The financial management reforms embodied in the Public Finance Act 1989 were designed in part to devolve much greater financial authority to departments and offices of Parliament. These now operate their own bank accounts and are responsible for making payments on their own authority rather than through offices of the Treasury. But departments still represent central government and they are subject to detailed requirements as to financial information and reports to be provided to the Treasury and, in particular, through Treasury instructions and other regulations, as to the accounting policies and practices that they must follow in their handling of public money.
The Treasury, the State Services Commission and the Department of Prime Minister and Cabinet as the central agencies take lead roles in co-ordinating and monitoring the policies and practices of departments under the political direction of the Cabinet. Departmental output plans can also provide a basis for an annual review of the performance of chief executives by the State Services Commissioner.
Outside the departmental structure, the entities performing public functions are more heterogeneous. The internal governmental processes for monitoring their performance are consequently also more various. The decision on how to monitor such entities is essentially one for the Government to make.
Within the Treasury a particular unit, known as the Crown Company Monitoring and Advisory Unit (CCMAU), has been established to monitor the performance of State enterprises and a few of the more commercially oriented Crown entities. While the unit is operationally independent of the Treasury, it is responsible to the Secretary of the Treasury for its financial performance. CCMAU provides advice to the shareholding Ministers on the performance of the entities for which they have a responsibility and helps them to manage their relationships with the boards of those entities. Its annual report is included in the Treasury’s annual report and its own performance is reviewed along with that of the Treasury’s.
Chief executives of government departments are not responsible for the outputs or financial performance of Crown entities or State enterprises, even where these organisations are funded wholly or partly through a vote administered by their departments.
However, through arrangements with Ministers who have responsibilities for Crown entities, State enterprises or other organisations, departments may be required to monitor the performance of these organisations and provide advice to their Ministers on them.
Thus, a department is likely to provide advice on appointments to Crown entities within the purview of votes administered by the department and to report regularly to Ministers on their funding and overall performance.
For example, one department with nine Crown entities to monitor has established a special governance and monitoring unit for this purpose. The unit is responsible for ensuring that the department takes a consistent approach to its monitoring of Crown entities.
Departments that are discharging a monitoring role are expected to be proactive in this regard and to require regular reporting from the entity concerned. They should be aware of issues affecting the entities for which they have a responsibility and monitor their activities so as to enable their Ministers to carry out their responsibilities in an active and informed manner.
In conducting financial reviews on behalf of the House, committees are likely to probe how departments are monitoring the performance of Crown entities in their sector, notwithstanding the absence of legal responsibility.
Parliamentary accountability for departments, offices of Parliament, Crown entities, State enterprises and other organisations can arise in a number of ways. The most obvious is through parliamentary questions, oral and written, that can be put to the responsible Minister. Even though there may be no legal responsibility for the actions of the entity concerned, a general political responsibility devolves on the responsible Minister to be the parliamentary mouthpiece through which the entity answers to the House. The performance of a department or other entity can also be the subject of debate on legislation relating to it, on the weekly general debate, in any urgent debate that the Speaker may accept, on the annual estimates, or occasionally on a special debate that may be held.
Select committees may receive petitions touching on their work and in any case have general power within their areas of subject competence to initiate inquiries into the performance and actions of all public-sector entities.
Although by these means the House and select committees can monitor the actions of public-sector entities and hold them accountable, a special accountability procedure known as financial review has been devised to be the parliamentary counterpart to the financial and operational reporting by these entities and to guarantee that some parliamentary attention is paid to them on an annual basis. The financial reviews that are conducted consist of select committee examinations of the entities (using, but not exclusively focused on, their reporting documentation) and of debates in the House. The procedures differ slightly between departments and offices of Parliament on the one hand, and Crown entities, State enterprises and other public organisations on the other.
Government’s financial statements
The Finance and Expenditure Committee is required to report to the House on the annual financial statements of the Government as at the end of the previous financial year.
These will have been presented to the House and thus become available to the committee about three months after the financial year ends. The committee must present its report within one week of the first day on which the House sits in the new year.
This first sitting is usually on a Tuesday in February.
Where a general election has supervened, preventing the committee doing its work in time, the House has extended the time for report.
The Minister of Finance and the Secretary of the Treasury are the principal witnesses before the committee in its examination of the Government’s financial statements. The committee’s report forms one of the bases for the committee stage of the Appropriation (Financial Review) Bill.
There is nothing to prevent the committee reporting back to the House on the Government’s financial statements before the Appropriation (Financial Review) Bill is introduced.
The Finance and Expenditure Committee plays the leading role in co-ordinating the House’s financial review process. The purpose of carrying out reviews is to determine whether the entity concerned has performed as promised – whether its actual performance, both in supplying services and in managing its balance sheet and other assets, is consistent with forecast performance.
It also involves considering how the entity is currently performing. Financial review involves a review by select committees of the annual reports and financial statements of departments, offices of Parliament, Crown entities, State enterprises and any other public organisation that the House resolves to make subject to the review procedures. For the forty-seventh Parliament the House resolved to extend these procedures to the Reserve Bank of New Zealand, the Abortion Supervisory Committee and Air New Zealand Limited.
(The Public Trust Office, which was previously declared to be a public organisation for this purpose, was dissolved on 1 March 2002.
Its successor, the Public Trust, is a Crown entity in its own right.
) The Education and Science Committee in 2001 decided to conduct staggered financial reviews of universities and other tertiary education institutions under its general inquiry powers.
This practice was continued by the committee in the succeeding Parliament.
The Standing Orders provisions for a debate on financial reviews do not apply to such education reviews.
Allocation of reviews
The Finance and Expenditure Committee is required, as soon after the commencement of the financial year as it thinks fit, to allocate to the subject select committees (or retain for itself) the task of conducting a financial review of the performance in the previous year and of the current operations of each individual department, office of Parliament, Crown entity, State enterprise or public organisation.
For departments and offices of Parliament the Finance and Expenditure Committee may make this allocation at the same time as it allocates estimates for examination, though it may be unable to do this when an election is pending and it is clear that the responsibility for conducting the financial reviews will fall to the select committees to be set up in the new Parliament. Generally, there is some correspondence between the examination of estimates for which a department is responsible and the financial review of that department, but this does not have to follow. Nor will it always be possible, since estimates are allocated on the basis of votes rather than departments. As with estimates, other committees may express a view as to whether individual departments or entities should be referred to them for review.
But the matter is ultimately for the Finance and Expenditure Committee to determine.
In respect of reviews relating to the 2003/04 year the Finance and Expenditure Committee retained nine organisations for review itself and allocated 125 organisations to the other committees for review.
Preliminary information gathering
The financial review formally begins when the annual report of the department or entity is presented.
The annual report, statement of intent and output plan of the department or entity concerned are the basic materials on which each committee’s work proceeds (though a financial review has proceeded even though the annual report had not yet been presented to the House).
Formerly, these reporting documents were supplemented for departments by a standard financial review questionnaire developed by the Finance and Expenditure Committee and consistently used by the other committees. However, the standard questionnaire was discontinued in 1997 on the understanding that departments would provide the information previously sought in the questionnaire (key result areas, measurable milestones, expenditure variances, etc.) through their annual reports.
Nevertheless, each committee may develop its own questionnaire to issue to an entity that is to undergo review.
Although a standard questionnaire is now rarely issued, committees often ask the entity concerned to provide further information on its operations, either before an oral examination by the committee commences or after it has concluded. Committees have criticised entities for failing to respond to such questions and for the poor quality of the responses received.
Only questions forwarded to the department or entity with the committee’s authority are formally part of the review. Questions sent to the entity by members without being submitted first to the committee are not part of the review, they are merely individual information requests.
Following the gathering of such preliminary information, including the answers to questions that the committee requires, and before any oral examination of the entity, the committee receives a briefing from the Auditor-General’s office on the entity’s financial performance. The Auditor-General provides a written brief on each entity unless directed otherwise by the committee concerned. The audit officials may also remain present throughout the hearing of evidence to assist the committee at any point. Other advisers may also be appointed.
It is entirely over to committees how they conduct the reviews that are entrusted to them. Because of the large number of reviews recurring each year (approximately 150 entities to be dealt with by the 13 subject select committees), it is not possible to conduct in-depth reviews of each one, each year. Indeed, financial review is not necessarily the place for an in-depth examination of any entity, since it operates within strict time-frames and is focused on recent performance. But issues identified in the course of carrying out a financial review may give rise to concerns that can be addressed by the committee utilising its inquiry powers to follow them up. Financial review is not intended to replace the committee’s inquiry powers as far as public-sector scrutiny is concerned, though work previously performed through the inquiry function may be absorbed into it.
Consequently, many financial reviews are completed on the basic documentation and the audit briefing without the need for an oral examination or a follow-up by written questioning. Where an oral examination is held, it is, as far as departments are concerned, focused on the chief executive and senior officials. Unlike the estimates, for which a Minister is responsible, the chief executive of a department is primarily responsible for answering to the committee for the performance of the department in fulfilling its objectives. Even in respect of reviews of non-departmental entities the focus is on the performance of the entity, and the responsibility for this lies with the board and the management of the entity. However, a Minister has attended the select committee examination when critical questions of governance of the entity and the respective roles of the Minister and the board were in issue.
Exceptionally, committees may hear from other witnesses, as when justice-sector organisations were invited to make submissions on the financial review of the Ministry of Justice.
Normally, the time constraints under which committees conduct financial reviews preclude this, but any follow-up inquiry will inevitably open up the opportunity for other groups to give their perspectives. A committee may also combine a financial review with any other related business (such as a petition)
that may be before it.
As financial review is generally concerned with entities that are in the public sector rather than with companies listed on the stock exchange, usually no issues in regard to the insider-trading legislation arise. (Questions of commercial confidentiality do sometimes arise.) However, the financial review procedure can exceptionally be extended to a public organisation that is also a listed company. In an instance where this occurred (with Air New Zealand Limited), the committee conducting the financial review organised its proceedings in a way that avoided any infringement of the insider-trading provisions.
As a result of the examination the department or entity may be asked (or may itself ask) to respond in writing to questions put to it. If there is an expectation of response before the committee reports, the department or entity will face criticism if it fails to do so.
Indeed, the report may be delayed in consequence. Committees may also criticise the quality of responses that they feel are inadequate.
Reports on financial reviews
Time for report
Following the committee’s consideration of the documentation, receipt of an audit briefing and oral examination of the chief executive (where this is held), it reports the results of the review to the House.
In the case of departments and offices of Parliament these reports must be made within one week of the first sitting day in each year.
This is likely to be in February. Consequently, committees have some four to five months from the presentation of the annual report to complete their work. But this period includes the Christmas/New Year break. Every three years it also includes the likely time at which a general election is held. Consequently, the House occasionally extends the time allowed for reporting.
For reviews of Crown entities, State enterprises and those public organisations that have been made subject to review, committees have six months from the date the entity’s annual report is presented to the House to conduct the review.
The financial year of Crown entities is in general 1 July to 30 June.
The financial year of State enterprises is not statutorily prescribed and depends upon the enterprise’s rules. Nevertheless, most annual reports are presented in the second half of the year and it is at that point that the six-month reporting time-limit begins to run.
Where a committee fails to report in time, its obligation to report is not discharged immediately. (This contrasts with a failure to report on a bill in time, where the bill is automatically discharged from the committee.
) The obligation to report still remains. However, a committee cannot remain indefinitely in breach of an obligation to report. The House may therefore regularise the position by granting an extension of time.
In the absence of this happening the Speaker determines when the committee must report. Its failure then to do so in time means that its task is at an end. The Speaker has ordered a committee that had failed to report in time on its review of a Crown entity to present its report by the end of the current week.
Nature of the report
Committees make a mix of narrative and formal reports on the results of their financial reviews. Where they do not feel it necessary to prepare a detailed narrative report, they present pro forma reports merely recording the fact that they have carried out a financial review of the department and that they have nothing to draw to the attention of the House. Usually these are cases where no oral examination was held. This does not mean that the process was not of value. Constant monitoring of the activities of departments was one of the main aims of the new select committee structure introduced in 1985. Financial review ensures that at least an annual interchange between a committee and the departments it is to monitor occurs, superficial as this may be in any particular case. If there are no apparent matters of concern to report, committees have pragmatically decided that they do not need to write a lengthy report each time to explain this. On the other hand, the financial review may reveal matters of concern that the committee considers need to be followed up in other ways, such as by the committee using its inquiry powers or by requesting the Auditor-General to investigate.
Other reports on financial reviews may contain a range of information and comments gleaned by the committee while carrying out its work, together with recommendations for future action. Some of the issues raised as a result of the review have been of general significance. Thus, committees have discussed the relationship between the outputs produced by the department or non-departmental entity and the Government’s desired outcomes. The entity’s performance in delivering its outputs is discussed in the statement of service performance that is contained in its financial statements, but committees have often found it difficult to discern from these whether or not the Government’s outcomes have been advanced. They have also complained of the difficulty of judging the effectiveness of outputs without information on their contributions to outcomes. Departments have therefore been asked to investigate ways of measuring this contribution in order to provide an indication of their effectiveness and have drawn praise where they have made progress in doing this.
The introduction of output plans with explicit links between outputs and outcomes was a direct response to this criticism.
Failure to make any statutory report in a timely fashion will inevitably be commented on, as will non-compliance with other reporting requirements, such as the need to report on equal employment opportunity initiatives
and to give reasons for any unappropriated expenditure that has been incurred.
The form of the annual report in its discretionary contents will also be commented on, such as a failure to give a breakdown of expenses or a clear explanation of how funds have been expended,
or a lack of detail about an agency’s business streams.
The omission of a narrative from a department’s report (though it technically met the State Service Commission’s reporting guidelines) was criticised by a committee as diminishing the report’s usefulness, and its reinstatement was recommended.
Errors of fact in the annual report are likely to be the subject of comment.
Any illegality revealed in the materials before it will be focused on by the committee. Thus, a department that wrote off a debt without ministerial approval and so was in breach of the law was criticised in the committee’s report on the financial review of that department.
Where a committee has subsequently detected an error in a financial review report that it had made, it has presented a special report to correct this.
Appropriation (Financial Review) Bill
The House’s vehicle for considering the results of the investigations into the financial performance of the Government and Government departments that are conducted by the Finance and Expenditure Committee and the other select committees is the passing of the annual Appropriation (Financial Review) Bill.
The Appropriation (Financial Review) Bill is a Government bill containing provisions dealing exclusively with the sanction, confirmation or validation of expenditure incurred in the previous financial year.
These comprise financial matters that occurred in the previous year and that are required by law to be included in an Appropriation Bill in the succeeding year: the confirming of transfers between classes of outputs that have been made by Orders in Council;
the confirming of excess expenses or capital expenditure approved by the Minister of Finance;
and the confirming of emergency expenses and capital expenditure approved by the Minister of Finance.
The bill may also contain provisions validating illegal expenses or capital expenditure incurred in the previous financial year.
Introduction, first reading and second reading
The Appropriation (Financial Review) Bill must be introduced before the end of March.
It is, in fact, usually introduced before the Christmas adjournment. There is no amendment or debate on the bill’s first reading.
As with any Appropriation Bill, the bill is not referred to a select committee after its first reading.
It is set down as a Government order of the day for a formal second reading. There is no amendment or debate on the second reading of the bill.
Financial review debate
The committee stage of the bill is the financial review debate. This is the House’s opportunity to debate the Government’s financial position as reflected in the Finance and Expenditure Committee’s report on the Government’s financial statements and to debate the previous year’s performance and current operations of departments and offices of Parliament.
The financial review debate must be held by 31 March,
by which time the select committees’ reports on their financial reviews of departments and offices of Parliament will all have been presented. Where committees have been given a substantial extension of their reporting time on financial reviews, the House has also extended the time within which the financial review debate may be held.
The Government is entitled to select any day (other than a Members’ Wednesday) for the financial review debate,
and to decide which financial reviews are available for debate on that day and how long is to be spent on the debate that day.
This information must be included on the order paper.
Four hours in total is allowed for the financial review debate. The Minister responsible for the department or office of Parliament may make multiple speeches of five minutes each but not normally more than two speeches consecutively. Other members may make two speeches of five minutes each on each financial review.
In practice, the Business Committee
or the whips are likely to work out a suitable allocation of time among the parties from the overall time available for the debate and the order in which particular financial reviews will be considered.
At the commencement of the financial review debate (subject to any determination by the Business Committee or leave of the committee to the contrary), the committee considers the report of the Finance and Expenditure Committee on the annual financial statements of the Government.
It then turns to consider the financial reviews nominated by the Government for consideration that day.
When the four hours for the debate have elapsed, the provisions of the bill and any amendments from the Minister in charge of the bill that are notified on a supplementary order paper are put as one question without debate.
No other amendments to the bill are permitted.
Passing of the bill
When the report of the committee on the bill has been adopted, the bill is set down for third reading forthwith.
There is no amendment or debate on the question for the third reading.
Debate on Crown entities, State enterprises and public organisations
The reports of committees on their financial reviews of Crown entities, State enterprises and public organisations are not debatable when presented to the House. But a debate of three hours during the course of each financial year is provided for the House to consider the performance and current operations of Crown entities, State enterprises and other public organisations.
The Government selects the day for such a debate to be held (it may extend over more than one day).
The day selected may not be a Wednesday on which Members’ orders of the day take precedence.
The Government also decides which financial reviews are available for debate and how long in total (up the maximum time for the debate) is to be spent on it that day. This information is advised on the order paper.
The Business Committee may determine the order in which financial reviews are to be considered and how long is to be spent on each.
The debate is usually held in the period April to June as financial review reports will have been presented by then. However, as reporting is a continuous process there will always be some entities’ reports outstanding regardless of which date is chosen for the debate.
Leave has been given to debate an entity’s performance even though the report relating to it had not yet been presented.
On the day selected the debate is set down as a Government order of the day for consideration in committee of the performance in the previous year and the current operations of Crown entities, public organisations and State enterprises.
A Minister is nominated by the Government to take charge of the order of the day. The Speaker has an obligation to ensure that the Government provides time within Government orders of the day for such a debate and, if necessary, will interrupt other business on the final sitting day in the financial year.
The debate does not have to be the first order of the day on the day it is held. When the order of the day for the debate is reached, the House resolves itself into committee to consider the financial reviews available for consideration.
Each member may speak on each review twice for five minutes each time. The Minister responsible for an entity has multiple five-minute speeches but not normally more than two consecutive speeches. The overall length of the debate is limited to three hours.
A question is proposed on each financial review as it is raised, that the select committee’s report on it be noted.
The debate covers both performance in the previous financial year and the entity’s current operations. The history of the entity before the period covered by its annual report is outside the scope of the debate.
The annual report of the entity, its statement of intent and other documents presented in respect of the current and previous years can be referred to and used in the debate.
The responsibilities of the shareholding Minister for a State enterprise are within the scope of the debate and members can attack the Minister in that capacity, but not other aspects of the Minister’s performance.