10% during the last two years.

Given the anticipated delays in completing audits, Parliament passed legislation extending the statutory reporting deadlines for many public organisations (including Crown entities, local authorities, and council-controlled organisations) to enable public organisations to meet their annual reporting obligations for 2019/20, 2020/21, and 2021/22.

Despite this, some audits still could not be completed within the extended statutory time frames. This was particularly the case for audits carried out by the Office's in-house audit service provider, Audit New Zealand.

In 2020/21, 71% of public sector audits were completed by the extended statutory reporting deadlines. We still have a backlog of public sector audits for the 2021/22 year. Although the delays can largely be attributed to the disruption created by the Covid-19 pandemic, addressing what could become a more enduring level of delayed audits needs my attention.

There has been good progress in clearing the outstanding 2020/21 audits. However, the delay in completing public sector audits has had a flow-on effect for the next tranche of audits that need to be completed in 2022. This is at a time when disruptions to, and the complexities in, carrying out audits are expected to continue and public organisations are generally under pressure with fatigued workforces.

To decrease the pressure on Audit New Zealand while it clears its backlog of audits, I have reallocated about 50,000 hours of audit work from Audit New Zealand to other audit service providers with capacity to complete this work on time. Further reallocations might be required.

It is worth noting that the disruption caused by the Covid-19 pandemic has created some positive changes for auditors – in particular, the amount of travel audit teams carry out. I intend that, where possible, the Office's working environment will continue to benefit from these changes as remote working becomes more normalised.

Like most other organisations, we are continuing to contend with the implications of a hybrid working model, including the implications for our organisational culture.

There are also implications for the Office's future working environment. The Office leases its office premises and we re-evaluate our size and location needs when we renew those leases. Changing work patterns present an opportunity to think about the Office's future accommodation needs.

Positioning Audit New Zealand for the future

Successive Auditors-General have chosen to have an in-house audit service provider for several very good reasons.

Having an audit service provider that is solely focused on public sector audits means that the Auditor-General has an ongoing connection with, and direct source of intelligence about, public organisations. Audit New Zealand's non-profit-seeking objective also gives the Auditor-General a benchmark for the fees that private sector auditors charge.17

Audit New Zealand is also expected to be the Auditor-General's auditor of last resort for many sectors. It is also expected to audit in areas where independence requirements mean that other firms are not able to carry out the audit.

As the Auditor-General's in-house audit service provider, Audit New Zealand is expected to recover its costs over the long term (including for capital expenditure). However, it does not have the same commercial imperative to generate profits as the other audit service providers.

To achieve this, the Office operates a memorandum account for audit and assurance services funded by audit fees.18 However, given historical constraints on audit fee increases, Audit New Zealand has struggled to build any buffer in the memorandum account to allow for new investment, such as new audit methodologies and tools.

Audit New Zealand has some advantages over private sector audit firms. Because it carries out only public sector audits, it has a deeper understanding of the Auditor-General's expectations of public sector audits.

The Office appoints an independent provider to carry out an annual survey of public organisations about their satisfaction with the audit service they receive. The 2022 survey reinforced that Audit New Zealand's satisfaction scores are consistently lower than those for other audit service providers. The level of satisfaction public organisations have with Audit New Zealand's audit service needs to improve.

About 88% of public organisations audited by audit service providers other than Audit New Zealand were satisfied with their audit, compared with 60% of those audited by Audit New Zealand. Feedback suggests that timeliness of audit completion and communication are important factors in this gap in satisfaction.

As well as clearing the backlog of audits, there is a need to better position Audit New Zealand for the future. This includes further considering its audit portfolio so that the portfolio reflects its strengths and capabilities. There is also a need to build Audit New Zealand's staff capacity, continue investing in technology, review its practice management, and continue to find ways to increase the efficiency of the way it carries out audits.

This work is under way. Repositioning Audit New Zealand for the future will be a priority for the remainder of my term.

11: This is a new model of public service agency designed to draw together chief executives to deal with complex issues that have impacts and policy levers for a wide range of portfolio areas.

12: The Government is piloting the establishment of two clusters of agencies in the justice and natural resources sectors.

13: See, for example, section 14 of the Public Service Act 2020.

14: As of 30 June 2021, 16.2% of public service leaders reported being Māori (Te Kawa Mataaho Public Service Commission,

15: Chartered Accountants Australia and New Zealand (December 2021), "Moves to address auditor shortage will maintain trust in New Zealand Inc" at

16: See section 42 of the Act.

17: To support the requirement for audit fees to be reasonable to the organisation being audited and provide a fair level of return to auditors, the Auditor-General can use Audit New Zealand's audit fees as a comparison for maintaining reasonable fees for all the audit service providers that carry out work on the Auditor-General's behalf.

18: The purpose of a memorandum account is to keep the revenue and expenses for activities that are wholly funded by third parties separate from those that are funded by the Crown.