Strategic responses

• Our strategy of “product leadership”
• Our vision
• Strategic areas of focus
• Specific changes to our assurance products/services mix
• Strategic actions
• Our proposed “project” approach
• Strategic risks
• Measuring our success
• Key strategic plan measures – external reporting

As outlined in the previous section, on the basis of our current capability the Office will struggle to respond to the challenges in our environment and to meet the expectations of our stakeholders over the next five years.

In the next section, we outline our strategy to position the Office to properly respond.

This includes our overarching strategy to become “product leaders”, and identifies the strategic areas we need to focus on over the next five years.

Our strategy of “product leadership”

In formulating our response to the key issues, we stood back and reflected on the strategy needed for the Office to more positively and effectively respond to our environment and stakeholder needs.

We decided on a strategy of “product leadership” – where the Office will strive to make more of a difference through the continual re-shaping of our products/services and the ways we deliver them to meet the changing environment and the needs of its stakeholders.

The characteristics of “product leaders” are:

• Innovation
• Speed
• Responsiveness
• Building on current key advantages/points of difference
• Flexibility, and
• Access to the best people

These characteristics are consistent with what the Office needs to do to respond to the key strategic issues.

This strategy of product leadership relies on the Office still being very good operationally and maintaining strong relationships with our key stakeholders. But it focuses us on enhancing our key strategic advantage – the design and delivery of responsive, high quality, innovative, and independent assurance services.

Product leadership = making more of a difference

Our vision

Emerging from our strategy of “product leadership”, we have developed a five-year vision:

To set the benchmark for design and delivery of independent assurance services by

• shaping our services to anticipate and respond to Parliament and other stakeholders’ needs and our changing environment
• building our capability to create and deliver our services
• fostering relationships and ways of working to support our strategy of product leadership, and
• acting independently in everything we do.

Five-year vision: To set the benchmark for design and delivery of independent assurance services

In the future, we aim to:

• be acknowledged as the innovators in designing public sector, independent assurance services and high quality deliverers of such services
• constantly challenge and enhance the way we work
• be the place where people want to work
• do as we want others to do/practise what we preach
• facilitate real change and improvement, and
• be seen as an essential part of the public system

Page 7 further describes the changes between where we are today and where we want to be in the future.

Strategic areas of focus

In order to become “product leaders” and more positively and effectively respond to the key strategic issues, we need to focus on the following four strategic areas:

1. Ongoing research and development and product development, and innovation
2. Changes to the breadth and depth of our current assurance products and services
3. Enhancement of our Strategic Audit Planning process and deployment of our full range of assurance interventions around issues/risks
4. Continual adaptation of our organisation

Ongoing research and development and product development, and innovation

We need the capability to carry out ongoing research and development, and product development. We need to be innovative. In the last decade we have had an over-reliance on Audit Service Providers (ASPs) to develop assurance approaches. This development did not occur to the extent needed – primarily due to the limitations of sector coverage for many ASPs, and lean pricing of audits through a decade of contestability amongst ASPs. We need to lead our own product development. This means getting on top of the current backlog (e.g. assurance responses to legislative changes and performance reporting) and thinking out to the future about where and how we want to shape our assurance products and services.

Changes to the breadth and depth of our current assurance product and services

We believe most of what we do now is the right work. However, within that broad product/services mix, we believe the breadth and depth of our assurance products and services needs to change over the next five years. Specific changes are highlighted on pages 26 to 31.

Enhancement of our Strategic Audit Planning process and deployment of our full range of assurance interventions around issues/risks

We already have a well-developed strategic audit planning process, which is recognised as among the best internationally. However, there are opportunities for greater involvement, communication and knowledge sharing between people working in and for the Office. In addition, our assurance responses to date have been somewhat linear – that is, dealing with single issues with single responses. Moving forward, we will enhance how we deploy the full range of our assurance interventions around key issues/risks. As an example, we have had a performance audit planned for several years on the funding of Non-Government Organisations (NGOs) by public sector entities but we have been unable to commence this work due to insufficient resources. In 2003-2004, our focus was diverted to the Awatere-Huata inquiry. Under our new scenario, the way in which we would plan to approach the NGO funding issue is to leverage off the work already done in our inquiry by:

• undertaking a performance audit to clearly flesh out the full range of issues
• developing best practice guidance on funding of NGOs
• undertaking specific work on funding of NGOs in annual audits, and
• offering wider assurance to entities on their NGO funding activities where appropriate.

Continual adaptation of our organisation

Changes to the way we choose auditors who do the annual audits opens the way for many of our processes and systems to be simplified across the Office. We are committed to “practising what we preach”, and maintaining operational excellence. We will position our support capabilities for this future strategy, not the past or present settings.

Specific changes to our assurance products/services mix

We have concluded that we will continue to deliver largely the same range of assurance products/services over the next five years, however the volume in some areas is expected to increase significantly and the distribution of our efforts may need to change.

SUMMARY OF PROPOSED CHANGES

Each of these changes is described in detail on the following pages.

Annual Audits

Annual audits will change over the next five years in several ways:

• firstly, we need to undertake significantly more work in the area of non-financial reporting
• secondly, we need to enhance the level of work done in the areas of waste, probity, governance and accountability, and
• thirdly, we need to ensure that our auditing practices remain leading-edge and responsive to the significant changes that are happening in the accounting and auditing profession internationally

Each of these is discussed further below.

The need to undertake significantly more work in the area of non-financial reporting

We need to do more audit work in a range of areas relating to non-financial reporting, including assurance over:

• Local authorities’ Long-Term Council Community Plans under the Local Government Act 2002
• Managing for outcomes initiatives in government departments and Crown Entities
• Sustainable development reporting
• More information generally from public entities on outcomes, capability, risk, ownership and stewardship

Enhancements needed to the level of work done in the areas of waste, probity, governance and accountability

We need to enhance the level of audit work in key areas of our audits that are unique to the risks that public entities face and where it is expected that the Audit Office will have coverage. These areas are around issues of:

• Waste
• Probity
• Governance and accountability

The need to ensure our auditing practices remain leading-edge and responsive

There are significant changes happening in the accounting and auditing profession internationally that will have a direct impact on New Zealand and on our public sector. These changes primarily flow from the major corporate collapses in the US and Italy and, closer to home, Australia. The changes include:

• The refocused attention and efforts that the major accounting firms are making on
  • Independence
  • Quality
  • Risk management
  • Core accounting and auditing technical skills
  • Client acceptance and continuance procedures
  • Auditing practices and techniques, and
  • Policies and procedures generally
• The legislative and regulatory responses that a number of countries have made that directly impact on the accounting and auditing profession, particularly relating to independence
• The heightened awareness that governing bodies have on their duties and responsibilities and the key role that independent audit assurance has in supporting them in the execution of their duties
• The major changes that the profession and regulators are making internationally which again flow directly to New Zealand and our public sector:
  • the adoption of International Financial Reporting Standards (IFRS)
  • the likely adoption of International Standards on Auditing (ISAs)

There are indications in the New Zealand private sector audit environment that these changes have already led to fee increases in the vicinity of 15% in order to meet the increased costs of undertaking audits.

Putting all of these changes together in our own annual audit context, we believe that the size of our annual audits will increase over the next three to five years. This enhancement of our annual audit products will need to be carefully managed over this time and we will have close dialogue with public entities, sector groups and other stakeholders as to how we intend to handle the inevitable cost increases that will arise.

Controller Function

The overall level of work in the Controller function will remain largely the same, although we note the Public Finance (State Sector Management) Bill, if enacted, will change the mix of our work in Controller activities in the future.

Advice to Parliament

The feedback that we regularly seek from select committee chairs in relation to the advice we provide to Parliament in Estimates Reviews, Financial Reviews and Select Committee Inquiries and advice on some legislation indicates that the current level and quality of service is at an appropriate level. Accordingly, we do not envisage any change to this area of our work, though note that assistance to Select Committees can be a substantial call on our resources – the Primary Production Committee’s inquiry into Scampi Fishing is a recent example of this assistance.

Inquiries

The Office has received and responded to a range of significant inquiries over the last five years, which we have dealt with by re-prioritising planned work in the area of performance audits and research and development/product development work that we would have otherwise undertaken, particularly in relation to the non-financial reporting dimension of our annual audits. We have formed the view that the Office is well positioned to undertake inquiry work, primarily because of our independence but also because of the existing infrastructure and professional practices in relation to gathering of evidence, accounting and auditing analysis, natural justice, and reporting. However, inquiries have placed a significant demand on the Office, particularly on our senior people, and we wish to place greater emphasis on appropriately resourcing and managing these inquiries in the future. This will enable us to focus on the other key areas of this strategy and complete inquiries on a more timely basis where possible.

Advice and Liaison

Advice and liaison with central agencies, public entities and other sector groups is an integral part of the Office’s involvement and presence in the public sector. We see our level of involvement in this area remaining largely at similar levels as the current state, however we will need to ensure that our involvement continues to be targeted at areas where our Office has core competencies – that is in areas of governance, accountability and reporting. Recent examples of this type of work were in Local Government legislation and the planned amendments to the Public Finance Act and Crown Entities legislation.

Working with the Profession

The Office plays an important role in representing public sector interests in working with the accounting and auditing profession, both in New Zealand and internationally. Again, we see our level of involvement remaining at similar levels to our current state. However, with the increasing demands that will arise out of international harmonisation of accounting and auditing standards, there will be a particular need to target our efforts into areas where we will achieve the most influence and best outcomes for the New Zealand public sector.

Wider Assurance Work

Wider assurance work is the audit work undertaken by Audit New Zealand in response to particular needs of public entities (and accordingly is paid for by them). As an example of this type of work, Audit New Zealand is often asked to provide independent assurance over tender processes for large or sensitive projects in the public sector. This wider assurance work forms an important part of the overall level of assurance being provided by the Auditor-General in the public sector and we envisage that the level of work will remain broadly in proportion to its current levels over the next five years. Enhancements in this dimension of our work will be to ensure that the work undertaken is contributing to our overall strategy and also providing opportunities for the Office to innovate.

Performance Audits

Performance audits are significant audits covering value-for-money or issues of effectiveness and efficiency. Our Office has a relatively lean mix of performance audits in proportion to our overall mix of work (currently 7%) compared to our comparable international counterparts (where performance audits comprise up to 40% of their work).

Parliamentarians are asking the Office to do more performance audits in order to provide greater breadth and depth of assurance in areas of value-for-money, effectiveness and efficiency. Increasing the number of performance audits - and our capability to deliver more performance audits - will also provide a more sustainable critical mass of audit professionals in this aspect of the Office’s outputs. We wish to increase the number of reports from 10 to 21 over the next two years in order to start addressing the many issues we identify in our strategic audit planning process. These issues are clearly mapped out in our annual plan.

In addition, we wish to improve our timeliness in the completion of performance audits.

International Liaison and Involvement

The Office has had strong involvement with our international counterparts and various working groups that have been established. In particular, we make a significant contribution to the training and development of our South Pacific counterparts. We also make significant contributions to Asian countries, actively work together with our Australian counterparts at state and federal level and are active members of the INTOSAI working group on environmental auditing. Given the amount of time involved, we will continue to target our efforts to maximise the benefits to the work of the Office as a whole.

In the previous section we outlined our four strategic areas of focus:

• Ongoing research and development and product development, and innovation
• Changes to the breadth and depth of our current assurance products and services
• Enhancement of our Strategic Audit Planning process and deployment of our full range of assurance interventions around issues/risks
• Continual adaptation of our organisation

In the next section, we outline our strategic actions to address these four strategic focus areas over the next five years.

Strategic Actions

Our response to these strategic areas of focus is as follows:

Our proposed “project” approach

Throughout this Strategic Plan, we have made reference to the need to improve our project management and take a “project” approach to getting things done, including:

• improving the timeliness of our inquiries
• being more efficient in conducting performance audits
• undertaking R&D/product development, and
• implementing other major initiatives under this Strategic Plan, like the development of our knowledge management strategy.

We already have well-developed project management for many aspects of our work, particularly our annual audits. Our “project” approach looks to extend good project management across all aspects of our work. We need to do this because we:

• want to maintain our efficiency and ensure we deliver value for money in all of the work we do
• want to be realistic in resourcing of tasks and ensure they get done on time, are clearly scoped and executed efficiently
• are moving to work on a more collaborative basis – harnessing the resources of all our Audit Service Providers and using external expertise.

In practice, the “project” approach will mean:

• taking a project management approach to all professional and corporate work over a set level of resource hours
• providing sound training, technical guidance and professional project management support for this work, i.e. the tools to run a good project
• enhanced tracking of resource allocation and utilisation
• improved governance and accountability of work from:
  • clearer project scoping
  • project management disciplines, and
  • more sophisticated management information.

In the previous section we outlined the key actions we are going to take to address our strategic areas of focus. We believe these actions will enable the Office to adequately respond to the issues in our environment and our stakeholder needs.

Inevitably, however, there is a range of risks we need to manage to ensure the successful implementation of our strategy over the next five years. In addition, we need to be able to demonstrate to our stakeholders the success of our strategy.

In the next section, we outline our strategic risks and how we will manage them over the next five years, together with the ways we will go about measuring our success in the implementation of this strategy.

Strategic risks

We see the following as strategic risks to the successful implementation of our strategy. We have completed a risk assessment based on likelihood and impact, and we have identified strategies to mitigate each strategic risk.

Measuring our success

We will measure and report in three key areas:

• The impacts that our work has and how we make a difference to the public sector
• The outputs we produce
• The success of this Strategic Plan

The measures for our impacts and outputs are set out in the current Annual Plan for 2003/04 (pages 28–31, and 74–83). These, together with measures of the success of this Strategic Plan, will be developed further in the Annual Plan for 2004/05 based on the outcome of our funding proposal.

To demonstrate the success of this Strategic Plan, the Office has developed the following measurement framework:

MEASUREMENT FRAMEWORK For measuring the success of our Strategic Plan

Our measurement framework is structured as follows:

Measurement Dimensions

Each Strategic Focus Area is assessed against four measurement dimensions:

• Impact
• Performance
• Capability, and
• Risk

Where:

Impact measures the extent to which the investment resulted in improvements on our impacts

Performance measures the extent to which the Office used the funding efficiently and for the purposes it was provided.

Capability measures the extent to which the Office maintained/built capability for the future, and

Risk measures the extent to which the Office managed the risks associated with the strategic intervention.

Measurement Categories

Within each measurement dimension, measurement categories have been used to assess our success:

After assessing each Strategic Focus Area using the above methodology, we have then developed Success Indicators and Targets.

Key Strategic Plan Measures – External Reporting

Using the above methodology, we have developed a preliminary suite of measures for internal and external reporting purposes.

The following lists what we see as the key measures of success relating to the implementation of our Strategic Plan for external reporting purposes. These will be further developed in our 2004/05 Annual Plan, once the outcome of our funding proposal is known.