The past 12-18 months has seen significant developments in the organisation of legislative audit arrangements in New Zealand.
These have to be seen against the wider background of far reaching public sector changes and reforms, particularly from the mid-1980's. The reform process has had a profound impact on the environment in which the Audit Office operates and on the influences operating on, and within, the office.
These developments have been accompanied by substantial changes in the nature of public sector auditing in the form of introduction of full accrual financial reporting and performance indicators which are now to be reported annually.
Consequential developments of significance in the New Zealand Audit Office have been the introduction of a regime for allocating audits on a contested basis, combined with significant organisational restructuring of the office.
Up to the mid-1980s, Government administration in New Zealand remained heavily centralised. Criticism of central government administration included:
In the late-1970s and early-1980s a series of changes were made in the existing system in an effort to improve the way the public sector was operating but they met with limited success. From the mid-1980s, a programme of more radical reforms commenced, as it became apparent that more comprehensive initiatives were required.
Corporatisation of Trading Activities
Following the election of a new government in 1984, the administration embarked on an economic programme which included the removal of wage and price controls, lowering of the protection provided to local industry, reform of the taxation system and deregulation of the finance and other sectors of the economy.
The public sector formed an important part of the reform process. The first area to be addressed was the trading operations of central government which were corporatised under the State-Owned Enterprises (SOEs) Act 1986. There were three broad objectives for creating SOEs:
The SOEs were therefore set up as limited liability companies with a capital structure appropriate to their industrial sector. They were required to pay taxes and earn a competitive rate of return on equity.
Accompanying corporatisation was a programme of deregulation in which many statutory monopolies enjoyed by SOEs were removed, thus exposing them to open competition from the private sector and creating incentives for greater efficiency.
The State Sector Act 1988
The new model of public sector management established under the State Owned Enterprises Act had a profound influence on reforms elsewhere in the public sector, including local authority trading activities and the core public service itself. One principle which was adopted was the organisational separation of policy formulation from the delivery of services. Other guiding principles were commercialisation and decentralisation. Commercialisation attempted to emulate a commercial management environment in the provision of services with cost effectiveness and competition as driving forces. Decentralisation emphasised greater managerial discretion over inputs as a means of improving the efficiency, adaptability and responsiveness of the public service.
The cumbersome and inflexible manner in which the appointment, promotion and pay-setting systems had traditionally worked required changes to fit the new management environment. These changes were brought about through the State Sector Act 1988. This established a new relationship between the heads of government departments, designated chief executives, and their respective Ministers. Permanent tenure was replaced by limited-term contractual agreements and an annual performance agreement.
Under the State Sector Act, the relationship between Ministers and top officials is significantly different from other Westminister systems. While Ministers remain accountable to Parliament at a macro level and are responsible for policy decisions, the chief executive of each department is responsible for providing policy advice and achieving the agreed production of outputs. Each chief executive signs a performance agreement with his or her Minister as a basis for an accountability relationship. At the departmental level, the corporate plan was established as a key accountability document.
The Public Finance Act 1989
The Public Finance Act 1989 became the other pillar of public service reform, introducing a substantially different system of financial management and accountability. The reforms associated with the Act include:
Electoral Reform
While not by itself a change in the way the public sector operates, the introduction of the mixed member proportional system of electing members of Parliament, may have consequences, on the way public sector entities are called to account, by the House of Representatives.
It may, thus, for example, not be unreasonable to anticipate an increase in the importance of the legislative branch of government, relative to the executive branch, with the former asserting to a greater degree what in constitutional terms, is the required separation of powers between itself and the latter.
Consequences for the Auditor-General's Role
The various changes have had a profound effect on the way public business is conducted. They have also brought about many changes in accountability and reporting practices, not only in central government but in local government as well. As already mentioned, the new, more comprehensive reports require full accrual accounting to be used and reporting of performance in non-financial as well as financial terms against budgets or annual plans. New skills have been required by public sector managers, accountants and auditors. Parliament has a far more extensive range of information available to it.
All these changes to the structure and management of public bodies, the accountability framework within which they operate, and the reports they produce to satisfy accountability requirements, have had a significant impact on the operations and focus of the Audit Office.
A significant effect has also been in terms of the incentives and pressures confronting the office.
Not surprisingly the Audit Office has not stayed immune from the questioning of performance which has characterised New Zealand's political, social and economic life over recent years! This questioning has taken the form of demands for:
It was inevitable, in the new climate of change, that those who were subject to audit by the Auditor-General, and themselves subject to reformist pressure, should
also demand the application of such disciplines to legislative audit. By his own choice, and reflecting the general trend of reform in New Zealand, the Auditor-General has responded by implementing changes to deliver and demonstrate efficient and effective audit services.
The significant changes already described have resulted in significant consequential changes for the Audit Office itself. These can be characterised as the creation of a regime for allocating public sector audits on the basis of contestability and a significant restructuring of the Office. An underlying aim of both changes was a wish to demonstrate that the resources entrusted by Parliament to the Audit Office were being used as effectively and efficiently as possible.
Introduction of Contestability
From December 1992, a new contracting philosophy and processes were introduced. The effect of this was to divide the portfolio of entities subject to audit by the Audit Office into two parts - those for which the provision of audit services was to be contestable, and those for which (for the time being, at least) the audit services were to continue to be provided by the Audit Office without market testing.
Rationale for Introducing Contestability
The major reason for introducing contestability was that it was difficult to demonstrate efficiency and value for money in the conduct of audits.
Contestability provides the mechanism for the Auditor-General to market-test the efficiency of the operational arm of the Office by comparing the quality and efficiency of the service it provides against that provided by alternative audit service providers.
The second reason was the belief that the exchange of knowledge which would occur as a result of drawing on a wider pool of auditors, and on private sector knowledge and practices, would make a positive contribution to the quality of financial management and accountability in the public sector.
Contestable and Non Contestable Entities
The division into a contestable and non-contestable pool reflected the fact that public sector entities subject to Audit Office audit, cover a wide spectrum of activities.
At one end, there are entities conducting commercial activities, a large number of which have been corporatised over the last decade as already mentioned. The scope of the audit of these entities is very similar to the audit of private sector organisations, with the exception of a greater requirement to examine compliance with legislation. The presumption is that private sector auditors can quite easily act as agents in auditing these public sector entites.
In the middle of the spectrum, there are entities with a mixture of social objectives, which are usually also subject to more comprehensive reporting requirements, notably the provision of statements of service performance. The financial part of the audit of these entities is not different to that normally undertaken by private sector auditors, but the additional requirements of auditing non-financial information and compliance with legislation, differentiate them further from private sector audits.
It is these two broad components that currently comprise the contestable pool. At the further end of the spectrum, there are Government departments and some related bodies, and regional and territorial local authorities. These rely wholly or largely on taxation revenues, and are also subject to comprehensive public accountability arrangements. At this stage, the audit of these entities will not be contested. This is to ensure that their unique and comprehensive accountability and legislative compliance requirements are well understood by the auditors, who have had long experience of dealing with them.
Progress with Contracting Out
By 1992, approximately 27% of the financial audits of the Audit Office were contracted out, as measured on a workload basis.
The intention is to conduct additional tender rounds at appropriate intervals over the next two years, so that by 1 December 1995, 57% of the total annual workload will be subjected to contestability, and auditors appointed under the new arrangements.
The audits of the other 43% will not be contested immediately because they are of entities in respect of which there are expectations of a closer oversight. The nature of their activities means that the audit involves particular public sector knowledge and experience. The possibility of extending contestable practices to this part of the portfolio cannot, however, be excluded.
Quality
In establishing the tendering regime, steps have been taken to ensure that the audit product is of the highest quality:
An independent evaluator has been employed to provide additional assurance that the tendering process conducted by the Audit Office is seen to be both rigorous and unbiased. Improvements have been made on the basis of the evaluators' recommendations and those emanating from a full debriefing of audited entities and tenderers.
Significant organisational restructuring of the Audit Office took place in December 1992.
One of the primary reasons prompting this was the lack of a clear understanding about the role of the Auditor-General in relation to meeting the needs of Parliament and the operational functions of the Audit Office carried out in support of that role. A large part of these operational functions is attest audits, i.e. audits leading to an opinion on the information contained in statutory accountability statements (principally financial statements and statements of service performance).
The effect of the separation has been to create much clearer distinction between the constitutional/political role and the auditing/doing role. It was a development which was felt to be consistent with the general worldwide trend in government administration, whereby the funders and purchasers of services are separate from the service providers.
The operational functions of the Audit Office concerned with attest audits have been located in a separate business unit called Audit New Zealand. The Audit Office is now divided into two units:
The advantage of this separation is, first, to provide a distinction and to strike an appropriate balance between, what is required to properly meet the needs of Parliament and the operational requirements of Audit.
Secondly it provides the mechanism to market-test the efficiency of the operational arm of the Office by allowing comparisons to be made between the quality and efficiency of the service it provides against that provided by alternative audit service providers.
The implication of this development is that the Auditor-General now has far greater flexibility in the procurement of attest audit services.
The new arrangements mean that there is now open competition between Audit New Zealand and private sector alternative audit providers, in respect of the large volume of work that has been made contestable. The tender processes have been specifically set up to ensure that there can be no bias in the way choices are made to obtain audit services. Audit New Zealand is now only one contractor, albeit a very important one, of services to the Auditor-General. A situation of real choice has, thus, been created which should result not only in increased audit efficiencies but in an improvement in public sector management.
This feature outlines the far reaching public sector and financial management reforms in New Zealand in recent years.
The impact of the various developments in the Audit Office is significant. The underlying aim of these changes has been to find ways to promote and demonstrate better performance in the conduct of public sector audits and their reporting. It is hoped that these changes will allow the Audit Office to discharge its responsibilities of securing accountability in an effective and efficient manner.