AUDIT REPORT (LTP)

 

Legal Eagle has some very strong views about the competence of Audit NZ.  It his view that the lax auditing by Audit NZ and its attitude that the obligatory requirements of the LGA may be treated as optional, has created a culture, certainly within the KDC, of non-compliance with legislation and an arrogant disregard of good governance. 

Legal Eagle made legal submissions to the Auditor General and Audit NZ to try and stop the issue of the audit report for the LTP on the basis that it did not comply with the requirements of the LGA.  Neither the Auditor-General nor Audit NZ responded.

Here are some extracts from the audit report that accompanies the LTP.  It can be seen in full here, at page 2.  Legal Eagle's comments are in blue.
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Suitability of the reforecast statement of financial position as at 30 June 2012

Without modifying our opinion, we draw your attention to the following matters in the LTP Statement of Proposal:

• the reforecast statement of financial position as at 30 June 2012 on page 8 of Part Two;

• the reasons for the adjustments made to derive the reforecast on page 43 of Part One; and

• the forecasting assumption on pages 89 to 90 of Part Two about the possible effect of the Council having not yet issued its 2010/11 annual report.

We consider the reforecast statement of financial position to be based on the best information currently available to the District Council, and we consider the adjustments to be necessary to correct information previously presented. Also, we note the low level of uncertainty associated with the possible effect of the Council having not yet issued its 2010/11 annual report.

Accordingly, we are satisfied that the reforecast statement of financial position as at 30 June 2012 provides a reasonable starting point for the LTP Statement of Proposal.

In other words Audit NZ with a few buttery words can ignore the absolute obligation under the LGA to have the annual report adopted well before the draft LTP issues.

Audit NZ seems to be totally unaware of the importance placed on the annual report and how it is a vital link in the chain that "feeds in" to the LTP. This is the view of the Auditor-General expressed in a report issued at the end of last year the Usefulness of Annual Reports (here).

The reforecast statement (here) that the auditor refers to makes it absolutely clear what a shambles the financial accounts and reporting have been, and, though improving, they have a long way to go.

It is interesting that in its past audits Audit NZ has not found one single problem with the financial accounts and yet the reports of Larry Mitchell, PJ Associates and Council's own reforecast document paints a picture of a Council wallowing in financial incompetence.

The proof of that pudding is the fact that quite suddenly, out of the blue, with no prior warning, Council has this incredibly high debt that has apparently taken Council and the auditors by surprise. Where were they for the past few years while Council was on its merry spending spree fattening up the contractors and consultants?

The staggering thing is that the EcoCare scheme was not even in Council's books. For 5 years its financial records did not even include it. Not a problem to the Audit NZ, it simply ignored it.

Only with pressure from ratepayers has Audit NZ decided to emerge from its stupor and start scrutinising the accounts. It now has to go back and try and slot EcoCare into the accounts for the past few years in a frantic attempt to bring the audit up to scratch. That is one of the problems holding up the adopting of the annual report.

There is also another small matter. Council has made a complete hash of the EcoCare scheme. Everything that it did was incompetent or illegal or both, whether it was its financial models, its decision-making, its consultation, its procurement policies and so on. It not only acted illegally but breached the trust of the ratepayers and is now trying to make them pay twice for the same project.

That is pretty major, and yet nowhere in any audit report will you find any recognition of any of the problems, any of the incompetence, any of the illegalities, any of the breaches of trust.

It is as if Audit NZ has taken a big can of whitewash and painted over and obliterated Council's trail of financial and legal havoc, and Audit NZ's own less that exemplary performance.

Because we are satisfied that it is a reasonable starting point, we consider it is in the best interests of the District Council’s ratepayers to be consulted on the matters included in the LTP Statement of Proposal ahead of the 2010/11 annual report being issued.

This is a joke. Not only do does Audit NZ ignore the requirements of the law and turn a blind eye to the shambolic state of Council's accounts, it now has the sheer effrontery to suggest that this totally illegal and inappropriate course of action is in the best interests of ratepayers.

Risks due to legal issues with targeted rates

We also draw your attention to the forecasting assumption on page 89 of Part Two of the LTP Statement of Proposal that the District Council will not need to refund targeted rates either for the Mangawhai Community Wastewater Scheme or for the roading impacts of forestry because it will be able to address the legal issues associated with the setting of those targeted rates. If the District Council had to refund any of these targeted rates, it would need to fund that cost.

Forgive ratepayers being surprised at this comment. We thought that Jonathan Salter of Simpson Grierson, one of the top experts in rating law, had decided that the EcoCare rates were illegal and that it was likely that the court would order that they should be refunded.

Obviously that opinion was not worth the paper it was written on. More money wasted by Council. But why the change of tack?

Quite simple. If Council acknowledges that it has to refund the EcoCare rates then it has to find immediately another $9.5 million to repay the illegal rates. That means that in the LTP the Council would have had to raise a further $9.5 million from ratepayers.

So, although there is a slightly negative comment in the audit report, Council managed to wriggle out of bringing the illegal rates debt into the ten year plan.

In respect of the illegal Ecocare and forestry rates the LTP states at page 89 part 2 that:

There is a risk that Council will not be able to address the legal issues identified and might need to refund the rates which have been collected to date.

In considering the reasons for the uncertainty the LTP goes on to say:

Council has had legal advice which identifies a number of deficiencies with the way in which rates needed to fund the Mangawhai Community Wastewater Scheme and the targeted forest owners rate to fund the roading activity were set. Any requirement to refund the rates which have been collected would create an additional short term cost until alternative rating streams could be put in place to cover the shortfall. Some $9.5 million of rates is at risk.

The rates remain valid until found to be otherwise by a High Court decision. Council is not aware of any judicial review proceedings having been filed with the Court as of the date on which it adopted this draft Long Term Plan. Council has also received advice identifying options for addressing the deficiencies. These include promoting a Local Bill to validate the irregularities. There are a number of precedents for use of this approach.

No provision has been recognised in the forecast financial statements in this Plan.

There are two points here.

The first is the complete dishonesty of Steve Ruru and the Councillors.

An independent review was ordered by the Auditor-General so that his matter would could be resolved. Obtaining an independent expert lawyer's opinion is the accepted way of settling disputes and avoids the costs and delay of going to court.

The terms of such a review were agreed by Councillors and ratepayer representatives. The findings of the review were to be binding on both sides.

Mayor Tiller led the charge to renege on that agreement. The terms of he review were modified dramatically, the lawyer appointed was employed as Council's solicitor, (thus losing "independence"), and, when the ruling went against it, Council decided not to accept the ruling. It realised that it would have to pay $9.5 million that it did not have. So it ran for cover. It completely rejected the findings of its own lawyer (more money down the gurgler) and is now insisting on a High Court ruling.

Steve Ruru played a cunning role in all this. Council almost begged us not to take any legal action to confirm that the rates were invalid, as it was "unproductive" and unnecessary as Council was keen to immediately sort the matter out with ratepayers - "going forward".

That did not happen. A vast silence. When asked about this Steve Ruru advised that the matter would be open to consultation in the LTP.

So here is the LTP and the illegal rates are not mentioned, except for the passage above stating why they have been excluded. Apparently they are going to be dealt with separately at a later stage.

Note the wording of the comment above and the clever trick that Steve Ruru played on ratepayers. He feigned acceptance of the Salter ruling, persuaded us not to issue legal proceedings and then in the plan used the fact that we had not issued proceedings as a reason for excluding the matter from consideration.

Where I come from that is dishonest and double-crossing and confirms that Steve Ruru is a worthy successor to Jack McKerchar.

The second point is that although the Council's solicitor was adamant that the court would find the rates illegal, and although the risk of Council having to front up with the $9.5 million is acknowledged to be "High" in the assessment of risk, Audit NZ has allowed Council to completely exclude the debt from consideration in the LTP.

That is shonky. There is no other word for it.

It is the same with the development contributions. Council failed to include a policy on development contributions in the last LTP. That is a fatal flaw (which of course Audit NZ failed to pick up) which means that all contributions paid have to be refunded.

No problem. Just ignore it. Sweep it under the carpet to join the illegal rates.

There are also problems with the illegality of other rates, for example the wastewater rate for the rest of Kaipara. Jonathan Salter was going to be instructed on the matter. But any further findings of illegality would only create further financial problems.

So, back to the carpet again.

The problem with all this carpet-lumping is that during the next financial year all the lumps are going to be exposed and its going to mean more massive rate increases.

Auditor-General's inquiry

Perhaps the best example of carpet- lumping is the Auditor-General's inquiry. It is a massive inquiry covering all aspects of EcoCare from go to whoa.

Surely that it is a significant contingency that has to be taken into account in this ten year plan. What if the debt is illegal? What if the EcoCare contract is held to be ultra vires? What if Councillors are held personally responsible for the debt?

The inquiry could have serious ramifications on the viability of Council. Couldn't it?

Not so according to Audit NZ. In fact Audit NZ already knows the outcome of the inquiry.

Bear in mind that the LTP is prepared by Council hand in hand with Audit NZ. This is what the LTP says about the Auditor-General's inquiry on page 88 of volume 2:

The Inquiry is expected to lead to a number of recommendations on how Council might improve its governance and management processes. These will need to be considered and an Implementation Plan developed once the Inquiry has been completed and a final report produced. Any costs created which cannot be funded from within existing budgets would need to be considered for inclusion in future Annual Plans/Long Term Plans. These costs would most likely be funded from the District general rate.

So there you go. Why waste the money on the inquiry?  

Implications of the District Council’s financial strategy

Finally, we draw your attention to the financial strategy on pages 21 to 42 of Part One of the LTP Statement of Proposal. In particular, we draw your attention to:

• the comment on page 27 that the financial strategy is based on balancing the operating budget and moving toward a more sustainable level of debt, while maintaining reasonable levels of service, renewing assets and ensuring rates remain affordable;

Note the last four words and try to stop choking.

• the comments on page 23 that there needs to be a substantial increase in rates for 2012/13 to fund current operating costs, and that the District Council considers the resulting rates for 2012/13 to be within the average range for a peer group of Councils and to be affordable to ratepayers;

Ditto as above.

Our audit procedures also include assessing whether:

• the LTP Statement of Proposal provides the community with sufficient and balanced information about the strategic and other key issues, choices and implications it faces to provide an opportunity for participation by the public in decision making processes;

Absolutely not. This is an LTP prepared by number-crunchers with one aim in mind only: to pay for the debt incurred by Council's illegal activities at any cost and with any outcome. There is nothing in the plan remotely related to the four well-beings, the statutory decision making, or any of the LGA requirements.

Ratepayers have absolutely no choices because the new rates for instance are presented as a fait accomplit. There are no outcomes considered, no facts and figures, no options to weigh up.

• the District Council’s financial strategy, supported by financial policies is financially prudent, and has been clearly communicated to the community in the LTP Statement of Proposal;

You must be joking. This is the Council that has acknowledged that its financial accounts and financial reporting is in a dreadful state. It had to borrow $9.5 million to make up for the errors in this year's annual plan. It has been unable to adopt the annual report because its accounts are in such a mess because EcoCare was excluded from them for 5 years and now it has to make all the adjustments. It has consistently breached its segmented debt policies (or rather never complied with them), and simply ignored the debt ratios in its treasury policies. It has set four years of EcoCare rates invalidly, two of those being completely ultra vires, plus illegal forestry rates and other wastewater rates, and the development contributions for Ecocare are all illegal. It extended the Ecocare scheme and increased the debt illegally and made a decision to prepare a new District Plan illegally and has proceeded to pour $5 million down the gurgler.

And now it is proceeding with the new LTP without the annual report being available and with a dismal understanding of it true financial status. To try and balance its books it has swept tens of million of contingent liabilities under the carpet.

Ratepayers have no clue where Council has been. The Councillors have no idea either. Those who know want to pull down the blinds on the past very quickly.

And no one knows where Council is heading now. All that ratepayers know is that this is a Council that is totally out of control, that cannot balance its books, that is hiding its debts, and that is effectively operating outside the limits of the LGA.

To suggest that the least competent and least prudent local authority in New Zealand, which, with the blessing of the Auditor-General, is about to destroy a whole district of New Zealand and to wipe out the beautiful village of Mangawhai, has policies which are "financially prudent", is an insult to the ratepayers of Kaipara.

• the presentation of the LTP Statement of Proposal complies with the legislative requirements of the Act;

• the decision-making and consultation processes underlying the development of the LTP Statement of Proposal are compliant with the decision-making and consultation requirements of the Act;

There is absolutely no decision-making. There is a completely new rating policy with SUIPs, a roading targeted rate, and a new UAGC, which requires decision-making at the highest level,  There is no consideration of outcomes or assessments of options and all the section 77 requirements. Likewise there are no section 101 considerations. Clearly the authors of the plan, bent on sourcing the appropriate sum of money, have given no consideration to the four well-beings.

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