July 26, 2021

The Editor Speaks: Auditor General says need to make changes to current financial reporting framework

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Colin WilsonwebCarrying on from my previous editorials on the Auditor General, Alastair Swarbrick’s latest Financial and Performance Reporting, he has highlighted problems with the present framework as it doesn’t give the Legislators reliable information if the limits on spending were actually complied with.

This is incredible as it would appear that this has been the case for as many years as government budgets have been prepared and passed.

The following is from the Auditor General’s Report:

“Under the terms of the PMFL, there is a requirement for the Legislative Assembly to provide legal authority for the Government to undertake activities and spend public resources. This is done through the Appropriation Law passed after the budget of the Government has been agreed to. Without the passage of this Law the Government has no authority to incur expenditure and therefore carry out its work.

“This is a fundamental control in the accountability framework for the use of public money which should enable the Legislature to hold the Government accountable for level of public resources it plans to spend in delivering its programs and services, and subsequently what it actually spent public money on compared to what was legally authorized through the Appropriation Law.

“For M&Ps the funds that they are provided by Cabinet for the delivery of outputs (Outputs to Cabinet) are those that are subject to Legislative control through the Appropriation Laws each year. Therefore control is exercised over the revenue that M&Ps request from Cabinet, and each entity should not request revenue from Cabinet greater than the levels approved by the Legislature in the relevant annual Appropriation Law in order to meet their expenses. Therefore it is currently possible for a M&P to incur expenditures greater than the revenues its requests from Cabinet, and thus report a deficit, but also remain within its appropriation limits.

“Through our audits, we have determined that the reporting by government back to the Legislative Assembly makes it very challenging for the Legislators to obtain assurance that the spending limits have been complied with and that the laws passed by the Legislative Assembly have been respected.

“Each M&P has a significant number of appropriations or legal limits with which they should comply and it is not possible, because of the poor form of reporting and supporting systems, to reliably determine how many of these were exceeded. “However at an entity level eight out of 15 M&Ps have reported through their financial statements that they breached the overall appropriation limits passed by the Legislative Assembly.

“The Legislative Assembly subsequently passed a Supplementary Appropriation Law for 2011/12 in September 2013 which attempted to address the breaches and regularize the transactions of the M&Ps. However the Supplementary Appropriation Law passed in our view was for all intents and purposes meaningless as section 9(5) of the PMFL clearly states that “all appropriations lapse at the end of the financial year to which the law by which the appropriation granted relates”, in other words the Supplementary Appropriation needs to pass into law prior to end of the financial year to which it relates. Therefore for the eight entities in question the amounts billed to Cabinet in excess of those in the original Appropriation Law were not legally provided for and any related transactions were irregular.

“Looking at the results reported in the M&P financial statements, it is my opinion that they do not present a clear picture of how each individual entity is performing and the resources being used. In other words, the entity financial statements in their current form do not provide the necessary information to demonstrate how government has collected and spent public resources or whether government has respected the limits set out by the Legislative Assembly. The main reasons for my opinion are:

  • the artificial split of entity and executive transactions with M&P financial statements only reporting entity transactions;
  • the unclear relationship between M&Ps surplus/deficit and their performance against the appropriation authorised by the Legislative Assembly, the inconsistent treatment across M&Ps, and the ability to basically undermine the authorized appropriations through reporting a deficit;
  • reporting against the appropriations is presently not well developed and therefore it is challenging for legislators to effectively determine whether Government and its entities are complying with the legal authority provided for incurring expenditure;
  • appropriations authorised under the Appropriation Law are measured on what is billed to cabinet, rather than the actual costs of delivering the services; and
  • the comparability of the actual and budget figures reported in the financial statements as the budgets are at least operationally being treated on a partial cash basis rather than an accruals basis as required under the PMFL. For example, M&Ps are being provided cash for non-cash budgets and transactions such as depreciation.

“As a result, I have made it known to senior government officials that they need to consider making changes to the current financial reporting framework to provide for more effective reporting of performance of the individual entities and providing effective accountability and transparency in the use of public resources. Without any changes that simplify the legislation or the development of considerable systems and practices that would ensure compliance with the legislation.”

Whether Swarbrick gets his wish remains to be seen. I would hope the full weight of Cabinet will get behind him otherwise the majority of the paperwork the civil servants amass is just a mess.


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