My Office has faced many changes and challenges in the past four years. Some have come from the changing international environment for accounting and auditing, and others have arisen at the domestic level. However, the rapidly deteriorating economic conditions of 2009 mean that the country as a whole – and therefore the public sector and my Office – faces perhaps the most significant and fundamental challenges we have experienced in many years.

As Auditor-General, I am responsible for auditing all of New Zealand’s 4000 or so public entities. My Strategy 2009-12 emphasises the need to generate greater insight from my Office’s audit work to support the public sector in responding to economic challenges, while maintaining vital services and building the trust of citizens.

We will step up our efforts to better use the wealth of information and knowledge that we have about the public sector to add value through reporting the performance of public entities, individually and collectively. This will give Parliament, public entities, and the public the maximum assurance and improvement benefit from our work.

Operating in the changing economic environment

In the changing economic environment, we need to continue to ensure that our audit fees are reasonable and that our audit effort is appropriately directed. We are acutely aware that accountability requirements – including those for an audit – are often a burden for smaller public entities and subsidiaries of larger public entities, which do not often present significant public risk. They include public entities such as schools, cemetery trusts, and reserve boards.

We have systems in place to ensure that we provide audit services at a reasonable cost to public entities. However, much of our annual audit work is set by statute and accounting and auditing professional standards, and therefore is largely beyond our control. To the extent that our annual audit work is within our control, we aim to streamline what we do so that we can gather the maximum amount of information from each audit, while keeping the level of audit work in proportion to the level of public risk for the public entity.

We also intend to include in the next few years a stronger emphasis in our work on non-financial reporting, waste, probity, and accountability. As we do this, we will be mindful of how such changes may affect the way we cost, resource, carry out, and report our audits.

In my view, we currently do not give enough audit attention to non-financial performance reporting in larger and publicly significant public entities. On the other hand, statutory compliance and audit requirements for smaller public entities may be too onerous. These requirements include adoption of the New Zealand equivalents to International Financial Reporting Standards, which were originally designed for large companies in the private sector.

Audit fees also traditionally reflect wage movements in the wider market for financial and assurance professionals. During the last few years, auditors have been required to do more work. The cost of employing auditors has also been steadily increasing, largely as a result of the adoption of international accounting and auditing standards. We are not yet certain how the current economic conditions will affect audit fees. However, I must continue to ensure that audits are performed well, both now and in the future, which means that my audit service providers must be fairly remunerated.

Focusing our audit work on the public interest

I am concerned that the demands created by changes within the accounting and auditing profession mean that our audit work has had to focus more heavily on the financial statements of public entities. This has been at the expense of “public interest” audit work, which is based on fuller consideration of the strategic, governance, and operational risks and challenges faced by public entities.

The proposed changes to the Auditor-General’s auditing standard on service performance information (AG-4) are a central part of my Strategy 2009-12. The changes will put a stronger focus on issues with, and risks to, the business of public entities, and on assessing the outcomes, impacts, and cost-effectiveness of services. Our AG-4 work should improve our own reporting and encourage improved performance reporting by public entities.

I expect our work in this area, and in other strategic areas of focus that we will set in our annual plan each year, to involve the full range of our audit assurance services (annual audits, performance audits, inquiries, and advice and assistance).

Building on our strengths

Although our strategy is to do better, we will be building on a position of strength. An international peer review in 2007 reported very positively on our operations, noting that the Office “would rate highly both absolutely and relatively in any international comparison”.

I am confident that we are moving strongly in the right direction and will be in a good position for the transition to a new Auditor-General during 2009.

K B Brady
Controller and Auditor-General

12 June 2009