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OFFICETWE~DITOR...-GENER...AL
Level2,100MolesworthStreet,Thorndon6011Telephone:+6449171500
PO
Box
3928,
Wellington
6140,
NewZealandFacsimile:
+6449171549
ToManaArotake
Email:info@oaggovtnzWebsite:www.oag.govt.nz
13March2012FileRef:
AU/APS/7-0004
I
JohnGrootChiefAdvisorRegulationBranchCommerceCommissionPOBox2351Wellington6140DearMrGroot
COMMENTSONDRAFTCOMMERCEACT(ELECTR'ICITYDISTRIBUTIONSERVICESINFORMATIONDISCLOSURE)DETERMINATION2012(THE"2012DRAFTDETERMINATION")
Thankyoufortheopportunitytoprovideasubmissiononthe2012DraftDetermination.TheAuditor-Generalistheauditorof21suppliersofelectricitydistributionservices(EDBs),WerecognisethattheCommerceCommission(theCommission)isthemainuseroftheInformationDisclosuresunderthe2012DraftDetermination,WethereforewishtoclearlyunderstandtheexpectationsoftheCommissioninrespectoftheauditoftheInformationDisclosuresinorderthatwesatisfytherequirementsofthe2012DraftDeterminationwhenitbecomesamandatoryrequirement.Atthispoint,wehavesomedifficultyinunderstandingtheexpectationsoftheCommissionbecauseofwhatappeartobecontradictorystatementsinthe2012DraftDeterminationandtheaccompanyingDraftReasonsPaper.Theaspectsofthe2012DraftDeterminationandtheDraftReasonsPaperthatappeartobecontradictoryare:•thestatedaimoftheCommissiontoensuretherequirementsarecost-effective;•theverydetailedInformationDisclosurerequirements;•theexpectationofanexplicitdutyofcaretotheCommission;and•theopinionoftheauditorthat"informationhasbeenpreparedinallmaterialrespectsinaccordancewiththisdetermination"Wefurtherdiscusseachofthesemattersundertherespectiveheadingsbelow.Inourview,therequirementsofthe2012DraftDeterminationhavechangedinafundamentalwayfromthepreviousElectricityDistribution(InformationDisclosure)Requirements2008(the"2008requirements").The2008requirementstendedtohaveadirectlinktotheauditedgeneralpurposefinancialstatementsoftheEDBs,andtotheprincipleswithin"generallyacceptedaccountingpractice"(GAAP).Conversely,the2012DraftDeterminationrequirestheInformationDisclosurestobepreparedinaccordancewithdefinedtermswhichhavelittleornodirectlinktotheauditedgeneralpurposefinancialstatements,nordotheynecessarilyrelatetoGAAPprinciples.AsaconsequenceauditorsoftheEDBswillbemuchlessabletorelyoftheirauditoftheEBDs'generalpurposefinancialstatementsinauditingtheInformationDisclosuresunderthe2012DraftDetermination.Onthisbasisalone,anauditoftheInformationDisclosuresunderthe2012DraftDeterminationwillbeconsiderablymorecostlythananauditunderthe2008requirements.
 
Weareconcernedaboutthefollowingaspects:
•ThestaledaimoftheCommissiontoensuretherequirementsarecost-effective
ParagraphX5oftheDraftReasonsPaperstatesthat:
"Wehaveconsideredthecostsofcomplyingwiththedisclosurerequirements.
We
havesoughttoensuretherequirementsarecost-effective,andarealignedwherepossibletoindustrypracticesandstandards,whilstensuringthereissufficientinformationavailabletointerestedpersonstoassesswhetherthepurposeofPart4ismet."
Fromapreparer(andauditor's)perspectivecost-effectivenesswouldbeachievedbyhavingadirectlinkbetweentheauditedgeneralpurposefinancialstatementsthatarepreparedforstatutoryreportingpurposesandusingGAAPprinciples.Bydepartingfromthatstartingpointthe2012DraftDeterminationautomaticallyimposesadditionalcostsonbothpreparersandauditors.Inourview,thecombinationoftheexpectationthattheauditorwilloweadutyofcaretotheCommissionandwillexpresstheiropinionthatthe"informationhasbeenpreparedinallmaterialrespectsinaccordancewiththisdetermination"presentsapotentialsourceofconfusionfortheauditor.Viewedoneway,theseexpectationscouldresultinamuchmoreexactingaudit,withconsequentcostimplications.Viewedanotherway,suchanauditmaybescopedatquiteahighlevelthatmaynotmeettheCommission'sexpectations.Fromourreadingofthe2012DraftDetermination,theCommissionappearstoexpectamuchmoreexactinganddetailedauditwhichwillhavesignificantcostimplications.Suchanexpectationiscontrarytoacost-effectiveregime.
•Theverydetailedinformationdisclosurerequirements
TheverydetailedInformationDisclosurerequirementswillimposeadditionalcostsonbothpreparersandauditors.ForexampletheverydetailednatureoftheInformationDisclosureswillrequireaverysophisticatedaccountingsystemtobekeptbytheEDB.ThelevelofdetailmayevenrequireaseparateandparallelgeneralledgersystemtobemaintainedbytheEDBforInformationDisclosurepurposes.Inanyeventitwouldseemthateverytransactionorentryrecordedinthegeneralledgerwillneedtobecodedwithinternalmanagementaccounting,statutoryreportingandInformationDisclosurereportinginmind.Todothisproperlywillrequiretheindividual(s)doingthecodingtohaveathoroughunderstandingoftheInformationDisclosurerequirements-anotinconsiderablefeatforEDBemployeeswhowillundoubtedlyhaveamultitudeofotherday-to-daytaskstocarryout.Combinedwiththisistheneedtoobtainaworkingunderstandingofthedefinitionsinthe2012DraftDetermination.Wewouldobservethattherearealmost50pagesofdefinitionsinthe2012DraftDeterminationandmanyofthesedefinitionsmustbereadinthecontextofthe169pageCommerceAct(ElectricityDistributionServicesInputMethodologies)Determination2010.RunningparallelwiththerequirementsplacedontheEDBaresimilarrequirementsplacedontheauditor.ThebigdifferencebetweentheEDBandtheauditoristhattheEDBwillneedtobefamiliarwiththerequirementsofthe2012DraftDeterminationonacontinuousbasis(foron-goingrecordkeepingpurposes)whereastheauditorwillneedtofamiliarisethemselveswiththerequirementsofthe2012DraftDeterminationonanannualbasiswhentheycometoaudittheInformationDisclosures.AsaresultEDBstaffwillbemuchmorefamiliarwiththeInformationDisclosurerequirementsthantheauditor.GiventhecomplexityoftherequirementsthereisariskthattheauditormayrelyontheEDB'sinterpretationoftherequirementsandmayacceptanincorrectinterpretationonthegroundsof"reasonableness"withoutunderstandingtheintentoftheCommissionwhentherequirementwaswritten.
2
 
Theimplementationandcontinuingapplicationofthe2012DraftDeterminationsuggestsalevelofsupporttoEDBsandtheirauditorsshouldbeprovidedbytheCommission.Inouropinionconsiderationshouldbegivento:-transitionalprovisions;-ongoingtrainingtoEDBs;and-provisionofahelpdeskfacilitytoEDBsandEDBauditors.
•TheexpectationofanexplicitdutyofcaretotheCommission
TheexpectationofanexplicitdutyofcaretotheCommissionsuggestsamoreexactinganddetailedauditoftheInformationDisclosuresthantheauditsthathavebeencarriedoutunderthe2008requirements.Weelaborateonthismatterfurtherunderthefollowingheading.Obviouslyifamoreexactingauditisrequiredthenthiswillhavecostimplications.WealsoquestioniftheCommissionhasthestatutoryauthoritytorequireauditorstostatetheyhaveadutyofcaretotheCommissionintheauditreport.Ourreasoningforthisviewissetoutintheattachmenttothisletter.
•Theopinionoftheauditorthat"informationhasbeenpreparedinallmaterialrespectsinaccordancewiththisdetermination"
InauditsofgeneralpurposefinancialstatementspreparedinaccordancewithGAAP,theauditor'sopinionisexpressedintermsofthefinancialstatements
"as
a
whole".
Suchanapproachwasalsopossible,butnotwithoutitschallenges,fortheInformationDisclosurespreparedunderthe2008requirements.ThisisbecausetheInformationDisclosurespreparedunderthe2008requirementswerebasedontheauditofthestatutorygeneralpurposefinancialstatementsandthedisclosureswerebasedonGAAPprinciples.Becausetherequirementsofthe2012DraftDeterminationarebasedonCommissiondefinitions,andtheformandpresentationofthedisclosuresisprescribed,itwouldseemtobeinappropriatefortheauditortoprovideassuranceontheInformationDisclosures
"as
a
whole".
Thisisbecause
"thewhole",
inthecontextofInformationDisclosures,isnotintendedforgeneraluseasisthecaseforgeneralpurposefinancialstatements.InfacttheauditorisunabletodetermineifanydisclosureintheInformationDisclosuresismoreimportantthananotherdisclosureandmustthereforeassumethateverylineitemineveryScheduleisofequalimportance.ThisinterpretationisreinforcedbyourbeliefthattheCommissionistheprimaryuseroftheInformationDisclosuresandtheexpectationthattheauditorhasaspecificdutyofcaretotheCommission.SuchaninterpretationimpactsontheapplicationofmaterialityinthecontextofInformationDisclosurereporting.Typically,inthecaseofgeneralpurposefinancialstatements,theauditorwillestablishalevelofmaterialityintermsofoneortwokeyfiguresinthefinancialstatements.Inthecaseofa"forprofit"entityakeyfigureistheentity'snetprofitandthisthenallowstheauditortoexpresstheiropiniononthegeneralpurposefinancialstatementsasawhole(inotherwordstosaythatthefinancialstatementsgiveatrueandfairviewinallmaterialrespects).ApplyingtheconceptofmaterialitytoInformationDisclosurereportsismuchmoredifficult.Underthe2012DraftDeterminationtheauditorisrequiredtostatethatthe"informationhasbeenpreparedinallmaterialrespectsinaccordancewiththisdetermination".Becausetheauditorisunabletodetermineifanydisclosureismoreimportantthananotherdisclosureitwouldseemthatmaterialitywillneedtobeassessedforeverydisclosure.SuchanapproachwouldmaketheauditoftheInformationDisclosuresunwieldyandprohibitiveintermsofcost.
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