After a Newsroom investigation, Parliament's Speaker is considering whether the Auditor-General should be called before a select committee to account for average audit fee increases of 43 percent for local councils. But first, John Ryan offers the public an explanation.
Comment: As the auditor of all local authorities, I see the pressures councils are under as they work hard to set affordable rates and to apply the funding they receive to the things that matter to their communities.
The significant inflationary and other cost pressures in the economy, and the investment in core assets that is needed, make this task particularly difficult.
Unfortunately, auditors face a similar situation.
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Audit fees have not kept up with audit costs for some time. When we last negotiated fees with councils, in 2020, Covid-19 had just arrived and we were concerned with how it would affect councils. At that stage, we did what many councils did with their rates – we held off increasing our fees.
In 2020, I wrote to all councils to say that audit fees had fallen behind what it costs to carry out audits in local government. This reflected increased requirements on auditors, changes and growth within organisations, and an increasingly competitive market for audit staff. I said then that while this was not a sustainable position, it was not the time to substantively increase audit fees, given that many councils had decided not to increase rates. But I also noted that fees would have to increase more substantially in the future.
As cost pressures continue to build, we now need to increase our fees to meet current and ongoing audit costs.
I am required by the Public Audit Act 2001 to ensure that audit fees are reasonable – both for audited organisations and for auditors.
We go through several steps when considering audit fees. We moderate fees for each council by considering the complexity of its operations, new initiatives it’s carrying out, the complexity of specific transactions it enters into, and new requirements in accounting and auditing standards.
Auditors are talking to councils about their proposed fee for the next three years. The final fee in most cases will be decided by negotiation between each council and its auditor. That will come down to how many hours are needed to deliver a high-quality audit. There will be some steps councils can take to reduce costs – such as dealing with known issues, and having all the information that needs auditing ready for when auditors start their work.
As always, I will ensure that auditors do not charge more than the reasonable cost of a quality audit.
That’s the cost side. So, what’s the benefit of the audit?
Independent scrutiny
Audits are an essential part of how the public holds councils to account for how ratepayers’ funds are used and the services they receive. An audit means someone independent is testing councils’ systems and financial controls to give assurance over what they report in their annual reports and long-term planning documents.
As part of this, auditors will look at how a council values its assets, how it manages sensitive expenditure, how well it has reported its delivery of services, the impact of those services, and much more.
The audit also helps councils by highlighting where they can make improvements to their systems and processes.
This work requires a highly trained, skilled workforce that understands councils and can evaluate, assess, and test the financial and non-financial information to a high level.
The cost pressures I outlined to councils in 2020 still exist, and Covid has only made them worse. For example, a global auditor shortage, coupled with border restrictions, left the country severely short of auditors. This has meant we’ve needed to pay more to attract and retain auditors. We have also invested in technology to maintain audit quality.
We are conscious of bringing councils with us as we address cost pressures. There is more to do in this process.
We will keep working with the sector to agree on fees that are reasonable and sustainable for councils and auditors, and then on the period of time that’s needed to move to that fee.
Local Government NZ recently asked central government to revisit the scope and requirements of reporting and auditing of councils.
I have made similar calls. In 2019 and 2022, I recommended that the Department of Internal Affairs and the local government sector review the content required in long-term plans to ensure they are fit for purpose and do not include requirements with limited value to their communities.
I welcome further discussions on the scope of the reporting and auditing requirements that help communities have trust and confidence in their local councils.
