Video transcript: Sharing good practice: Whangarei District Council's journey

Transcript for a video of a presentation filmed at the 2019 Audit New Zealand client updates.

Title: Sharing good practice: Whangarei District Council's journey

Delyse Henwood

Hi everyone. Firstly I’d just like to thank Athol and Audit New Zealand for giving us the opportunity to share our experience and learnings with you today. The last four years or so have been quite a journey for Whāngārei as well as for me personally. So I’m Delyse Henwood. I have been part of the WDC family for five years now. I originally started as management accountant, then moved into a financial accountant role and, more recently, became the Finance Manager. As Athol has indicated, I have a support crew with me here today to help take you through our journey. So firstly I’ll give you just a brief outline of what we’re hoping to cover with you today. We’ll start by explaining why we’re even here and what we hope to share with you. We have a short video to play to give you an overview of our district and just to provide you a bit more context. Next we will discuss the catalyst for our change.

As Athol already indicated, things were not pretty. After that, we’d like to take you through some of the actions that we took in those early stages to try and improve the situation we were in. Those changes will include technical changes as well as those relating to our internal culture and our relationships, both within Council and with Audit. After painting that rather dismal picture, we will bring back some positivity and share with you the results and outcomes of our journey. If we have time at the end – I’ll see how we go – we might bring in a bit of our future challenges to come. So, as I’ve mentioned, the purpose of our presentation today is to share with you our learnings and experiences in the successful re-engineering of our annual report process.

Although the slides do refer specifically to the annual report, it was so much wider than just approving a financial compliance document. It meant taking a step back, getting out of the detail, and questioning the way we were doing things – not just within the finance department, but throughout Council. It meant breaking down the silos, getting other departments on board, rather than the finance being the ambulance at the bottom of the cliff – I’ve heard that phrase a lot today. And a big contributor to our success is our relationship with Audit New Zealand, so we hope to provide you some insight into the importance of that relationship.

So these are just a few fun facts about our district, and we’d now like to play a short video. This was created as part of our consultation for our 19/20 annual plan, and it will just give you a bit of a brief introduction to our district.

Title: Annual plan 2019-20

The Whāngārei District Council has heaps of stuff planned for our district. It’s all a part of the 2019 annual plan. There’s great things going on in town, and also all the way out here. Kia ora, bro.

One of the cool things Council are doing this year is investing in our roading.

That’s right. On cycle ways, footpaths and maintaining roads.

Council are building a new sewer network out here in Hikurangi.

Our wastewater network has over 23,000 connections across the district.

And the Council provide hundreds of public toilets, keeping them clean and tidy for everyone to use.

They’re also getting ready to turn on a second biogas generator, which will make electricity from all of that wastewater. Pretty onto it, eh?

We all know Whāngārei’s going places, but we want to get there faster and safer.

Once complete, the Kamo shared path will link a network that connects Onerahi, Maunu and Raumanga together.

This network will get more cars off the road and give more options for travelling.

Whāngārei has some of the best quality drinking water in the country. But we don’t just have the best water; we have lots of it.

Council deliver more than nine million cubic metres of water per year to the district. That’s a lot of water. And it’s all because of…

The public water supply has been operating for over 100 years, supported by 44 reservoirs, seven water treatment plants, and we’re just about to start building a new Whau Valley water treatment plant.

It’s all about future-proofing for our growing district, eh?

There’s going to be a brand new football hub going in here.

14 cents from every ratepayer dollar goes towards maintaining parks, reserves, sports fields and playground.

And they’re helping to host the Women’s Rugby World Cup in 2021.

You know, Council maintain 55 kilometres of walking tracks. And their focus on water projects helps to keep our waterways clean and healthy.

The Council’s already done major road projects to help ease congestion. Spedding Road, Kamo Bypass and Porowini Ave.

And they’re also upgrading intersections at Tarewa Road, Maunu Road and here at Central Avenue.

There’s going to be a lot of changes down here too. Council are turning this carpark into a cool playground, with an amphitheatre and a water feature.

They’re also putting in new skate parks at Pohe Island and Ngunguru.

Come on, let’s go.

Our waterways are getting cleaner, though Council want to make them even better.

By focusing on stormwater across the district, all the way from Teal Bay to Waipu. Whoa. 34 mil over the next years will help improve water quality.

And prepare for climate change.

That means even cleaner rivers and harbour.

If you want to know more about what the Council’s up to, check out the 2019 annual plan or visit their website.

Dominic Kula

Alright, so if that doesn’t make you want to move to Whāngārei I don’t know what will. I was going to start this slide by saying the picture wasn’t always that rosy, but you will have some very challenging slide intervals as you go along. So we weren’t always this polished. So, for my sins, I’ve been at Council for a number of years, so I’m officially on the Jurassic list. I’ve had six jobs in that time and had a number of different perspectives as we’ve gone through our journey. We did want to give you a bit of a deeper dive into where we came from as an organisation, some of the issues we did have to face before getting into the detail round the annual report.

So when my first job that involved audit was created – that was governance department – we basically were an engineering-focused organisation, so we’d been through a sustained period of little or no rates increases, and I think it would be fair to say that the cracks were starting to show. Fortunately or not fortunately, most of those were below the iceberg, so most weren’t on our management letters or visible to Council. But, when I went into the role, with the first insurance placement, we had a $300 million gap between our asset valuations and our insurance cover. We had no clear delegations manual; we had no risk frameworks; we had no legislative compliance. And that was around 2012. So we did start a journey early on to basically prioritise some of those gaps and really start to work through them. What helped that along significantly was the creation of an Audit and Risk Committee. And, while I’d certainly take on board it’s not all about reporting and accountability, it provided visibility in a platform that we hadn’t had before.

So, by the time we got to 2015, we’d actually closed most of those corporate governance gaps, but we still had a really competitive relationship with Audit. So basically our default position was to either ignore the management points, to pretty much push back, or to do the minimum we could to tick the box. We got to a point in 2015 where we had a shift in councils, we had a shift in rating base, and ultimately we started to work closer with Audit, through Audit and Risk, and build that relationship, and got more into our compliance framework with Audit. But we still didn’t have really a constructive relationship or a collaborative relationship. So this is the first of the cheesy slide interchanges. Little did we know we were heading into…

Title: The perfect storm

Delyse Henwood

I had lots of fun doing that. So, while the governance framework had made some really big improvements, finance still had a long way to go. The year leading up to the preparation of our 14/15 annual report saw the culmination of the perfect storm. We experienced a number of staff changes within our finance department. This included the resignation of our financial accountant as well as our PPE accountant – two key roles in the preparation of our annual report. A contractor was brought on board to get us through the annual report, which was a little bit like putting a band aid on a broken leg. This was also the year that we implemented PWC’s value financials. For those of you who are not familiar with this software, it allowed us to prepare our financial statements from figures that are imported directly from our trial balance. This improved the integrity of our financial statements, and it removes that risk of human error that can be inherent when you’re using Excel for such tasks. Although a fantastic tool, of which we are seeing the benefits now, the year of implementation wasn’t without its challenges.

We were grappling with the introduction of IPSAS 23, the classification of exchange, non-exchange and what that meant for our disclosures and our recognition. We had significant problems with our property, plant and equipment. This had resulted in over 15 million of operational costs that had accumulated on our balance sheet and our work in progress over the several years. Athol has mentioned this – in our 2015 audit management report, we had a staggering 52 outstanding management point letters, with a number of those being critical. At this point, the annual report process took four months, which meant that elected members were adopting the annual report in October. For obvious reasons, this wasn’t ideal, particularly in an election year. So, now that I have described the state of turmoil we were in, that was basically our breaking point. This is the next cheesy slide.

I’ll hand over to Dom now, who will take you through the implications of the predicament we were in, and to shine a light on the governance perspective and take you on a journey with our solution.

Dominic Kula

So, by that stage, I’d shifted roles. I was in charge of infrastructure projects, contract management and asset data. So we were working pretty closely alongside both the finance department and Audit and really trying to find quickfire solutions to longstanding problems. So, as Athol’s already pointed out, there was significant overtime and stress on the finance team, a number of prior period adjustments and restatements. But I think probably one of the bigger things for the team was it really detracted from not only what they do on a day-to-day basis, but also the value-add. And I think it probably undermined the credibility of the team, and it was very easy for the rest of the organisation to say, “This is finance’s problem.” So there wasn’t an organisational view on the solution.

Obviously, Audit were going through a pretty similar and painful process around ours, and obviously additional cost to us as a council. But, also, we had to involve the technical department around prior period adjustments, which, from a project perspective, just absolutely took all the certainty out of the timeframes, and we were really worrying about whether we’d be able to adopt. In terms of councils, obviously leading into and just after an election, there were a number of concerns raised, and political fallout, but also across the wider organisation, a major amount of overtime and pushback and just not a real buy-in to a culture of change, which was ultimately where we needed to go. The technical solutions will be covered by Nathan and team, and those in and of themselves are probably pretty simple.

I think it’d be fair to say most of the requirements of particularly asset engineers and project engineers were actually already in our documentation, so we had requirements in our EES and our As-built requirements. There was just a real culture that this wasn’t part of people’s job. We could have gone in quite easily and implemented processes that would tell them what they had to do, but there was a real missing piece in the puzzle, which was bringing people along with us. So we held a number of workshops with different parts of the business to start to develop the tools, policies, processes, try and make it as easy as we could for them and have them involved in the solution, but, alongside that, also started doing reporting through the executive team and our Audit and Risk Committee. So shining a light on those areas increasingly where there were issues and they weren’t being resolved. That caused a lot of pain internally, but we got over that.

But I think the biggest thing from a culture perspective is our relationship with Audit very quickly started to change. So I vividly remember some of the discussions we had around work in progress and prior period work in progress in particular, invested assets, and they were a major issue for Audit. They were lumping found assets into that, for example. And our counterargument, which we were eventually able to have, was found assets are part of doing your job well – they’re about good asset data. So there came a more constructive discussion which actually moved us forward. So onto the technical.

Delyse Henwood

So this actually ties in nicely with Audit New Zealand’s engagement cycle that Steven shared with us earlier this morning. We had a very similar focus. The idea was, “Let’s get better information. Let’s get better reporting, better engagement with Audit, and hopefully that will give us a better-quality audit, or an outcome.” From a finance perspective, our first course of action was to arrange a meeting with Audit New Zealand.

After the year we’d just been through, we needed to convince Audit that we could improve the process and shave a month off the timeframe. It’s probably fair to say that Audit were sceptical. To be fair, so was I. We discussed key dates, shared the plans for improvements, and also gave a bit of a preview of the project plan that we’d started creating. The project plan included a detailed list of tasks that were involved. We covered interdependencies, responsibilities, any bottlenecks we had, external contributors and timing. We also maintained a risk register to help keep focus on any impending risk areas.

We engaged Deloitte’s to assist with the review of our annual report and end-of-year process. And, although having an external influence and fresh eyes was useful, it wasn’t the main advantage. The most significant benefit that arose from these meetings was the fact we’d put aside dedicated time to focus solely on our year-end process away from our BAU activities. By removing ourselves from our daily jobs, we could take a step back and question why we were doing things the way we were, rather than just applying the standard thought process of, “Because that’s what we did last year.”

We also applied some various tools from the likes of David Palmiter to help streamline some of our processes and take out some of that noise. And perhaps the most significant piece of work was around our property, plant and equipment continuous improvement programme. So, on that note, I will hand you over to Nathan.

Nathan Wright

Good afternoon. My name’s Nathan Wright and I’m currently the Senior Management Account at Whāngārei District Council. But, for the past few years, I have been the Property, Plant and Equipment Accountant, so making sure we’re accounting for all our fixed assets properly.

So the largest roadblock we saw in delivering a clean and early annual report was in this PPE area. To put in a bit of context, we’ve got a PPE balance of about $1.6 billion. It’s split over three different asset management systems, and depreciation makes up about a quarter of our operating expenses. It’s such a large part of what we do as a council, so getting it right was crucial if we were ever going to clear some of those audit management point and adopt our annual report a month earlier.

If we take a look at the split of management points from 2014/15 – sorry, I don’t get any cool slide transitions – of the 52 management letter points that we had, 20 of them related to PPE, so about 38%. Pretty significant. So these related to a number of issues such as capitalisation timing, accounting treatment, reconciliations, and the list goes on.

So, firstly, I’ll run through some of the changes that we made to our processes in order to address these points, and then I’ll discuss the involvement of Audit New Zealand as well in that improvement. So there might be a little bit of technical accounting detail, just a little bit, so sorry about that, but it is important to understand that whole journey. So really this programme was set up to look at the full end-to-end PPE process. So the first thing that we did is we introduced a capitalisation policy. So this was designed to help differentiate opex and capex upfront, rather than waiting until a project’s complete. It included some specific guidance, and we continuously update that as well based on decisions we make, so we don’t have to reinvent the wheel every time we come up with an issue. It also sets some rules around capitalisation timing, which has helped speed up that process.

As Dom touched on earlier, we ran workshops, and some training with project managers and asset managers, to go through the policy, explain it, why was it important, and how can you actually apply it. And, as Dom also mentioned, we could never have achieved what we did without getting their buy-in and bringing them along with us. So we also brought in some monthly work-in-progress meetings with staff to discuss project status. This kept everything front-of-mind and gave us early insight as to whether we needed to think a little bit more carefully about the accounting treatment.

We created a projects ledger. So this was basically a way of capturing the fact that there were operating costs associated with projects: things like feasibility studies, that sort of thing. So that helped project managers have a one source of the truth to look in, and a way to recognise the fact that not everything is solely capex. So this then flowed into the way that we reported and budgeted projects, and changed that approach from looking at capex to looking at projects.

We also introduced some capitalisation templates, so they went along with the policy. And that was given to project and asset managers to help capture the information that we needed in order to get the assets in our asset management system and speed up that whole process. And it also looked at a couple of simple ways to allocate costs, which was really useful too. And, finally, we also engaged with some valuers a lot earlier than we usually would, so things like investment properties, which helped take out a lot of that bottleneck in those July/August months.

Introducing these initiatives, they definitely had their own challenges. But it has now enabled us to work through the majority of our issues upfront so that we can spend more time focusing on complicated and technical issues, and also those value-add pieces of work. So that ties in nicely to the next piece, which is working with Audit New Zealand. So one of the things that we did was we gave Audit New Zealand read-only access to our document management system, SharePoint – just putting that out there – and also our general ledger. So this gave them the ability to sample and search through our transactions and also find any information that they needed. So that, to us, has really helped the overall auditing process and shows an increased level of trust and transparency between the organisations. So, by improving those internal processes and timelines that I mentioned earlier, we were able to identify issues a lot sooner, and we could actually raise them with Audit New Zealand at our interim audit, or possibly even earlier. So we could prepare file notes and get their feedback, basically, on whether they were comfortable with our proposed approach or if we’d need to go away and do some more work. That saved a ton of stress in those last few days, trying to resolve issues before adoption.

Delyse Henwood

So, as Dom had already touched on, Audit New Zealand were invited to attend our quarterly Audit and Risk Committee meetings. This provided a really useful vehicle for elected members to communicate directly with our auditors. Both WDC and Audit New Zealand had the same goal; we wanted unqualified audit opinion. However, we were not working congruently.

This is a bit of a brave statement to make in a session that’s run by Audit New Zealand, but I think it’s fair to say, many organisations fear the arrival of the dreaded auditors. The common perception is that the auditors are the gatekeepers who are here to try and find a problem and to make our lives difficult. What was required was a complete change in mindset and a change to our approach.

We increased our communication with Audit New Zealand through various channels we’ve already mentioned. We now welcome Audit’s recommendations generally – sorry, Athol – and we view them as opportunities to improve the way we do things. In a situation where we do disagree, then we can have that robust conversation. This really has been a pivotal change in the way we operate and has provided the foundations for a transparent, cooperative relationship with our auditors. So now to move into the shining light at the end of a very long, dark tunnel.

The positive outcomes of implementing everything we have discussed had been significant. We now adopt our annual report at the end of September. We have improved a number of processes and our accuracy as well. Reduced overtime and stress, I’m very relieved to say. We have increased confidence and trust from our elected members, as well as our senior leadership team. This has also created an environment that allows us to have that continuous improvement and to keep looking at how we can do things using that management letter point as our bible, I guess, of areas we need to be thinking about. We have significantly reduced our outstanding management point letters.

My husband actually often refers to the phrase, “Happy wife, happy life.” I think it’s pretty safe to now say it’s more, “Happy audit, happy wife, happy life.” I don’t have much of a commentary for this slide; I’m not sure much is needed. When I showed this graphical representation to my manager, he said, “That’s your presentation right there; just show them that.” I’m afraid that would have made for a very long 45 minutes.

So, on that note, we’d like to play you a video to help share with you the outcomes from the governance perspective from a couple of our elected members and our CE. One of the starring roles is here today, Councillor Sharon Morgan, so she’ll be available for autographs this afternoon.

Sharon Morgan

My name is Sharon Morgan and I’m the Deputy Mayor of Whāngārei District Council. I’m also, fortunately – I count myself being fortunate in this space –  I am the Chair of Audit and Risk. Now, six years ago, when the Audit and Risk Committee was formed, I would say we had a relationship with, obviously, Audit New Zealand – you have to have a relationship – but it was more at arm’s length. And, having walked a path with Audit New Zealand, with the Audit and Risk Committee and with councillors, I count myself fortunate to have been in that position.

I believe we’ve built a really strong, positive working relationship – and, of course, that can only benefit our residents and ratepayers who we are representing. Because we have put in place really strong financial reporting. We have an internal auditor. We have obviously the external auditor, and we have a really strong risk management programme. So, with all of those things chugging along nicely, I think we can be proud of the efforts that, as a team, we’ve put together.

It hasn’t been us in isolation; Audit New Zealand have walked a path with us, and I think they would also be thrilled about where we are now sitting in a council managing our risk, and showing and demonstrating real professionalism and best practice. A benefit, I think, of councillors and Audit New Zealand being in the same room together, Audit New Zealand also gets a better overview of councillors’ thinking, and maybe there’s some points raised that they will look into later, and maybe those become action points so they are really tailored to our council for us to address.

Sheryl Mai

Kia ora, I’m Sheryl Mai, Whāngārei Mayor. I want to talk to you about the impact that we’ve had about bringing our reporting for the annual report forward from October through to September.

When I first became the Mayor, we were signing off the annual report for the previous council, and that felt a little odd. So we put the challenge to our staff to see if they could bring the timing forward so that we would be able to report on the annual report in September, which kept it out of the election cycle every three years. It was a big challenge, and they were up for it, and we’ve reaped the rewards, because we’ve really got that sense of reporting on the financial year that we’ve all had some involvement with. Again, when I first became the Mayor, our audit report had a number of outstanding issues, and many of those were urgent. That was a situation that felt a little uncomfortable, and we worked really hard with our partners, with Audit New Zealand, to decide on what the priorities were for the work that we had to do, and we set those priorities, we worked really hard, and we’ve reduced the number dramatically over the last five years.

So all credit to our teams, but also all credit to Audit New Zealand for helping us through that process and agreeing on what the actions would be that we could work on together. So the relationship between the two organisations, I think it helps build trust from our community that we are being audited thoroughly every year, and that we comply and that we are working on the important issues that were raised in our audit report. It’s made a huge difference, and I’m really proud of the progress that we’ve made and will continue to make.

Rob Furlong

Kia ora everyone, my name’s Rob Furlong and I’m the Chief Executive of the Whāngārei District Council. Three or four years ago, we had a real problem with our audits. Because we worked really well with the Audit New Zealand auditors, we’ve managed to reduce that down to now only a handful of outstanding audit matters and the work in progress has dramatically decreased. I think the key thing for us was to get our relationship with Audit New Zealand right. In the past, we’d seen them as people who were just looking for a problem, and they were more of a chore than anything else. But what we’ve done now is we’ve tried to look at them as people who can provide us with some ideas about how to do our business better, and that certainly helped.

Another advantage of working closely with Audit New Zealand has been that we have managed to work more closely amongst ourselves and make sure that our budgets are more integrated and more realistic. That’s been really helpful, and it’s also been helpful to drive a culture of Council not working so much in silos but working as a group, in a coordinated way, to help our district. One of the most important things is just to change our attitude. As soon as we saw Audit New Zealand as providing us with an opportunity to improve, as opposed to someone who was looking for problems in our business, things started to come right. From then on, we could work as partners, and we’ve certainly seen the results of that. It’s been really good.

Many years ago, I was told that an auditor was an accountant who couldn’t stand the excitement. Ours are much better than that; they’re actually really helpful. It’s about our attitude and about their attitude, and it’s gone really, really well. So hopefully everyone else will have the same advantages that we’ve got.

Delyse Henwood

So I’m conscious of time here, so I won’t go into detail with our next challenges, save to say, in local government, there’s always something. There’s always room for improvement; there’s always new challenges arising. We have our usual activities we’ll continue with, as well as some of those a bit more – well, we’ll see how they go over the next little while. We have an asset management upgrade in progress, as well as TechnologyOne upgrade to Ci Anywhere later on this year, so safe to say there will never be a dull moment. So I would like to thank you for your attention today, and I hope that us sharing our experience has been beneficial for you and help maybe, hopefully, provide you some food for thought with your annual report process and relationship with the auditors.

Lastly, I would just like to take this opportunity to acknowledge my predecessor, Rich Kerr. Some of you may have had the pleasure of working with him when he lived in Auckland. Rich was the driving force behind the transformation of our annual report and year-end process. He would have been really chuffed to be standing up here today telling you how great we are and how much we’ve achieved. So, in some ways, this is a tribute to him, the passion and energy with which he worked, and what he achieved during his time at WDC. Thank you.

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