New Zealand Treasury Uses IFAC Guidance for Government-wide Internal Control Assessment

This article was originally published in the December 2013 issue of Chartered Accountants Journal, published by the New Zealand Institute of Chartered Accountants.

As the government's lead economic and financial advisor, the Treasury of New Zealand has a particular focus on ensuring state-level public sector performance improves living standards. Setting clear expectations and producing relevant and reliable accountability information is critical to this.

For its work in preparing fiscal forecasts and financial statements, and in assessing departmental performance, the Treasury relies on information provided by other government departments and agencies. In order to evaluate the adequacy of this information, the Treasury performs assessments to ensure that the internal controls used by information providers are operating effectively.

As the Treasury sought to refresh its approach in this area, it chose to embed the International Good Practice Guidance, Evaluating and Improving Internal Control in Organizations, published by the International Federation of Accountants (IFAC), into its internal control and financial management assessment tool, CIPFA TICK.[1] With permission from IFAC, the Treasury adapted the guidance to help departmental and agency risk committees and senior management respond to results that were outside predetermined tolerance levels. That is, the Treasury doesn’t expect perfect results but we do expect results will be within the risk appetite level of senior management.

The IFAC guidance seeks to facilitate the evaluation and improvement of existing internal control systems by highlighting a number of areas where the practical application of existing internal control standards and frameworks often fails in many organizations. Because the Treasury wants to be alert to such issues, this guidance is, therefore, very relevant for public sector organizations in New Zealand.

The Treasury tool is an electronic questionnaire that seeks assessments against each of the nine principles identified in the IFAC guidance. The survey is completed annually by approximately 500 budget holders, internal auditors, finance staff, and senior managers across New Zealand’s public sector. The first year’s results, for the year ending June 30, 2013, are publicly available online.

Although the Treasury and other central agencies have been reassured that internal control systems are currently adequate for reporting objectives, the survey results have also highlighted challenges.

• There is a low level of maturity in integrating objectives, risk management, and internal controls. Work is ongoing to develop and improve expectations and assessments of risk management.
• Updating risk management processes and responsibilities has proved a burden for departments that have been restructured recently. This has reinforced the importance of central agencies paying greater attention to departments undergoing significant change or restructuring until new performance levels are normalized.
• Delivering value for money is a common objective for many public sector organizations, but it is not easily measured. This has undermined accountability, which has led to a widespread lack of meaningful responses to substandard performance in this area. Central agencies currently have several projects in place in the performance reporting and management area. The survey has emphasized the importance of these initiatives.
• Some senior management teams lacked consistent leadership on risk management; internal control was also not always being consistently reinforced. The departmental performance assessments processes are drawing attention to these concerns.

Through this refreshed focus on assessing the effectiveness of internal controls, the Treasury has been able to collect more useful performance information for department management and achieved cost savings in the process. A summary of the survey results, as well as an analysis of the responses, can be found on the Treasury website.

Ken Warren is the chief accounting advisor at the New Zealand Treasury and a member of the International Public Sector Accounting Standards Board (www.ipsasb.org).