6 Operating instructions applying to departments as defined in the Public Finance Act 1989

6.1  Financial responsibility of Chief Executives

Section 34 of the Act makes departmental Chief Executives responsible for the financial management and financial performance of their departments.

Chief Executives are responsible for operating their own accounting and management systems and establishing day to day procedures to support those systems.

Specific responsibilities, which must be addressed by Chief Executives, include:

• financial reporting requirements;
• the system of internal control;
• financial management and financial performance of any bodies, activities or statutory offices that are funded by way of an appropriation administered by the department and that are not natural persons or separate legal entities;
• banking, receipt and payment systems;
• accounting systems;
• control over asset acquisition, utilisation and disposal;
• purchasing, contracting and tendering procedures;
• risk management;
• travel policies and procedures;
• personnel policies and procedures; and
• foreign exchange exposure management.

A number of publications have been developed to assist departmental Chief Executives with the development and maintenance of appropriate accounting policies and systems. Departments may obtain these publications from their Vote Analysts.

The Chief Executive's responsibilities must be carried out within the parameters of legislation and Government policy. The requirements of the Act, the State Sector Act 1988, Treasury Instructions, Minister of Finance Instructions and any other legislation or regulations governing the operations of the department must be complied with. These requirements may result in departments having responsibilities to parties other than the Crown. Government policy, as set out in Cabinet decisions, Ministerial direction, or agreements between the Chief Executive and the Responsible Minister (as defined by the Act) may also impact on the manner in which the Chief Executive meets his or her responsibilities. Cabinet Office circulars limiting departmental chief executives' authority to approve certain types of departmental spending (with spending in excess of those limits requiring approval of the responsible Minister or of Cabinet) are a specific example of Cabinet decisions that impact upon financial management within a department.

In addition to responsibilities associated with the financial management of the department, the Chief Executive may be responsible for incurring expenditure, collecting revenue, or managing assets and liabilities on behalf of the Crown, or for managing trust money on behalf of the Treasury (which manages it for the Crown). Financial delegations from the Minister responsible for an appropriation to the Chief Executive are a specific example of Cabinet decisions that impact upon the financial management of activities a department manages on behalf of the Crown (i.e. non-departmental activities).

6.2  Reporting obligations

6.2.1  Annual financial statements of departments

6.2.1.1  Reporting requirements

Section 45B of the Act sets out the requirements for preparation of the annual financial statements of departments. They must be prepared in accordance with generally accepted accounting practice as defined by section 2 of the Act; and include:

• any other information or explanations needed to fairly reflect the department's financial operations and financial position;
• the forecast financial statements prepared at the start of the financial year for comparison with the actual financial statements;
• a statement of actual expenses and capital expenditure incurred against each appropriation administered by the department and each class of outputs included in each output expense appropriation; and
• a statement of unappropriated expenses and capital expenditure incurred in relation to the activities of, or appropriations administered by, the department together with an explanation of the reasons for the unappropriated expenses and capital expenditure.

6.2.1.2   Non-departmental activity

A number of departments administer non-departmental activities on behalf of the Crown. Although departments are not directly accountable for the financial performance of non-departmental activities, the department is responsible for the effective and efficient administration of contracts or payments for non-departmental activities or of non-departmental revenue or receipts. The provision of information on the financial extent of these activities will provide context for, and supporting information regarding, departmental outputs, and is necessary to reflect the financial operations of the department for the year and its financial position at the end of the year.

Departments therefore must disclose non-departmental activities in the form of schedules. If applicable and appropriate, departments must have up to six separate sets of schedules for assets, liabilities, income, expenses, contingencies and commitments (if not fully disclosed in the statement reporting expenditure or expenses or liabilities incurred against appropriations). Departments must also provide a statement regarding the accounting policies used in preparing the schedules, to the effect that measurement and recognition rules consistent with generally accepted accounting practice are applied in the preparation of the schedules. The schedules are to be audited.

6.2.2  Provision of reports to Ministers

Chief Executives must provide regular financial and performance information to their Responsible Minister, and to Ministers responsible for appropriations administered by their department. These reports must, if requested, be made available to the Treasury.

Although the format and timing of this information is at the discretion of Ministers and departments, as a minimum concise variance/exception reports should be provided; it is not necessary to provide full financial statements each month. Cabinet has directed that five principles should be adhered to when preparing this information.

These principles are:

• No surprises: Ministers should expect to be adequately warned in advance of any issue of significance, for example, if there is any risk that appropriations may be breached.
• Linked to other reporting: Performance information should be linked to Ministerial priorities, and should therefore link to any communications from Ministers that express those priorities. Such information should also be consistent with measures of performance included in the information supporting the Estimates of Appropriations, Statement of Intent[1] and Annual Report.
• Materiality: The level of detail should be appropriate. The issue of materiality should consider both the dollar value of financial information and whether the information is significant for other reasons.
• Forward Looking: A common criticism of reporting is that information is historic and often simply describes what has already occurred. Reporting should also make projections of future situations and compare these with what was planned. Where variances indicate that remedial action is required, departments should clearly and concisely identify areas in which ministers are required to make decisions. Decisions contained within a report should be distinguished from information provided purely for the minister's information.
• Exceptions Basis: Exceptions reporting focuses on areas where performance has departed or is anticipated to depart from agreed performance expectations.

6.2.3  Provision of reports to the Treasury

The Treasury is responsible for reporting aggregate financial information to the Minister of Finance. The Secretary to the Treasury requires assurance that there is an adequate system of internal control in place in departments, and that the departmental information used in this reporting can be relied upon.

In addition, the role of the Treasury in preparing forecasts and actual financial statements means that the Treasury also requires timely information in specified formats. Chief Executives must supply timely and accurate information to the Treasury for the following purposes:

• preparation and compilation of the Budget and the Estimates of Appropriations, Information supporting the Estimates of Appropriations, supplements, and adjustments to these;
• budget and appropriation monitoring;
• monitoring and control of Crown revenue, expenditure, assets and liabilities (refer also to section 6.5 "Crown revenue, expenditure, liabilities and assets");
• forecasting and monitoring of banking activity (refer also to section 6.6 "Banking");
• monitoring and control of trust money (refer also to section 6.7 "Trust money");
• monitoring and control of contingent liabilities (refer also to section 6.8 "Contingent liabilities");
• preparation of the financial statements of the Government of New Zealand; and
• explanation of material variances to forecast.

Such information must be provided by way of reports in the form, and within the time frame, from time to time specified by the Treasury. These requirements are set out in Treasury Circulars.

When providing reports and financial information to the Treasury, Chief Financial Officers should keep in mind Treasury's expectations for these. These expectations apply regardless of whether the information provided relates to monthly or annual actuals, estimated actuals or forecasts and applies to information provided on both a cash and accruals basis. Reports and financial information should be:

• submitted on time (as per timetables published in Treasury Circulars);
• appropriately reviewed and authorised;
• free from material errors and omissions;
• complete, accurate and internally consistent, including any associated checklists, other supporting information or certification;
• accompanied by clear and accurate analysis;
• credible and supportable, particularly where judgements are made (e.g. measuring complex obligations. What significant assumptions were made? What judgements were required?);
• consistent with other information provided to the Treasury or published;
• in compliance with Cabinet decisions where applicable;
• in accordance with Crown accounting policies (refer section 3) and the forecast policies (refer section 4.4);
• subject to effective internal controls that provide assurance over the information delivered to the Treasury; and
• a correct reflection of inter-entity transactions and balances that have been confirmed and agreed with other entities as required. Refer to the Eliminations Framework available on the Treasury's website for further guidance: http://www.treasury.govt.nz/publications/guidance/reporting/accounting

The Treasury further expects entities to:

• regularly inform their stakeholders regarding the financial information that they report to Treasury, particularly if there are significant departures from previous forecasts;
• proactively identify and resolve issues promptly; and
• manage other key relationships (e.g. auditors). This will include being proactive and communicating constructively.

6.2.4  Compliance with accounting and forecasting policies

All reports supplied to the Treasury must be prepared in accordance with the relevant accounting and forecasting policies issued by the Treasury. In the case of departmental activity they are the "Accounting and forecasting policy parameters for departmental external financial reporting" (section 4 of the Treasury Instructions). In the case of Crown activity managed by the department, reports are to be prepared in accordance with the "Accounting policies for external financial reporting by the Government" (section 3 of the Treasury Instructions).

6.2.5  Provision of other information

Section 79 of the Act provides the legal authority for the Treasury to request information from departments (except an intelligence and security department unless the Secretary and the Chief Executive of that department agree or, failing that, the Minister and Responsible Minister jointly decide that the Treasury may make the request) in relation to the financial management, financial performance, or banking activities of a department, or in relation to the management or control of any Crown asset or liability.

Chief Executives must supply such information or access as the Treasury may from time to time require for the purpose of examining the accuracy of information provided to the Treasury or the integrity of the financial management system operating in a department.