Pressure on Parliament's Speaker to intervene in 43%-plus mandatory fee increases by an 'unaccountable monopoly'.
Councils say they'll be forced to cut services to pay for sharp audit cost rises – and schools are next in line for the fee shock.
Newsroom has heard from 29 mayors and council executives up and down New Zealand, as the Auditor-General and his designated private sector auditors advise of average fee increases of 43 percent or more. Kaikōura District Council chief executive Will Doughty is calling for the Minister for Local Government to intervene, saying his council's 64 percent hike takes the fee to $182,979 – or two percent of the small South Island council's annual rates take.
So too, Nelson mayor Nick Smith, whose council faces a 60 percent ($107,000) increase to $284,000: "You can't have parts of government imposing costs on the community without some elected person saying yes, I take responsibility."
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At its behind-closed-doors annual general meeting, Local Government NZ agreed to call on central government to take action to reduce council audit fees by revisiting the scope and requirements of reporting and auditing on councils.
The question is, where does the buck stop? Local Government Minister Kieran McAnulty emphasises the Office of the Auditor-General is independent of the Government, so he shouldn't intervene.
Parliament's Speaker Adrian Rurawhe says Parliament has oversight of the Auditor-General and Audit NZ, and a committee scrutinises and reviews their performance. He and the Officers of Parliament Committee were aware of fee hikes, after Auditor-General John Ryan wrote forecasting average fee increases of about 8 percent per annum over the next four years.
"There will be a big backlash if we do see those types of increases for schools – I don't know where we're going to find that money." – Leanne Otene, Principals' Federation
In April, the committee agreed to provide the Auditor-General $16 million in capital injections in response to ongoing financial problems due to covid disruptions and increased costs, on the basis that its fee increase would be relatively small.
"There has not been any further consideration of audit fees by the Officers of Parliament Committee as that’s a decision for the Auditor-General," Rurawhe told Newsroom.
However this week, in an interview with Newsroom, Assistant Auditor-General Todd Beardsworth confirms average proposed fee increases across local government are in fact 43 percent – far higher than the 8 percent advised to the Parliamentary oversight committee this year.
"There's a number out of a hat – you just pay it. And that's sucking up a lot of dough." – Phil Mauger, Christchurch mayor
And the country's 2,400 schools are next: the Auditor-General will moderate their fees later this year.
"They need to prepare for some reasonable numbers," Beardsworth says. "I'm not sure where we'll end up with schools, but it shouldn't be unexpected that with the pressure on audit fees, there could be some significant increases coming."
That's alarmed school leaders. "If the public sector is seeing these fees hikes of 43 percent, schools cannot afford this," says Principals' Federation president Leanne Otene.
"There's been quite a bit of wage inflation in the audit profession, which is on the back of the auditor shortage that has affected the profession since the lockdowns and closing the borders." – Todd Beardsworth, Assistant Auditor-General
"We're really under the pump at the moment. We've just had our teachers receive a pay hike and bulk-funded pay increases, we've had increases due to cost of living, and all those things have happened to schools this year with the ops grant decided at the end of last year – so we can ill afford to have any more unforeseen increases this year.
"There will be a big backlash if we do see those types of increases for schools – I don't know where we're going to find that money. Given we are so tight with our operations grants at the moment, we are really educating our kids on a shoestring budget."
Why are audit fees rising?
Todd Beardsworth says there are a number of reasons for the increased fees, including increasing audit complexity and the increased costs recruiting more auditors in the aftermath of the Covid border closures. The Auditor-General had commissioned an independent review of the fee rises, and this had given them sign-off.
"The main drivers, for reasonably significant cost increases for councils, can be related to the increased complexity of the councils' operations, which has been impacted by Covid, recent weather events and the like," he says.
"Also, there's been quite a bit of wage inflation in the audit profession, which is on the back of the auditor shortage that has affected the profession since the lockdowns and closing the borders."
"The Auditor-General has got a monopoly statutory power, and the accountability is through Parliament that gave them that power." – David Seymour, Act Party leader
Audit fees are generally set for three years. So councils are negotiating the fees for their 2023-25 audits – which in most cases will rise sharply in the first year, then roughly in line with inflation in the second and third year.
Schools will soon start negotiating fees for their 2024-26 audits. The last school contract round was finalised in 2021, Beardsworth says, before cost and salary inflation increases were well understood. "We do know that these audits are costing significantly more than what was determined in that contract round."
Audit NZ advises its proposed fees for about 60 of the country's 78 councils, then that provides an effective cap for private sector auditors like EY and Deloitte, who the Auditor-General commissions to audit the remainder. The Office of the Auditor-General compares the audit fees with rates revenue, total revenue, and assets, and where it's not convinced the projected hours are a fair reflection, it moderates the fee down.
"You can't have parts of government imposing costs on the community without some elected person saying yes, I take responsibility." – Nick Smith, Nelson mayor
Local authorities paid $12.8 million in fees for their 2021/22 audits, but Beardsworth says the actual hours to complete these audits was 63 percent more than budgeted. So now Audit NZ is paying catch-up, and local authorities' total fees are expected to rise about $5m this year.
The Public Audit Act 2001 requires that fees must be reasonable, and this year's independent reviewer finds that "a robust process has been maintained".
If councils and auditors can't agree a fee – and that looks increasingly likely in some cities, districts and regions – then the Auditor-General can set the fee. And that's subject to arbitration if one of the parties requests it. The last time that happened was when Whitireia Polytechnic challenged its fee in 2009/10.
What can be done about it?
Act Party leader David Seymour, who sits on the parliamentary committee, wants more answers. "The Officers of Parliament Committee is going to have to ask the Auditor-General's Office to reconcile the report you're about to make with what they've told us in the past," he says. "The person that can call a select committee inquiry is the chair, who is the Speaker.
"The Auditor-General has got a monopoly statutory power, and the accountability is through Parliament that gave them that power."
He says the Auditor-General should be made accountable. "Parliament's given this committee the job. If there are complaints from local government bodies, the right thing would be for the chair to convene a meeting, even though that's quite irregular for this particular committee, and ask the Auditor-General how we got from 5-8 percent increases to 43 percent over two years."
Christchurch mayor Phil Mauger, in an interview with Newsroom, says the rise in audit fees is "bloody scary". He says the audit fee for ECan, the Canterbury regional council, is going up 58 percent.
"And you can't go anywhere else. There's a number out of a hat – you just pay it. And that's sucking up a lot of dough."
"Council has not accepted the new fee increases and discussions with Audit NZ are underway to resolve this. Council views the proposed new fee increases as significant and unjustified." – David Bryant, Hamilton City Council
Nick Smith sheets home responsibility to the Government increasing the scope of audits: "It's just another brick in the wall. I don't mind having our subsidiary costs going up as much as inflation. That's reality. But when they're just so out of kilter, that's the painful bit. We raised our concern with the Audit Office in June. They've basically come back and said, 'too bad'."
He says Government just keeps dumping extra costs on councils, that they have no choice but to pass on to the ratepayers.
"The Government is extending the scope of the work of the Audit Office. And that is no doubt adding to the cost. If you ask me, what I want as a mayor from the Audit Office is, I want them narrowly focused on making sure that our financial systems are robust, that nobody's tickling the tin, they don't have any fraud, all those sorts of things taking place.
"I do get worried that the Audit Office gets into making judgments beyond their expertise into whether things are good value or poor decisions. Is the engineering good, are we making the right spending decisions on roads, on water, those things. And the problem is, every time they extend that scope, we're paying for it."
"I wrote to Audit NZ recently advising that I would only sign year one of a proposed three year contract due to us not being happy with their fees or service." – Nadine Taylor, Marlborough mayor
Even though ministers aren't responsible for the Office of the Auditor-General and Audit NZ, and their fees and operations, he says they are responsible for the broad regulatory scope of today's council audits.
"My view is the Government has been carelessly extending its demands of the Audit Office and how far they dig into local government without being upfront about the extra costs that they impose. It's a cost creep by neglect, rather than by intent," Smith says.
This is symptomatic of the Local Government Act: it's "very bureaucratic, process-driven", rather than being focused on ratepayers getting good value for money.
"We worked really hard last year in Nelson to keep our rates increase down to the inflation rate of 7.2 percent, despite being hit with about $70 million worth of flood costs that are a bit unavoidable. We're trying to do our bit to make sure that council is not contributing to the broader cost-of-living crisis. And this sort of whack from the Audit Office just makes it really hard.
"The Speaker is responsible but also, the Minister of Local Government and the Minister of Finance have got to take an interest. It's entirely appropriate that the Auditor-General is quite independent in respect of doing investigations about improper spending of either ratepayer or taxpayer money, but you can't have parts of government imposing costs on the community without some elected person saying yes, I take responsibility."
