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7. Suggestions for Improvement

Report on the Efficiency and Effectiveness of the Office of the Auditor-General of New Zealand by an International Peer Review Team.

The following are the main suggestions for improvement in the context of the three broad areas in which the report has been structured. The Auditor-General’s response to each suggestion is set out in the box which follows it.

7.1 Governance and Management

7.1.1
A task force should be established to carry out planning and preparatory work on the proposed move to a new building housing both the Office of the Auditor-General and Audit New Zealand Business Units. Adequate funding needs to be provided for the move. Regular communication with, and involvement of, all those affected will be important for a successful outcome.

We agree that the OAG and Audit New Zealand should co-locate. We have raised the possibility of relocation with OPC. The final outcome will depend on the quality of our business case to support the move.

7.1.2
It is suggested that consideration be given to having a performance audit undertaken of the Office by the External Auditor in the next year.

We are considering this suggestion and this proposal has also been passed on to our Audit and Risk Committee for their consideration. (The Auditor-General has agreed that all added assurance work undertaken by the auditor must have the Audit and Risk Committee’s support.)

7.1.3
High priority should be given to the completion and rolling out of the organisation’s risk management policy and updated business continuity plan in the current financial year.

Agree. Drafts of both have been completed and are in the process of being rolled out.

7.1.4
The leadership teams should maintain a strong focus on the implementation of a knowledge management system that will meet the needs of the Office of the Auditor-General and Audit New Zealand.

Agree.

7.1.5
Close attention should be paid to resourcing the Research and Development function at a level capable of supporting the strategic decision-making critical to the credibility and effectiveness of the organisation, as well as to its ability to respond appropriately to a fast-changing environment.

Agree. A senior level appointment has been made since the Peer Review Team was here, but the Research and Development unit is still under-staffed.

7.1.6
The Office of the Auditor-General and senior Parliamentary Services managers should continue their efforts to strengthen the relationship between the Office of the Auditor- General, the Officers of Parliament Committee and key parliamentary Select Committees.

Agree.

7.2 Financial Statements and Assurance Auditing

7.2.1
The retention and recruitment of a small number of key staff is a risk that needs to be specifically covered in the Risk Management Plan for the Office.

This risk is now included as one of the key strategic risks in our Risk Management Plan.

7.2.2
The direction, scope and breadth of the enhanced financial statements audit in the public sector should be evaluated as a matter of priority by the Office of the Auditor-General in relation to its own performance and for the information of its stakeholders, particularly Parliament.

We consider that a public sector audit differs from the financial statements audit carried out in the private sector. The Public Audit Act 2001 recognises that difference, in that it envisages that the Auditor-General will publish auditing standards additional to the NZICA standards (section 23), which the Auditor-General does. Further, the various statutes (eg Public Finance Act, Crown Entities Act, Local Government Act) which govern the accountability of public entities require those entities to report more than their financial performance, and require the Auditor-General to audit that information.

The “direction, scope and breadth” of the annual audit work is thus mandated by statute, and was thoroughly considered by Parliament when the Public Audit Act was passed in 2001. Parliament has also recently considered the reporting requirements for most public entities – for local government in 2002 and for government departments and Crown entities in 2004.

The intention in adding requirements for the annual audit is to gain more value from the audit. However, we recognise the risk of “brief creep” and have clarified the responsibility within the OAG for ensuring that it does not occur.

7.2.3
The Office of the Auditor-General should address the issue of public sector entities having the same Audit Service Provider for periods approaching, and exceeding, twelve years in the interests of preserving audit independence and maintaining the efficiency and effectiveness of the entities concerned.

The Auditor-General reviews the position on an annual basis and is satisfied that the current position is acceptable. The fragility and small size of the auditor pool in New Zealand as well as the geographic dispersal of the audit entities are taken into account. Appointed Auditors are replaced every six years (five for companies listed on the Stock Exchange).

7.2.4
It is suggested that, in the selection of Appointed Auditors, the assessments against each selection criterion should be documented and summarised in the relevant submission to the Auditor-General.

Agree. This is now being done.

7.2.5
It would be prudent for the Office of the Auditor-General to minimize the risks associated with being seen not to comply with the main requirements of the government’s procurement policy.

The Government’s procurement policy does not apply to the OAG or some other elements of the public sector (eg the Health Sector). We consulted with FEC before introducing the current allocation process. The key driver for appointments is quality but we also make sure that the principles of openness, value for money and fairness are satisfied in our allocation process.

7.2.6
The desirability of merging at least some of the technical resources of Audit New Zealand and those of the Office of the Auditor-General should be further investigated for better operational effectiveness and efficiency, particularly where the skills involved are difficult to recruit and retain.

This was considered in detail in 2005/06 when the Professional Practice Group was established in Audit New Zealand. While some resources are shared eg Legal and Corporate Services, it was decided that the needs of the Office were best met by retaining separate technical teams. We will continue to ensure the two teams do work together when that is the best use of resources – as has been the case with preparing for the adoption of IFRS.

7.2.7
The structure of audit operations in Audit New Zealand could be more efficient if audit responsibilities were assigned in a manner that would permit greater specialisation amongst the Directors and staff and if any duplication between Audit New Zealand and the Office of the Auditor-General were reduced. The result would most likely be greater economies of scale, greater efficiencies in the performance of the audit work and improved identification of audit issues.

The concept of specialisation was taken into account during the recent reallocation of Directors to audits. However, given the breadth of Audit New Zealand’s portfolio of audits and the geographic spread of audits, complete specialisation would not be cost effective. The roles of sector specialists in Audit New Zealand and Sector Managers in the OAG have a different focus. The former are focused on doing effective audits at an entity level whereas the latter have supporting Parliament as their primary focus. They do work collaboratively.

7.2.8
Although the Audit New Zealand Quality Control Manual includes a wide range of policies and follows the recently implemented international standard on quality control, it does not provide sufficient information with respect to policies surrounding recruitment, performance evaluation, career development, promotion, and auditor rotation. During interviews, it was evident that such information exists but it is not part of the Quality Control Manual that can be easily accessed. This is a matter that requires attention.

Agree. This has been attended to.

7.2.9
While it is noted that Audit New Zealand has appropriate audit tools and audit methodology to conduct quality audits and that staff are more focussed on their role, more effort is required to ensure that Audit New Zealand executes its new methodology and policies in a manner that will continue to deliver high quality professional services and adapt to the international changes in the accounting and auditing profession, In the opinion of the Peer Review Team, the response to these challenges should be for Audit New Zealand to continue its efforts to train all of its staff in the elements of the new audit methodology and practices but to also hold separate in-depth training on key elements of that methodology and separate training sessions customised and targeted for senior staff.

Agree. Targeted training is scheduled for May – June 2008.

7.2.10
It is incumbent on the Office of the Auditor-General to ensure it remains independent of implementation issues related to local government to retain its objectivity and cautious scepticism as part of audit responsibilities and also be seen to be doing so.

Noted.

7.2.11
The Office of the Auditor-General is strongly encouraged to address comprehensively the full range of issues emerging from the recent quality assurance review covering the LTCCP.

This has been done as part of the methodology revision that was signed off in March 2008.

7.3 Performance Auditing, Good Practice Guides and Inquiries

7.3.1.
The Office of the Auditor-General should consult with the Officers of Parliament Committee and the Finance and Expenditure Committee to determine the value they would see in a more proactive discussion on the Office’s draft performance audit work programme. This would include commenting on the reasons for specific proposals for performance audits or studies not being included in the final programme.

All Select Committees are consulted on the draft work plan. This year we had a detailed discussion with FEC on the draft plan and suggestions for additional projects were provided to us. As we did last year, we are formally responding to each committee in relation to the suggestions they have made. For our 2008/09 work programme we are hoping to involve the committees much earlier to seek their suggestions on what we could include in the work programme.

7.3.2.
The Office of the Auditor-General may wish to discuss with heads of major public entities how the existing consultation arrangements on the Office’s performance audit work programme might be further developed and refined; and, where a performance audit is pursued, whether there would be merit in more direct contact with the relevant Chief Executive during the key design and scoping stages of the audit.

We will continue to review our process for consultation on our proposed work programme. We note that, as part of the scoping stage for possible audits, we do consult the heads of the entities which would be affected by an audit.

7.3.3.
The Office of the Auditor-General should undertake an analysis of Post Project Reviews covering performance audit reports published in 2007-08 to determine how the closer involvement of performance audit teams with the scoping of performance audits has paid dividends. The Office of the Auditor-General should also continue to explore new and innovative ways to get to the bottom of topics, such as making further use of “issue analysis” meetings, to make sure that it has full knowledge of entities’ plans and vice versa.

An analysis of the Post Project Reviews will be undertaken. We also agree to the second suggestion.

7.3.4.
Where an entity’s performance is assessed against internally set standards, there is a risk that performance audit reports may not encourage the stretching of performance. At the audit planning stage, the PAG should test to see whether the methodologies proposed for the audit will yield sufficient independent benchmarking, research and analysis to provide an objective assessment of the auditee’s activities and performance, including whether the immediate targets and standards that the audited body has set for itself are sufficiently challenging.

We do look externally for good practice. However, the need to do so will be stressed in our internal guidance.

7.3.5.
The Office of the Auditor-General may wish to be more ready to offer an opinion on whether it considers that, where particular information is unavailable, the entity should have had that information available for analysis and decision-making.

Agree. The message is generally implicit – we will make it explicit.

7.3.6.
More financial analysis would be helpful in some reports, particularly those that examine particular programmes and initiatives.

Agree. We will take steps to ensure that the necessary expertise is available to each audit team.

7.3.7.
More quantification of the costs and benefits of government programmes would help to determine whether entities are choosing the most cost-effective means of achieving their objectives.

Agree.

7.3.8.
The structure and content of reports could be altered to reduce descriptive content and give more prominence to key findings and analysis in direct support of recommendations.

The structure of reports will be reconsidered. We need, though, to ensure that reducing the descriptive content does not reduce the reader’s understanding of the topic under consideration.

7.3.9.
Reports could include more explicit explanation of their scope.

Agree. We will take care to explain more clearly the focus of our audit, and any limitations on its scope.

7.3.10.
In addition to recent new instructions to performance audit teams that recommendations should be significant and targeted, we would add that they should also be measurable: setting out wherever possible clear timescales for action by the entity, and by defining the criteria against which the impact of a recommendation should be assessed.

Agree.

7.3.11.
With 14 performance audits to deliver in 2007-08 and a core audit staff of around 15, the Office of the Auditor-General might consider reviewing staffing levels for performance audits, looking in particular at continuity and at its capacity to do justice to the range and number of audits tackled each year

Agree. Resourcing of the team needs to be under continual review.

7.3.12.
The Office of the Auditor-General should investigate whether a better balance can be struck between the effort and resources committed to the conduct of a performance audit and that committed to its review.

Agree. The Performance Audit Process Improvement Project that we have initiated has focused on this.

7.3.13.
At present, much of the quality assurance effort is focussed towards the end of an audit or, indeed, after an audit report has been published. We consider that there would be merit in targeting more of this resource at earlier points in the audit lifecycle. This, we feel, could bring further depth and rigour to the scope and design of a performance audit and would provide a useful “challenge mechanism” to test the range of methodologies and approaches planned for an audit.

We will discuss this suggestion with our Australian counterparts (as possible providers of quality assurance). We need to ensure though that additional QA would not add to the length of time (and hence the cost) of the audit.

7.3.14.
There is scope to strengthen the processes for following up the recommendations made in performance audits, for example by public entities being invited to set out formally their immediate response to the Office of the Auditor-General’s recommendations, and at a later date, for the Auditor-General to review the steps they have taken to implement those recommendations. This would strengthen accountability by placing a clear obligation on public entities to take necessary action. It would also apply a discipline upon the Office of the Auditor-General’s performance audit teams to ensure their recommendations were practical and capable of implementation.

Noted. We do offer a briefing on each performance audit to the relevant Select Committee, and we consider appropriate follow-up of performance audit recommendations as part of our work planning. We will look at establishing a more systematic approach to follow-up.

7.3.15.
There may be a case to enhance the annual Performance Audit Evaluation Report to the Officers of Parliament Committee, for example, by increasing the number of audits covered in the evaluation and, if the Committee so wished, for the Office of the Auditor-General to make a presentation to them in support of the Report.

Noted. We will discuss this suggestion with the Speaker as Chair of the Committee.

7.3.16.
When preparing good practice guidance, the Office of the Auditor-General should consider whether such guidance, in some circumstances, would carry added weight and authority if it were jointly prepared and published with other bodies, including the Treasury, the State Services Commission, or the New Zealand Society of Local Government Managers.

We acknowledge the benefit of joint publications in some circumstances, and we will consider working jointly with other agencies where appropriate. We currently consult many bodies, including those named, before publishing our guides. However, our guides are usually intended for the whole public sector, and no other agency has that breadth of responsibility.

7.3.17.
The Office of the Auditor-General may wish to develop the means to canvass a wider body of views concerning satisfaction with the handling of inquiries, and ask a wider set of questions about the quality of its inquiries work, in order to further develop and refine the inquiries process.

We are not sure how we would do this. Many inquirers and audit entities do give us feedback if they do not like the outcome of the inquiry. Their views are considered.

7.3.18.
Consideration should be given to strengthening areas of the Inquiries Manual, for example in respect of the need to establish early in an inquiry the expectations and benchmarks that determine the standards against which the actions of public entities are to be assessed.

Agree. Often, though, there is a need for considerable work to understand the issue before we decide whether to proceed with an inquiry.

7.3.19.
The Performance Audit Group should consider whether any topics for future audit lend themselves to an inquiry-style approach. By including some of these shorter studies, the Group would be able to offer a wider range of products and increase the flexibility of its approach.

The suggestion is noted and accepted, though we think it is a task for the Operations Group, not the PAG. Some of the articles in our Central and Local Government annual reports are of this nature.
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2008 Peer Review of our Office

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