AsureQuality Limited. Annual Review briefing to the. Primary Production Committee. 2013/14 Financial Year. 19 February 2015

Transcription

1 Annual Review briefing to the Primary Production Committee AsureQuality Limited /14 Financial Year 19 February 2015

2 2 2 Assistance to the Committee The Primary Production Committee is conducting an annual review of the performance in the 2013/14 financial year and the current operations of AsureQuality Limited 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 not 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 Mark Evans, Sector Manager, Parliamentary Group on or Mark.Evans@oag.govt.nz at the Office of the Auditor-General.

3 Summary of key issues Part A: Results of the 2013/14 audit 3 We issued an unmodified audit opinion on the financial statements and non-financial performance reporting of AsureQuality Limited (AsureQuality). We assessed AsureQuality s management control environment as very good and its financial information systems and controls as good. Part B: Advice to the Committee The key points we cover for the Committee, and suggest questions on, are: AsureQuality reports that its outgoing Chief Executive, Michael Thomas, enhanced the commercial focus of the business resulting in improved shareholder returns. We suggest asking AsureQuality to discuss the main changes made in the reporting period that enhanced the commercial focus of the business. AsureQuality s strategic priorities for include continuing to enhance a customercentric and solutions approach in the core New Zealand market. We suggest asking what the enhancement of a customer-centric and solutions approach means for AsureQuality. A burgeoning dairy sector and increases in live animal exports strongly affected AsureQuality s revenue growth in 2013/14. We suggest asking about the extent that AsureQuality s future growth is dependent on growth in its services to the dairy sector. AsureQuality reports on the influence of international competition and demand on its business. It also discusses the potential effect domestic market rivalry and multi-national company adoption of in-house laboratory services may have on its market share. We suggest the Committee ask about the business planning AsureQuality has undertaken to deal with these particular trends and developments. AsureQuality observes a sense of urgency in building international revenue. It is building on its New Zealand business to obtain and/or increase revenue from Australia, China, Southeast Asia and the Gulf States. We suggest asking AsureQuality to comment on the level of access it has currently in its target markets, including the planned investment vehicles and effectiveness of partnership(s) with in-market companies.

4 4 4 Overview of AsureQuality Limited AsureQuality is a limited liability company and a state enterprise in terms of the State-Owned Enterprises Act AsureQuality s shares are held on behalf of the Crown by the Minister of State- Owned Enterprises and the Minister of Finance. Treasury monitors AsureQuality on behalf of shareholding Ministers. AsureQuality s Chief Executive is John McKay, who joined the organisation in June 2014 (replacing outgoing Chief Executive Michael Thomas). The Board is Chaired by Janine Smith. AsureQuality is a provider of what can generally be described as conformity assessment services 1. AsureQuality s business activities are grouped into four areas: audit, inspection and training; food and contaminants testing; diagnostic products; and biosecurity services 2. AsureQuality s total revenue for the year ended 30 June 2014 was $173 million (2013: $160 million). Asurequality registered a $12.5 million profit for the period (2013: $10.1 million) 3. As at 30 June 2014, an independent estimate of the commercial valuation of the Crown s investment in AsureQuality was $128 million 4. Asurequality has eight subsidiary companies, which are listed on page 45 of its 2014 Annual Report. AsureQuality employs approximately 1,700 staff at 140 sites around New Zealand and Australia 5. 1 AsureQuality Statement of Corporate Intent , Appendix 2, non-financial performance. 2 AsureQuality Annual Report 2014, pages AsureQuality Annual Report 2014, pages 6 & AsureQuality Statement of Corporate Intent , page AsureQuality Statement of Corporate Intent , page 45 &

5 Part A: Results of the 2013/14 audit 5 1 Audit opinion 1.1 We issued an unmodified audit opinion on the financial statements and non-financial performance reporting of AsureQuality Limited. 2 Environment, systems and controls for measuring financial performance 2.1 Our conclusions on AsureQuality s management control environment, systems, and controls for measuring financial performance, for the year ended 30 June 2014, are set out in the table below. 2.2 We made our conclusions in the context of our work in forming an opinion on AsureQuality s financial 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 2013/14 are based on the accountability documents relating to that year. They are not an assessment of overall management performance, or of AsureQuality s effectiveness in achieving its financial objectives. (See the Appendix for an explanation of the grading scale and underlying assumptions.) Management control environment 2013/14 Very good No improvements are necessary. 2012/13 Very good Comment Based on our reviews during 2013/14, we found that appropriate policies, systems, and controls were in place and appeared to be operating effectively. Financial information systems and controls 2013/14 Good Improvements would be beneficial and we recommend that AsureQuality address these. 2012/13 Good Deficiencies we identified in 2012/13 have been resolved. Comment We found that some improvements could be made in the following areas: 1) From our examination of the IT environment for the general financial system (TechOne), we were satisfied that, overall, the control environment can be relied upon. However, we pointed out where minor improvements could be made in information security policy, users awareness, and back-up controls. 2) We examined the general control environment and were satisfied with the overall control environment. However, we noted several minor points in our review of the financial processes, which we raised with management.

6 6 6 3 Significant matters of audit interest 3.1 No issues arose that we need to draw to your attention. 4 Legislative compliance 4.1 We reviewed the systems and procedures that AsureQuality uses to identify and comply with legislative requirements. Our work focused on areas that could pose a risk to the information contained in the financial statements, on which we issue an opinion. 4.2 No issues arose that we need to draw to your attention.

7 Part B: Advice to the Committee 7 5 Strategic direction 5.1 AsureQuality s Statement of Corporate Intent states that its core business is to support customers and regulators to ensure food and other products are safe, of good quality and meet specifications set by countries and other standards setting bodies AsureQuality reports that its outgoing Chief Executive, Michael Thomas, enhanced the commercial focus of the business resulting in improved shareholder returns 7. AsureQuality s strategic priorities for include continuing to enhance a customercentric and solutions approach in the core New Zealand market The Committee may wish to ask: The Committee notes that AsureQuality reports that its outgoing Chief Executive, Michael Thomas, enhanced the commercial focus of the business resulting in improved shareholder returns. Please outline the main changes made in the reporting period that enhanced the commercial focus of the business. The Committee also notes that AsureQuality s strategic priorities for include continuing to enhance a customer-centric and solutions approach in the core New Zealand market. What does the enhancement of a customer-centric and solutions approach mean for AsureQuality? 6 Growth and competition 6.1 AsureQuality reports on the effect that the strong dairy sector (given increasing demands for quality control in dairy export markets) and live animal exports had on its revenue growth in 2013/14. It notes the influence of international competition and demand on its business and the potential effect domestic market rivalry and multi-national company adoption of in-house laboratory services may have on its market share 9. 6 AsureQuality Statement of Corporate Intent , page 4. 7 AsureQuality Annual Report 2014, page 6. 8 AsureQuality Statement of Corporate Intent , page 9. 9 AsureQuality Annual Report 2014, page 10.

8 8 6.2 The Committee may wish to ask: The Committee notes the effect that the strong dairy sector and live animal exports had on AsureQuality s revenue growth in 2013/14. To what extent is AsureQuality s future growth dependent on services it offers to the dairy sector? The Committee notes the influence of international competition and demand on AsureQuality s business and also the potential effect domestic market rivalry and multi-national company adoption of in-house laboratory services may have on its market share. Please outline to the Committee the extent of this effect, and the business planning AsureQuality has undertaken to deal with these particular trends and developments. Building international revenue 6.3 AsureQuality observes a sense of urgency in building international revenue. It is building on its New Zealand business to increase and/or obtain revenue from Australia, China, Southeast Asia and the Gulf States The Committee may wish to ask: The Committee notes AsureQuality s intention to build its international revenue. Please comment on the level of access AsureQuality currently has in its target markets, including the planned investment vehicles and the effectiveness of partnership(s) with in-market companies. 10 AsureQuality Annual Report 2014, pages 7 & 14.

9 APPENDIX Explanation of scope and grades 9 Indicative areas 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.

10 10 Grade Very good Good Needs improvement Poor No improvements are necessary. Improvements would be beneficial and we recommend that the AsureQuality Limited address these. Improvements are necessary and we recommend that the AsureQuality Limited address these at the earliest reasonable opportunity. Major improvements are required and we recommend that the AsureQuality Limited address these urgently. 1. The reporting under Part A of this briefing, Environment, Systems, and Controls for Measuring Financial Performance, 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 areas of the management control environment, information systems, and controls the auditor has given attention to during the course of the audit. 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 (see below). 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. Grades assigned to entities may therefore fluctuate from year to year according to 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 accordance 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.