New Zealand Trade and Enterprise

Transcription

1 Annual Review briefing to the Commerce Committee New Zealand Trade and Enterprise /16 Financial Year 9 February 2017

2 2 2 Assistance to the Committee The Commerce Committee is conducting an annual review of the performance in the 2015/16 financial year and the current operations of the New Zealand Trade and Enterprise (NZTE) in accordance with Standing Order 345. The Controller and Auditor-General provides Parliament with assurance on the performance and accountability of public entities. The Office of the Auditor-General typically assists select committees with their annual reviews by providing further details on the results of the annual audit in Part A of our written briefings, and by suggesting lines of enquiry and questions relevant to the particular public entity under review in Part B of our written briefings. Our annual audits provide a high, but not absolute, level of assurance about whether a public entity s financial statements comply with generally accepted accounting practice (GAAP) in New Zealand and fairly reflect its financial position and its financial and service performance for the period audited. Due to the volume of transactions, audit work is planned and performed to obtain evidence on a sample basis. Auditors use professional judgement to assess the evidence and ensure there is reasonable assurance that there are no material misstatements in the financial statements (that is, differences or omissions that would affect someone s overall understanding of the financial statements). We report, in our audit opinion, only material differences or omissions that we find. To identify lines of enquiry for Part B of this briefing, we: analyse the results of the annual audit and the accountability documents; refer to any relevant performance audit or inquiry work; and use our specific knowledge of the entity gained during the audit process and by ongoing contact with the entity. Where necessary, we checked factual information with the department or other entities to ensure that our advice to the committee is accurate. We did not give the entities any of the contemplated or actual advice that is in this briefing. Contact for further explanation If any member of the Committee would like further explanation or elaboration of any aspect of this briefing document, please do not hesitate to contact Colleen Pilgrim, Sector Manager, Parliamentary Group on or Colleen.Pilgrim@oag.govt.nz at the Office of the Auditor-General.

3 Summary of key issues 3 Part A: Results of the 2015/16 audit We issued a standard audit report, which means that we were satisfied that the information we audited fairly reflected the activities of New Zealand Trade and Enterprise (NZTE) for the year and its financial position at the end of the year. We assessed and graded NZTE s management control environment and its performance information and associated systems and controls as good. We assessed and graded its financial information systems and controls as very good. These grades are the same as for the previous year. The main matters arising out of the audit are: - NZTE implemented an action plan which included updating its procurement rules, guidelines, and supporting documents and templates; providing procurement training; and developing a reporting framework. We will follow up on the action plan as part of our 2016/17 audit. - The reported results for a number of the material performance measures rely on information provided by NZTE s customers. This information is not independently verified by NZTE or our auditors. NZTE has disclosed the inherent limitation and the source of information used in its annual report. We are satisfied that the performance information fairly reflects NZTE s performance. Part B: Advice to the Committee The key points we cover for the Committee, and suggest questions on, are: Three year improvement programme. In February 2015, NZTE underwent a second Performance Improvement Framework (PIF) review. In response, NZTE set out a list of intended actions. In its 2016/17 Statement of Performance Expectations, NZTE says it is embarking on a new three year improvement programme seeking, among other things, better impact with its customers. The Committee may wish to ask how NZTE has progressed its proposed improvement initiatives over the two years since the last PIF review, what the new initiatives will be in the three year improvement programme, and what targets have been set for better impact with its customers. The Committee may also wish to ask about the place that the New Zealand Story will have in the next three years programme. Risk management in NZTE s economic growth strategy. NZTE is aiming in the context of the Business Growth Agenda (BGA) to double the international revenue of its portfolio of companies that receive intensive focus, by It reports that while its F700 customers growth is 5.6% above that of similar businesses in New Zealand s export economy, there was negative growth for 27% of the F700 businesses in 2015/16. The Committee may wish to ask about progress against NZTE s economic growth strategy, what NZTE sees as the most pressing risks and growth challenges for F700 customers, and what it is doing to help the F700 to manage them. The Committee may also wish to ask what the major trade and tourism areas are now, and about its strategy for addressing the main challenges to growth in those areas. Business-led coalitions. NZTE began to focus on business coalitions in the last two years. It currently measures the percentage of the coalition s objectives that have been met, as the measure of its impact in this area. It is a new measure. The level achieved was 71% against a target of 60%. The Committee may wish to ask about the performance of business-led coalitions, and how the tangible benefits of coalitions are being measured. Māori business growth. NZTE has 3,850 Foundation (low-intensity help) customers. Of these, 72 (1.9%) are Māori. It has 705 F700 (intensively-managed) customers, of whom 44 (6.2%) are Māori. The Committee may wish to ask what NZTE is doing to enhance its capability and that of its partners to better target and support potential Māori customers.

4 4 4 Overview of NZTE NZTE is a Crown Agent established under the New Zealand Trade and Enterprise Act It was formed by merging the NZ Trade Development Board (Trade New Zealand) and Industry New Zealand. Its purpose is to grow companies internationally bigger, better, and faster for the benefit of New Zealand. 1 NZTE was last seen for financial review by the Committee in February 2016, for the review of its 2014/15 performance. Pages 54 and 55 of NZTE s Annual Report set out its performance framework, and page 5 provides an overview of its strategy. NZTE is governed by a Board appointed by the Ministers for Economic Development and of Trade. The chief executives of MBIE and MFAT (or their delegates) attend Board meetings as advisors to the Board. MBIE undertakes the monitoring and evaluation role for the agency. As at 30 June 2016, NZTE employed 576 (2015: 565) full-time equivalent (FTE) staff. Of these, were international FTEs. There were customer-facing FTEs. The staff are in 50 locations, ten of which are in New Zealand. Onshore it has offices in Wellington, Auckland, Christchurch and Hamilton and various smaller provincial centres. Offshore it has hub offices in Sydney, Singapore, Shanghai, Dubai, Hamburg, Los Angeles, and Sao Paulo, with offices in other areas. NZTE s total revenue in 2015/16 was $ million (2015: $ million). Total expenses for the year was $ million (2015: $ million) including grants of $ million (2015: $ million). It had a deficit after tax of $5.413 million (2015: surplus of $8.146 million). Significant variations against Budget are explained in Note 25 to the financial statements on page 90 of the annual report. NZTE provides trend data on its improvement journey on page 3 of its annual report. NZTE works with other agencies to deliver the Government s priorities for economic development, in particular MBIE, MFAT, MPI, Education NZ, Tourism NZ, Callaghan Innovation, and the NZ Export Credit Office. 1 NZTE, Annual Report , inside front cover.

5 Part A: Results of the 2015/16 audit 5 1 Audit opinion 1.1 We issued a standard audit report, which means that we were satisfied that the information we audited fairly reflected the activities of New Zealand Trade and Enterprise (NZTE) for the year and its financial position at the end of the year. 2 Significant matters noted during the audit 2.1 We noted the following significant matters during our audit of NZTE that we want to draw to your attention. Procurement 2.2 In 2014/15, we recommended that some improvements be made to ensure that procurement activities comply with NZTE policies and procedures and accepted good practice in the public sector. We made eight recommendations that, if implemented, would improve procurement practices. 2.3 In response, NZTE implemented an action plan which includes updating its procurement rules, guidelines, and supporting documents and templates; providing procurement training; and developing a reporting framework. The implementation of new procurement practices requires changes to both the system and human behaviour. 2.4 We will consider the overall effectiveness of NZTE s procurement processes once the improvements have been embedded for a period of time and any teething issues have been resolved. 2.5 We will follow up on the action plan as part of our 2016/17 audit. This will include auditing a sample of procurements entered into. Performance information 2.6 NZTE s main goal is the achievement of the business growth agenda target of increasing exports from 30 percent to 40 percent of GDP by In order to achieve this goal, NZTE works with other NZ Inc. agencies and NZTE customers to focus on growing companies internationally bigger, better, faster for the benefit of New Zealand. 2.7 Therefore, the impact that NZTE makes is predominantly assessed on the results its customers achieve. The reported results for a number of the material performance measures rely on information provided by its customers. This information is not independently verified by NZTE or our auditors. NZTE included additional disclosure in its reporting to highlight this, disclosing the inherent limitation and the source of information used in its annual report. We are satisfied that the performance information fairly reflects NZTE s performance. 2.8 NZTE has responded to concerns we expressed in 2014/15 and again this year about supporting documentation for the value of customers exports, by completing additional internal quality control procedures.

6 NZTE is implementing an improvement plan in this area, which we will follow up on as part of our 2016/17 audit. 3 Environment, systems and controls for measuring financial and service performance 3.1 Our conclusions on NZTE s management control environment, systems, and controls for measuring financial and service performance, for the year ended 30 June 2016, are set out in the table below. 3.2 We made our conclusions in the context of our work in forming an opinion on NZTE s financial and service performance statements. The purpose of commenting on the underlying environment, systems, and controls is to highlight areas for improvement we identified during our audit. The grades assigned for 2015/16 are based on the accountability documents relating to that year. They are not an assessment of overall management performance, or of NZTE s effectiveness in achieving its financial and service performance objectives. (See the explanation of the grading scale and underlying scope at the end of this letter.) Management control environment 2015/16 Good We have recommended that some improvements be made. 2014/15 Good Deficiencies we identified in 2014/15 have been resolved in part. Comment The main area of improvement required to the management control environment is to improve procurement practices. Positive steps towards improving practices are being taken as part of NZTE s action plan: - there is dedicated procurement support staff and ownership for the procurement function; - a register of contracts has been created, and initial guidance has been communicated to employees who are considered high users; - procurement guidelines and supporting templates have been updated and published, effective 1 July 2016; - conflicts of interest policy and guidance have been reviewed and are in place; - NZTE has established minimum expectations to enable the clear documentation of compliance with the planned evaluation approach and the decision-making that support the selection of the preferred supplier(s); and - staff training has been carried out from 1 October 2016 to reinforce documentation requirements and provide good practice examples. We will follow up on the action plan as part of our 2016/17 audit. This will include auditing a sample of procurements entered into. Other than the matters mentioned above, and based on our reviews during 2015/16, we found that appropriate policies, systems, and controls were in place and appeared to be operating effectively.

7 Financial information systems and controls 2015/16 Very good We have made no recommendations for improvement. 2014/15 Very good Comment No deficiencies have been noted in the areas we reviewed during 2015/16. Performance information and associated systems and controls 2015/16 Good We have recommended that some improvements be made. 2014/15 Good Deficiencies we identified in 2014/15 have been resolved in part. Comment The following comments are based on our audit of the 2015/16 financial and service performance information in the annual report, including the Statement of Performance, and their supporting systems and controls. In 2014/15, we recommended that NZTE reinforce the requirement to comply with policy and procedures to ensure that the value of export details is supported by appropriate review and supporting documents. This remained an issue for the 2015/16 audit. NZTE completed additional internal quality control procedures to ensure that sufficient audit evidence was available for audit. This enabled an unmodified audit opinion to be issued. NZTE is implementing an improvement plan in this area. The improvement plan focuses on three key aspects: leadership, guidelines, and capability of the platform used to record the results. We will follow up on the improvement plan as part of our 2016/17 audit. Other than the issues mentioned above, and based on our reviews during 2015/16, we found that appropriate policies, systems, and controls were in place and appeared to be operating effectively. 7 4 Legislative compliance 4.1 We reviewed the systems and procedures that NZTE uses to identify and comply with legislative requirements. Our work focused on areas that could pose a risk to the statements on which we express an opinion the financial statements and the performance statements. 4.2 We have previously reported that there have been instances where some local laws and obligations had not or may not have been complied with at NZTE s international offices. This could expose NZTE to legal liabilities and reputational risks. 4.3 NZTE established a work plan, which prioritised the review of employee terms and conditions of each location based on risk. A report from the review is expected in November NZTE has completed a review of the legal structure of NZ Central in China. NZTE is working with representatives from the Ministry of Foreign Affairs and Trade to formalise an agreement for a new operating structure. 4.5 We asked NZTE to keep us informed of any issues and developments.

8 8 Part B: Advice to the Committee 5 Three year improvement programme 5.1 In February 2015 NZTE underwent a second Performance Improvement Framework (PIF) review. 2 NZTE set out a list of its intended actions in response to the review. 5.2 NZTE said that, in one area developing system insight it had been slower to make progress, finding it a complex area to change. 3 The challenge from the PIF team to be unrelentingly optimistic was taken as a helpful invitation for us to be more courageous and be more challenging to drive for greater impact In its 2016/17 Statement of Performance Expectations, 5 NZTE says it is embarking on a new three year improvement programme. Its outcomes for the improvement programme include: increased catalytic investment, relentless focus on growth, breakthrough customer experiences, and delivering with NZ Inc. The 2014/15 surplus was targeted to one-off initiatives in 2016/ NZTE had a deficit after tax for 2015/16 of $5.413 million. For 2014/15, it had a surplus of $8.146 million. A major factor in its 2015/16 performance was the reduced value of the New Zealand dollar and the consequent lower average foreign exchange rates. There were also higher New Zealand Story costs The Committee may wish to ask: The Committee notes NZTE s new three year improvement programme. How has NZTE progressed its proposed improvement initiatives over the last two years since the PIF review? What has NZTE done to be more courageous and challenging? What will the new improvement initiatives be, including those to which the 2014/15 surplus will be applied? What targets have been set for greater impact with NZTE s customers? Please explain the higher costs of the New Zealand Story, and NZTE s current evaluation of the costs and benefits of this initiative in the next three years. 2 State Services Commission, the Treasury and the Department of the Prime Minister and Cabinet Performance Improvement Framework: Review of New Zealand Trade and Enterprise May State Services Commission, the Treasury and the Department of the Prime Minister and Cabinet Performance Improvement Framework: Review of New Zealand Trade and Enterprise May 2015, page 3. 4 State Services Commission, the Treasury and the Department of the Prime Minister and Cabinet Performance Improvement Framework: Review of New Zealand Trade and Enterprise May 2015, page 4. 5 NZTE, Statement of Performance Expectations 2016/17, page 5. 6 NZTE, Annual Report 2015/2016, page NZTE, Annual Report 2015/2016, page 90.

9 6 Risk management in NZTE s economic growth strategy NZTE has 705 F700 (intensively-managed companies of less than $500 million international revenue) customers. It is aiming in the context of the Business Growth Agenda (BGA) to double the international revenue of its F700, by To meet this goal, NZTE reports that it needed to achieve 10% growth for the F700 by 2018, and that it has done so, two years ahead of target NZTE reports that its F700 customers revenue growth was 11.5% in 2015/16, 5.6% above that of businesses of comparable size and sectors in the New Zealand export economy. 9 However, only 58% of the F700 had growth of over 10%. There was negative growth for 27% of the F700 in 2015/ NZTE says this highlights how tough it is to grow companies internationally from the edge of the world The Committee may wish to ask: The Committee notes the performance of NZTE s F700 customers. What progress has been made to date against NZTE s aim to double the international revenue of its F700 companies, by 2025? What does NZTE see as the most pressing risks and growth challenges for its F700 customers, and what it is doing to assist its customers especially those with negative growth in 2015/16 to manage them? What are the major trade and tourism areas in 2016/17 and out years, what are the main challenges to growth in those areas, and what changes have been made to NZTE s strategies for addressing them? 7 Business-led coalitions 7.1 In the last two years, NZTE began to focus on supporting and encouraging the development of business coalitions (a self-selected, business-led group of companies, who are willing to work together for a common go-to-market purpose, as a means to improve their market entry). As at 30 June 2016, it had 25 coalitions among its customers NZTE expected to have appropriate measures for the coalitions in 2015/16, and its new measure is the percentage of the coalitions objectives that have been met. The level achieved was 71% against a target of 60%. 7.3 The Committee may wish to ask: What proportion of New Zealand Trade and Enterprise s customers were involved in coalitions as at 30 June 2016, and what proportion does it expect to have as at 30 June 2017 and in out years? What data does the current measure (percentage of the coalitions objectives that have been met) provide on the financial and non-financial benefits for businesses that adopt the coalition model, compared with those working outside a coalition? 8 NZTE, Annual Report 2015/2016, page See graph, NZTE, Annual Report 2015/2016, page NZTE, Annual Report 2015/2016, page NZTE, Annual Report 2015/2016, page NZTE, Annual Report 2015/2016, page 19.

10 10 8 Māori business growth 8.1 NZTE has 3,850 Foundation (low-intensity help) customers. Of these, 72 (1.9%) are Māori. It has 705 F700 (intensively-managed) customers, of whom 44 (6.2%) are Māori NZTE says that it intends to build the capability of our Regional Business Partners and ensure that they better target and support Māori The Committee may wish to ask: The Committee notes that 72 (1.9%) of the Foundation customers and 44 (6.2%) of its 705 F700 (intensively-managed) customers, are Māori. What proportion of Māori businesses is NZTE aiming to have in its customer base? What is New Zealand Trade and Enterprise doing to enhance its capability and that of its partners to better target and support potential Māori customers? 13 NZTE, Annual Report 2015/2016, page NZTE, Statement of Performance Expectations 2016/17, page 5.

11 APPENDIX Explanation of the approach, scope and grades used The reporting under Part 3 of this letter, Environment, systems, and controls for measuring financial performance, (ESCO) is a by-product of the underlying audit work carried out to form an opinion on the financial and service performance statements. Its scope is limited to those aspects of the management control environment, information systems, and controls that the auditor has given attention to during the course of the audit. The approach taken covers the following three aspects. Aspects A. Management control environment B. Financial information systems and controls This is the foundation of the control environment and may include consideration of the following: clarity of strategic planning/the way the entity manages and reports performance; communication and enforcement of integrity and ethical values; commitment to competence; participation by those charged with governance for example, the involvement and influence of Audit Committee and Board (or equivalent); management philosophy and operating style; organisational structure; assignment of authority and responsibility; human resources policies and practices; risk assessment and risk management; key entity-level control policies and procedures; information systems and communication (including information technology planning and decision-making); monitoring; and legislative compliance arrangements. These are the systems and controls (including application-level computer controls) over financial performance and financial reporting, and include the following: appropriateness of information provided and reported; presentation of financial information; reliability of systems; control activity (including process-level policies and procedures); and monitoring.

12 12 C. Performance information and associated systems and controls This concerns the quality of the main measures of outcomes or impacts and performance measures selected for reporting against, as well as the systems and controls (including application-level computer controls) over performance reporting, and includes the following: appropriateness of information provided and reported; review of the associated forecast information and Information Supporting the Estimates; the audit of the current reporting period statement of service performance and main measures of outcomes/impacts in the annual report; reliability of systems; control activity (including process-level policies and procedures); and monitoring. Comments and grades are based on conclusions drawn from the statement of service performance and annual report for the current reporting period. Further comment on improvements in progress may be included in a subsequent section on significant matters of audit interest. 2. Recommendations for improvement are generally limited to those findings that the auditor considers are the more notable weaknesses in the design or operation of the management control environment, information systems, or controls. The recommended improvements determine the grade assigned. A single, serious deficiency drawing a recommendation for improvement may, of itself, determine the grade. Similarly, the most serious deficiency among several will draw a stronger recommendation and affect the grade accordingly. 3. Deficiencies in the management control environment, information systems, or controls are the gaps between what auditors observe and what auditors consider, in their professional judgement, constitutes best practice. Auditors professional judgement is informed by many factors, including national and international standards, knowledge of best practice, and standards and expectations for the public sector in New Zealand. 4. To help ensure the relevance to all entities of the auditor s recommendations and grading, the auditor s recommendations are made with reference to what is considered best practice, given the size, nature, and complexity of the entity. Thus, notions of best practice will vary among entities because what is considered necessary, sufficient, or beneficial for some entities may not be so for others. There is, therefore, not a one size fits all standard across the public sector. Rather, recommendations for improvement are based on the auditor s assessment of how far short the entity is from a standard that is appropriate for the entity s size, nature, and complexity of its business. 5. Further, notions of best practice may vary over time in response to change for example, changes in the operating environment, changes to standards, and changes in general expectations. Therefore, grades assigned to entities may fluctuate from year to year depending on how entities respond to changes in the environment and in best-practice expectations. Grades may also be affected from year to year because of changes in emphases, in line with the auditor s risk-based approach to testing systems and controls. 6. Improvements are recommended only when it is considered, in the auditor s judgement, that the benefits of the improvements would justify the costs. 7. Recommendations for improvement are based on the auditor s conclusions about the state of the entity s management control environment, information systems, and controls as at the end of the financial year.

13 8. The following table explains what each grade means: Grade Explanation of grade 13 Very good Good Needs improvement Poor We have made no recommendations for improvement. We have recommended that some improvements be made. We have recommended that major improvements be made at the earliest reasonable opportunity. We have recommended that fundamental improvements be made urgently.