British Accounting Review (1998) 30, 343–360

Article No. ba980077

VALUE FOR MONEY AUDITING IN NEWZEALAND: COMPETING FOR CONTROL IN

THE PUBLIC SECTOR

KERRY JACOBSDepartment of Accounting and Business Method, University of Edinburgh

This paper provides an overview of the changing role of performance or Value forMoney (VFM) auditing in the New Zealand public sector. In many countries therehas been a strong interest in public sector reform and the place of accountingtechnologies such as VFM. A theoretical framework, derived from public policyliterature, is used to explain the changing role and relevance of VFM auditing in NewZealand. Within the policy process problems, solutions and opportunities are relativelyseparate streams. Expert groups or epistemic communities compete to define theproblem and to advocate their particular solutions. The Office of the Auditor-Generalis presented as an epistemic community within the New Zealand policy process andthe technology of VFM as a solution to the problems of the day. However, the Treasury(NZ) also developed a policy solution involving radical restructure of the public sector,challenging the existing role of VFM. In response, the Audit Office re-defined the roleof VFM auditing as a service to the parliamentary select committees. The changingrole of VFM illustrates the flexible and the contestable nature of accounting technologiesand casts some doubt on the argument that the growth of accounting in the publicsector is inevitable.

1998 Academic Press

INTRODUCTION

Theorists such as Holmes (1992) and Hood (1991, 1995) have suggestedthat public sector reform is now an international trend, which has also ledto a change in the role of accounting. Hood (1991, 1995) has called thereform trend New Public Management, a phrase that is now used by manyothers to describe the replacement of traditional input focused forms ofpublic administration with managerialist technologies and practices whichhave more of an output focus (James and Manning, 1996; Ferlie et al.,1996).

The author is grateful for comments and assistance provided by staff and ex-staff from the Office ofthe Controller and Auditor-General, Sharon Jacobs, Steve Walker, Sue Llewellyn Irvine Lapsley andJune Pallot and the two anonymous referees.

Please address all correspondence to: K. Jacobs, Department of Accounting and Business Method,William Robertson Building, 50 George Sq., University of Edinburgh EH8 9JY, UK.

Received October 1997; revised April 1998; accepted June 1998.

0890–8389/98/040343+18 $30.00/0 1998 Academic Press

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Hopwood (1984) was one of the first to comment on the growing emphasisupon accounting in the management of the public sector, and the linkbetween accounting and public policy. One of the ways that this emphasishas been expressed is in the practice of value for money (VFM) auditing.VFM is not a unitary concept but a social construct, or as Guthrie andParker, (1997) describe it, a malleable masque. Parker (1986) defined VFMaudit as ‘an examination designed to determine whether the organizationin question is performing economically, efficiently and effectively in its useof resources, operations, procedures and pursuit of objectives’ (p. 6). Parker(1986) indicated that although different terms were used to describe theprocess (such as VFM, operational, performance and management audit,economy and efficiency reviews), they basically described the same thing.However, the exact nature of the practice is dependent upon the legalmandate and practices in a particular context (Parker and Guthrie, 1991).As Hopwood (1982, p. 44) observed ‘. . . an interest in audit and review cannot be isolated from wider interests in the dynamics of political processesand the organisational means for their fulfilment.’ Therefore, this paper isan attempt to place VFM in an institutional context, and as such respondsto Guthrie and Parker’s (1997, p. 4) challenge to study how performanceauditing technology and technical practices are ‘created, sustained andremoulded in various institutions and nations’.

VFM or performance auditing (PA) would seem to be inconsistent withNew Public Management (NPM) reform as the technology was developedwithin the progressive public administration (PPA) model and reflects PPAassumptions and accountability practices (Hood, 1995). However, theempirical literature indicates that the use of VFM or performance audit hasbeen strengthened by the public sector reform rather than eliminated by it(Guthrie and Parker, 1997; Leeuw, 1996; Barzelay, 1997). Therefore, isthe use of VFM auditing a characteristic of NPM reform or a throwbackto an earlier model of public administration?

New Zealand provides the perfect setting to study the changing role ofVFM auditing in the public sector as it is often hailed as the archetypalexample of NPM reform policies (Hood, 1991; Boston et al., 1996). Withthe exception of Pallot (1991) and Skene (1985), little attention has beenpaid to how the reforms have changed the role and relevance of VFMauditing in New Zealand. Both Skene (1985) and Pallot (1991) predictedthat reform would alter the role of VFM auditing in New Zealand howevertheir views on how the role would alter were completely different. Skene(1985) maintained that the VFM would become more relevant in a reformedpublic sector while Pallot (1991) maintained that the emphasis on VFMwould be reduced and the Audit Office would focus on the financial auditfunction. This paper seeks to resolve the debate by presenting an empiricalstudy of how the role of VFM audit actually changed in response to theNew Zealand public sector reforms.

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THEORETICAL FRAMEWORK

Several authors have described the use of VFM in various countries (Buttand Palmer, 1985; Glynn, 1987; McSweeney and Sherer, 1990; Guthrie,1990). However, little work has been done which takes a longitudinalapproach and shows how the role and nature of VFM auditing developsand changes. One description of the development of VFM audit technologieswas the work of Hamburger (1989). He argued that, within Australia, VFMauditing emerged from a ‘contested process shaped by the interests ofcompeting groups and individuals’ (p. 4). Hamburger noted that between1974 and 1989 there were significant changes in the value-for-moneyprogramme of the Australian Audit Office (AAO) and attributed thesechanges to the personal influence of successive Auditors-General:

‘A significant part of each of these changes can be traced to the personalinfluence of three Auditors-General. This should not surprise students ofpublic sector audit. The independence of the Auditor-General is unique inmodern public administration’ (Hamburger, 1989, p. 19).

Following Hamburger (1989), one would expect that it is the personalinfluence of successive Auditors-General which determines the nature androle of VFM audit. However, Guthrie and Parker (1997) argue that althoughindividual Auditors-General (and their staff) do have a tremendous influenceon the development and direction of performance audit (VFM) technologies,that to just focus on personalities is to ignore the importance of theinstitutional. Guthrie and Parker (1997, p. 37) suggest that performanceauditing is best represented as ‘a dramatic play in which the sponsors, actorsand audience continually create and review the execution of the drama’.From this perspective we can see that the question is not whether individualsdo or do not have influence, but how they interact with others in institutionaland political settings. In effect, ‘society must be understood as a processconstructed historically by individuals who are constructed historically bysociety’ (Abrams, 1982, p. 227). Therefore, this paper uses a theoreticalmodel derived from the policy theory literature to study the changing roleof VFM auditing in the New Zealand public sector.

Although there has been a strong interest in the role of accounting in thepublic sector, accounting researchers have generally failed to see accountingin a policy context, and little use has been made of political theory. Withinthe policy literature, extensive work has been done on analysing how politicaldecisions are made and how groups and individuals influence those decisions.Various models of the policy process have emerged. These models rangefrom the rational model, which sees policy formation as a cost–benefitdecision analysis done by politicians, or possibly bureaucrats, to models ofnetworks or communities, which see the process of policy formation as theproduct of a complex interaction between different groups and individuals,sometimes over a long period of time (see Ham and Hill, 1993).

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Those who have studied the policy formation process are often verycritical of the descriptive power of the rational choice model. One suchresearcher is Kingdon (1984) who found that the rational model was notan accurate reflection of reality but that ‘problems’, ‘solutions’, participantsand choice opportunities are separate streams—each largely unrelated tothe others. Particular policies emerge when conditions, people and ‘solutions’converge.

‘Problems’ are the issues or agendas defined by those within the policynetwork (Atkinson and Coleman, 1992; Marsh and Rhodes, 1992). As aunit of analysis the policy network focuses attention on the political actorsin the policy process rather than the physical or organisational structures,emphasising the importance of individual agency and power in the sense oftransformative capacity (Giddens, 1984). Therefore, through a policy net-work certain individuals or groups may be able to exert considerable influenceon what may ultimately become the policy.

Kingdon (1984) suggests that people do not set about to solve problemsbut more often the ‘solutions’ are developed first, then people search for‘problems’ to solve. Often those responsible for developing ‘solutions’ arespecialist groups, or epistemic communities. The uncertainty and complexityof many modern policy issues means that groups of experts holding technicalknowledge become critical participants in the policy process of any advancedcapitalist economy (Haas, 1992). The influence of an epistemic communityderives not only from its advice but also from its ability to define how issuesare perceived. Therefore, the continued existence of an epistemic communitydepends upon their ability to identify problems that fall within their domain,to develop ‘solutions’ and to sell those ‘solutions’ to policy makers.

This paper focuses on how the Audit Office functioned as an epistemiccommunity in the development and redevelopment of VFM. Kingdon’s(1984) concept of policy competition provides a way of linking a focus onthe individual agency of successive Auditors-General with a wider socialand political perspective on the changing role of accounting in the publicsector. While documents and quotes are attributed to individual Auditors-General, these must be seen as reflecting a wider policy or epistemiccommunity clustered around the Office of the Auditor-General.

The next section of this paper describes how VFM emerged within NewZealand and how it was promoted by the Audit Office as a ‘solution’ togrowing government expenditure, as a way to restore public confidence andto address demands for public accountability. The second section presentsthe New Zealand public sector reforms as an alternative policy solutiondeveloped by Treasury. Between 1984 and 1991, the New Zealand publicsector was restructured in line with Treasury recommendations. The thirdsection describes how Chapman, appointed as Auditor-General in 1992,was initially dismissive of VFM and argued that there was no longer a needfor that kind of review. However, rather than disbanding the VFM group,the ‘function’ of the group was redefined from departmental review and

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public accountability to a process of management consulting and in-dependent advisory support for parliamentary standing committees. VFMwas restructured by those within the Audit Office and (re)presented as thesolution to a different set of problems. In conclusion, it is argued that thechanges to VFM illustrate the contextually dependent nature of accountingtechnology. Due to this, the growth of accounting in the public sector isnot seen as inevitable but dependent on the advocacy of accounting solutionsby epistemic communities involved in the policy process.

The empirical material used in this paper was drawn from sourcessuch as the reports issued by the Auditor General1, published newspaperinterviews and obituaries. However, some of the critical details about thechanging role of VFM auditing were not provided by these sources. There-fore, three interviews were conducted during 1994 and 1995, one withBrian Tyler and two with the three senior staff within the Office of theAuditor General who had been responsible for the changes. These interviewswere taped and transcriptions were returned to the participants for commentand amendment. Three follow-up interviews were done in 1997. Due toconfidentiality agreements the interview with senior staff has been referredto as Audit Office Interview, followed by the date of the interview.

THE EMERGENCE OF VFM (1975–91)

The Office of Auditor-General has existed in New Zealand since 1840,before the country had secured representative government. The earliestofficial mandate was contained in the Audit Act 1858 [31]. ‘The Auditorof Public Accounts’ was appointed by the Governor of the Colony of NewZealand under the authority of the Crown. Over the next 100 years theAudit Office developed into a significant government department with aclearly defined statutory independence and a responsibility to ensure thatpublic money and assets were not being wasted, misappropriated or misused(Audit Office, 1991).

In the 1970s there was a convergence of ‘problem’, ‘solution’ and op-portunity that allowed the development and establishment of VFM auditingin New Zealand. The ‘problem’ was a perceived economic crisis and apolitical desire to cut costs (Skene, 1985). The opportunity or policy-window was a process of review and change in central government financialmanagement. One ‘solution’ was the development of VFM audit within theAudit Office.

Fougere (1993, p. 118) presented the 1970s as a time of ‘growing economiccrisis’ and argued that the crisis focused Government attention on ‘costshifting and rationalisation strategies’. The 1960s had been a time of rapideconomic growth and relative prosperity within New Zealand. However, bythe 1970s this growth began to slow and the boom turned into a bust. ALabour Government, dedicated to the development of the welfare state,

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was replaced by a National Government, with a desire to cut costs withinthe public sector. There were also public demands for accountability sparkedby a series of ministerial scandals and well publicised cases of departmentalincompetence (Skene, 1985).

A number of the new Government Ministers were committed to de-veloping a business-like approach within their departments, creating anenvironment of change. This change process was reinforced by the im-plementation of a number of financial and administrative reforms (re-commended by Treasury in their 1967 review). Many of the administrativechanges were strongly influenced by the PPBS (Planning ProgrammingBudgeting System) models, although the practice fell short of expectations(Pallot, 1991, p. 166).

During the 1970s many countries expanded the compliance and probityroles of their legislative auditor to include matters such as the efficiency,effectiveness and performance of government units (Glynn, 1985). From1974 there were efforts within the Audit Office to develop performanceaudit functions in New Zealand. Two key factors in that process were theappointment of A.C. Shailes as Auditor-General in 1975 and the PublicFinance Act 1977. Shailes was a former Treasury Officer and had beeninvolved in the 1967 Treasury review of public management (Skene, 1985,p. 275). Under the old Public Revenues Act 1956, the Audit Office had noformal authority to conduct VFM reviews. However, the Public FinanceAct 1977 Section 25 (3) provided a legal mandate for the Audit Office toconduct performance or value for money auditing.

‘. . . the Audit Office may, whenever it thinks fit, make such examination as itconsiders necessary in order to ascertain whether, in its opinion, the resourcesof the Crown or Government agency . . . or local authority, have been appliedeffectively and efficiently in a manner that is consistent with the applicablepolicy of the Government, agency, or local authority, as the case may be.’

The VFM mandate contained in the Public Finance Act 1977 was themost radical innovation in the function of the Auditor-General since theestablishment of the office in the 1840s and came largely from within theAudit Office (Skene, 1985, p. 276). While the Auditor-General did not havethe power to question the merits of executive policy, he could inquirewhether resources were applied ‘effectively and efficiently’ in a mannerconsistent with any given policy. When compared to other countries, themandate given to the Auditor-General was remarkably broad in its inclusionof the ability to question policy effectiveness (Skene, 1985). Many publicauditors, such as those in Australia and in the UK, are explicitly restrictedby their mandate to questions of economy and efficiency (Glynn, 1985).

Within New Zealand the important question was not whether the workwas or was not VFM audit, but which section of the 1977 Public FinanceAct provided the mandate for the audit. Therefore the VFM and performanceaudit work was generally referred to as Section 3 work. The broad definition

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of section 25(3) left it to the Audit Office to decide the nature, scope,method and object of review, thereby placing considerable power andautonomy in the hands of the Auditor-General and his/her staff.

In 1983 Shailes retired as Auditor-General and was replaced by BrianTyler. Tyler was very supportive of the VFM review, or ‘extended audit’ ashe called it, and allocated resources within the Office to strengthen anddevelop this work. By the 1980s the Audit Office in Canada had establisheditself as the leader in VFM auditing in Westminster-style governments.An exchange of ideas and personnel with Canada (Pallot, 1991, p. 223)strengthened the place of VFM in New Zealand and created a core groupwithin the Audit Office who were experienced in doing VFM reviews.

‘David Brittian came over from Canada (in 1978) and brought the Canadianmethodology that had been operating for ten years. His approach, which washis own individualised version, very results orientated, very delivery orientated.And they started, kicked off and ran four programme based projects as anopening shot under Dave’ (Audit Office Interview, November 1995).

The 1980s and early 1990s were a time of growth and consolidation ofVFM in New Zealand. In 1986 the Audit Office established a designatedVFM group. It was thought that this would allow VFM auditing in NewZealand to develop. It also allowed the Audit Office to employ a numberof non-accounting professionals such as engineers, public sector managersand policy experts2.

‘In 1986 they determined to set up a new structure. Originally it was goingto be four directors and a group of twenty people who were all accountants.It took a year to set up and it ended up being a team of about fifteen people,ten of whom were from outside. This new structure allowed this type ofauditing (VFM) to develop, a bit of a force-field around it to give it a littleprotection. It was also to bring in what were then called non-accountants . . .Unqualified auditors I think we were called . . . I remember non-accountantsas the term—it was just atrocious. But it was the people with backgrounds inpublic sector management, public sector policy delivery and engineering.People who had the background and the orientation to get involved in thesewider areas of management operations. That team kicked off on the 1 August1987 and the vestiges of it are still here’ (Audit Office Interview, November1995).

By 1987 the name of the unit changed to the Major Projects Group,reflecting the philosophy within the Audit Office that ‘everyone is doingVFM work’ as part of the annual audit process. However, specific expertise(and capacity) was needed for larger review projects.

Over the fifteen years between 1977 and 1992 more than 40 VFM (orSection 3) projects were undertaken and published as well as 20–30 smallerprojects that were either not reported publicly or were released as part ofthe reports of the Auditor-General. The reports produced tended to focuson programmes rather than issues or departments and were concerned with

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the adequacy of the systems in place to ensure efficiency and effectivenessrather than measuring the efficiency and effectiveness of the programmesreviewed (Glynn, 1985).

The development of performance or VFM auditing within New Zealandcan be seen as a response by the Audit Office to the ‘problem’ of economiccrises and the call for political accountability (Skene, 1985). Initially theVFM work was a tentative process, commenting on expenditure that wasextravagant and wasteful and conducting experimental efficiency audits.However, the process was boosted by the appointment of Shailes who wascommitted to public sector reform (Spencer, 1995) and the 1977 rewriteof the Audit Office mandate. While Section 25(3) of the 1977 PublicFinance Act made VFM ‘legal’, the Shailes Report (1978)3 established thecredibility of the department. The ongoing review process and the contactswith Canada built on that credibility and consolidated a cadre of expertknowledge within the department. This development of core expertise andshared values fit with Haas’ (1992) description of an epistemic community.

The concept of VFM as a ‘solution’ to the need to cut costs and to ensurethat there was ‘value for money’ from public spending was further developedunder Tyler as Auditor-General. However, Tyler argued that the Auditor-General was responsible not just to parliament but to the public too:

‘There are those that believe the Office of Controller and Auditor-Generalshould report to the House and leave it at that. But I’ve always been of theview that my responsibility was to the people. It was them that I was reportingto through the agency of Parliament representing people. But in the ultimateit’s the people’s money: they are the stockholders, and that’s where my loyaltylies’ (Taylor, 1992, p. 2.1).

As such, Tyler developed the concept of VFM as a tool for public ac-countability. The Section 3 mandate provided the opportunity to reviewareas of public concern and to protect not just against bureaucratic, but insome cases parliamentary abuse of public resources (Ringer, 1991).

In 1988 Tyler questioned the propriety of government spending ontaxation advertisements. This prompted Peter Neilson, then Associate Min-ister of Finance, to state that he would sue the Auditor-General (Burns,1989). In August 1990 Tyler criticised Parliament, or rather the Par-liamentary Service Commission, for a lack of effective control over ex-penditure on MP’s postage, travel and communications. Tyler explainedhis motives as follows:

‘Things like parliamentary postage and so on were really small change in thewhole scale of government and some people suggested that I was wasting mytime looking at things like that. I took the view that it is very difficult to testthe integrity of Ministers and I took these things as being litmus tests of howthey regarded their particular responsibilities. I therefore regarded them asnot being important in themselves but as providing a pointer as to how theylooked at their responsibilities and if they were conscious of the fact that the

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Audit Office was looking at their actions in the small things, then perhapsthey would be more conscious in the larger things’ (Tyler Interview, November1995).

Tyler also questioned the validity of parliamentary air travel when it appearedthat government ministers used public funds for campaign travel.

‘There were small things like Ministers and Members flying into the Tamakiby-election at the taxpayers expense. I raised the point and suggested that itwas not on’ (Tyler Interview, November 1995).

The act of holding politicians accountable for their action indicated howbroad the Section 25(3) mandate really was, and how the Audit Officecould use it. It was also clear that while politicians welcomed reviews ofdepartmental performance, they did not welcome comments on their ownactions. The process of political review illustrates how malleable the VFMtechnology was in the New Zealand context. However, it was this verymalleability of the nature and process of VFM review and of the underlyingSection 3 mandate that caused such political concern and attack. BrianTyler observed that:

‘We can start getting close to the political bone, particularly on value-for-money inquiries. Comment on financial matters is almost always applicableat the departmental level, so the political agro is not great, but there is oftenthe potential when one starts looking at programmes and whether they havebeen conducted efficiently and effectively, for such enquiries to becomepolitical, in the sense that they can lead to political debate, and, sometimes,attack’ (Accountants Journal, 1992).

The VFM reviews and the criticisms of political spending created tensionbetween the Audit Office and individuals in parliament. This tension canbe traced to the mandate created in 1977 under Shailes (see Spencer, 1995).When Tyler retired in 1992 there were some people in power who wantedto see the mandate of the Auditor-General restricted and VFM audit ended(Burns, 1989).

PUBLIC SECTOR REFORMS—AN ALTERNATIVE SOLUTION

Between 1984 and 1994, New Zealand underwent a process of massivereform. In some ways this paralleled the development of VFM auditing inthe Audit Office. However, it also represented the rapid growth in importanceand power of another epistemic community—Treasury, and a growingdebate on the place and future of VFM.

During the late 1970s and the early 1980s staff within Treasury devotedconsiderable attention to developing a coherent economic model for reform(see Scott and Gorringe, 1989). Scott (Accountants’ Journal, 1993) de-scribed how the model for reform was developed in one division that was

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established in 1979 to look at the ‘fundamental problems of the NewZealand economy’.

‘It was really from that group that a lot of thinking about the New Zealandeconomy developed and finally took shape in the 1984 brief to the incominggovernment’ (Accountant’s Journal, 1993, p. 39).

Those within the think-group became an influential force within Treasuryas a whole, transforming the values and perspectives of the organisationand of the advice they presented. Denemark (1990, p. 281) described thisprocess:

‘By the end of the decade Treasury had moved from being a post-war bastionof Keynesianism and had started hardening not just in a free market directionbut in a Chicago School direction. The result was the creation of a highlyideological Treasury, fundamentally committed to the renewal of unfetteredmarkets and to the wholesale dismantling of the collectivist State’.

An epistemic community formed within one division of Treasury, but overtime the influence of this division transformed the organisation as a whole.In the 1984 brief (Treasury, 1984), Treasury expounded a clear reformagenda reflecting core values and solutions developed in the planningdivision, values and solutions which became characteristic of the NewZealand reforms.

‘In the unique circumstances of New Zealand, the synthesis of public choice,transactions cost theory and principal-agent theory was predominant, pro-ducing an analytically driven NPM [New Public Management] movement ofunusual coherence’ (Hood, 1991, p. 6).

Having identified the ‘problem’ and developed a ‘solution’ the issue forTreasury was one of opportunity. Treasury were unable to interest thethen Minister of Finance (Robert Muldoon—also Prime Minister) in theirproposals for reform. Muldoon had rejected the increasingly monetaristeconomic advice provided by Treasury and was following his own moreinterventionist economic policies (Denemark, 1990, p. 282). During histerm in office he reorganised the Prime Minister’s Department, whichbecame his major source of policy advice, effectively sidelining the Treasuryand their advice (Boston et al., 1996, p. 60). However, with the election ofthe fourth Labour Government in 1984, the Treasury came under theleadership of Roger Douglas and found a number of key supporters withinCabinet. Denemark (1990) suggests that the Treasury’s influence was sostrong that they effectively became the creators of Labour’s political-eco-nomic policies. Radical social and economic reform, as proposed by Treasury,was chosen by the Government as the preferred policy device to address theproblems facing New Zealand. Problems defined by those within Treasury ineconomic terms (Scott and Gorringe, 1989).

The initial Government emphasis was on reducing state intervention inthe New Zealand economy. They deregulated the financial and industrial

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sector, introduced major reforms in the tax regime and lowered tariffs(Bollard and Buckle, 1987). The next step was to focus attention on publicenterprises. In 1985 the Government announced that public enterpriseswere to be restructured along more commercial lines and responsibilitiesfor non-commercial functions would be separately funded. Managementwould be given more flexibility in decision making, and commercial criteriawould be established for all State Owned Enterprises (SOEs). For many ofthe SOEs, commercialisation and corporatisation was followed by pri-vatisation. Between the 1988 budget and the end of 1990 over fifteen ofthe largest SOEs were sold, removing the organisations from the publicsector.

The reforms set off a process of conflict/competition between Treasuryand the Audit Office for the jurisdiction of the public sector. The Treasurymade a case that the SOEs should be ‘freed from the structures of bur-eaucratic control and Parliament’ such as audit and VFM review by theAudit Office, claiming that this was inconsistent with a commercial ori-entation (Taylor, 1992, p. 1). The Treasury repeated similar re-commendations in their 1989 submission to the Financial and ExpenditureCommittee (FEC). This submission was addressed solely to the Auditor-General and recommended that SOEs be removed from his jurisdiction.

In 1988 the FEC commissioned Strategos Consultants to conduct areview of the Audit Office. The report (Kirk, 1988/AJHR I. 19A, pp. 31–35)suggested that there was no longer any need for an Audit Office with state-sector-specific expertise. Most of the audits could be contracted out toprivate sector auditors, and the other functions were either covered underthe new reporting requirements, or were a duplication of State ServicesCommission (SSC) or Treasury functions. Even if the Audit Office wasretained, Strategos argued that they should not audit the SOEs and thatVFM audits were a waste of time and money.

In his response to the Strategos Report (AJHR, I. 19A, pp. 36–39), Tyler(the then Auditor-General) suggested that the report showed a lack ofknowledge of the nature and function of the Audit Office and the role ofthe Auditor-General. Tyler maintained that the public sector reforms didnot reduce but increased the need for independent scrutiny by an Auditor-General. While most of the conclusions of the Strategos Report were rejectedby the FEC, the chairman of the committee attacked Tyler’s response,accusing the Audit Office of ‘headline hunting’ and employing political tricksand media campaigns to avoid contestability (Sutton, 1988, pp. 40–41). TheStrategos Report was seem as a thinly disguised attack by the Treasury onthe powers of the Auditor-General (Taylor, 1992) which indicated the viewheld by some within Treasury and within parliament that the powers of theAudit Office should be restrained, particularly their mandate for VFM work.The report can also be seen as a response by those in power whose actionshad been criticised in the press by the Auditor-General under the Section25(3) mandate.

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Following the reforms of the trading aspects of government, the non-trading aspects were also restructured. Treasury dominated the developmentand implementation of these changes (Treasury, 1987; Boston et al., 1996).In effect, the accountability arrangements were restructured, and privatesector management practices and performance measures were introduced.For example, under the Public Finance Act (1989) public sector accountinghad to be conducted on an accrual rather than a cash basis and all financialreporting had to comply with private sector accounting standards.

Specific areas of the public sector were also subject to massive re-structuring. Health care reform involved the separation of purchaser andprovider and the introduction of an internal-market. The management ofschools was delegated to the local level and the administrative functionsconducted by the state were reduced. Departments such as social welfarewere restructured along functional lines.

TRANSFORMING VFM (1992–97)

At the end of 1992 Jeff Chapman was recruited as Auditor-General. Hemade it clear that he intended to shift the emphasis of the Audit Office(Clifton, 1992). He saw the accountability of the Audit Office as primarilyto parliament rather than to the public. He made it clear that he was notgoing to use his powers to criticise government actions (individually orcollectively) and public sector audits would be open to tender from privateaccounting firms (Collins, 1992). Chapman had some major questionsabout the future of VFM/Section 3 reviews which he did not see as beingparticularly relevant to the reformed public sector and to his role as Auditor-General (Chapman, 1994, p. 10).

‘There is an increasing doubt about the value of audit projects conducted toassess value for money for programmes and activities of Departments—common threads are: Value for money may be in the eye of the beholder—whatmakes the Auditor-General special as a VFM evaluator. Isn’t this the politician’srole? How do VFM projects contribute to Parliamentary Committees’ ongoingscrutiny of departmental operations. Who chooses the projects? Is it a personalbias of the Auditor-General or is it related to some master plan. Do MPsbecome involved in the choice of projects? How does the Auditor-General’swork dovetail with other management improvement exercises being carriedout within Government? What positive improvements in public administrationhave resulted from VFM audits that would not be better achieved by a reformprocess?’

Although the Audit Office was restructured the VFM group remained.Between 1992 and 1994 Chapman initiated a series of reviews which resultedin a new name (The Performance Audit Unit) and a shift in emphasis awayfrom major reviews/public accountability and towards earning external

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revenue through consulting services. Some of the external revenue jobs werea by-product of financial audit projects.

‘We were in a survival mode and I think that is a natural reaction to suchpressures on you. Under Jeff we were required to get some external revenueas well as our Crown revenues. So we have a development involved in tryingto put ourselves on the market in order to get work from the outside. So thesepressures were at the time, from Jeff anyway, coming on that the whole areawould be opened up to contestability therefore if you don’t get work youweren’t going to be employed. Under those circumstances you don’t get asmooth transition forward . . . We were being set up to be contestable in thesame way as the financial auditors and we had to get outside revenue’ (AuditOffice Interview, November 1995).

The re-orientation of the group led to a change in attitude on the part ofboth clients and Auditor-General. Audit clients began to see the auditorsmore as consultants and less as reviewers because they were not there tocriticise them and to report to Parliament but were willing to provideassistance. However, there were only four external jobs that were actuallyconducted before these were stopped (Interview 9/97). Some of thoseinvolved felt that although these reports were less critical that earlier work,they were also less effective (Interview 9/97).

Chapman placed considerable emphasis on the need for the Audit Officeto work more closely with parliamentary select committees. Special projectwork was defined after discussion with key parliamentary committees andbriefings and advice would be provided as requested by the Auditor-General(Chapman, 1994).

Chapman resigned in October 1994 amid accusations of financial mis-management and fraud4. There was a gap of almost a year before DavidMacdonald was appointed as Auditor-General. In his first report as Con-troller and Auditor-General Macdonald clearly signalled his support for theSection 3/VFM work within the Audit Office. He mentioned that future‘special studies’ will be targeted to ‘areas of greatest risk or significance’(Audit Office, 1995, p. 13) and was critical of the fact that the Audit Officewas unable to conduct Section 3/VFM work in Crown Health Enterprises(CHEs) and State-owned enterprises. He suggested that the restrictions onthe Audit Office VFM mandate were not satisfactory and that parliamentneeded to address this issue in new legislation:

‘The second issue concerns the scope of the audit mandate that the AuditOffice has for CHEs. In 1993, my predecessor reported on the unsatisfactorysituation regarding the limited mandate for State-owned enterprises. The samesituation applies to CHEs (as well as other public sector companies such asCrown Research Institutes and Port Companies)’

‘The Office was asked by three members of Parliament to undertake a reviewof certain matters in relation to the waiting list of a particular CHE. It wasquite clear that the members expected the Office to have the power to provide

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them with the response they were seeking. In the event, they were advisedthat the Office did not have the power to undertake the necessary audit workbecause it went beyond the Office’s mandate, which is only to do an audit interms of the Companies Act 1955 and 1993. Consequently, the Office wasunable to peruse the issues that they raised.’

‘Since then, other requests to address concerns by the public have had to bedeclined. The decision as to whether this is a desirable state of affairs isultimately a matter for Parliament. I would expect it to be considered at leastin the context of pending new legislation for the Office.’(Audit Office 1995, p. 22).

Chapman’s emphasis on the needs of parliamentary select committees wascontinued under Macdonald who developed a Parliamentary-Group withinthe Office charged with co-ordinating the parliamentary accountability work,and with liasing with the select committees. The report of the StandingOrders Committee released in late 1995 indicated strong parliamentarysupport for maintaining the extended mandate work of the Audit Office,particularly in terms of advice and support to parliamentary committees:

‘However, it is important that the resource for special studies be retained asit is critical to the Controller and Auditor-General’s ability to perform thisindependent role in respect of parliament’ (AJHR, 1995 I.18A, p. 45).

Under the leadership of David Macdonald the service to the select com-mittees has grown and developed. Currently the parliamentary select com-mittees have a significant input into the development of the Section 3(special project) work programme and often call on the Audit Office foradvice. All of the select committees have Audit Office staff in regularattendance and a strong working relationship has been established betweenthe Audit Office and the committees. One senior manager within the AuditOffice put it like this:

‘A really critical role is managing the parliamentary interface, and we arespending a lot of time with the select committees. It is an important clientrelationship that we have to manage. What is different for us from so manyother jurisdictions is that we are working with a dozen committees; we arenot just working with the public accounts committee. And if we can pull itoff the Audit Office can be more effective, we can serve parliament muchmore effectively and through that serve the taxpayer’ (Interview Audit Office,September, 1997).

With the change in electoral system5 following the 1993 referendum, theparliament in general and the parliamentary committees in particular havebecome more powerful. Therefore, the growing relationship between theAudit Office and the committees secures the future of the Section 3/VFMwork in New Zealand.

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CONCLUSION

The New Zealand reforms and the changing role of VFM presents a storyof competing policy solutions. VFM was developed in the late 1970s as aresponse to government calls for efficiency, economy and effectiveness indepartments and a public call for mechanisms of accountability. Throughoutthe 1970s and 1980s the development of VFM was strongly supported bythe Auditor-General and a core group or epistemic community developedwithin the Audit Office who were knowledgeable in VFM work.

Within New Zealand the ‘problem’ of the 1980s was defined as aneconomic rather than administrative issue. The ‘solution’ to this ‘problem’was a programme of structural reform involving the introduction of un-fettered markets and to the wholesale dismantling of the collectivist State.Treasury was central to the process of problem identification and thedevelopment of a reform ‘solution’ (Boston et al., 1996). As a result theAudit Office found itself sidelined and its scope constrained.

In many ways the technology of VFM was replaced by the NPM reforms,however, as the technology was malleable, it was restructured and revisedby these within with Audit Office to play a new role in the reformed NPMenvironment. The 1994 changes to the VFM group within the Audit Officecan be seen as a response to a loss of jurisdiction and a re-definition of therole of VFM. VFM was no longer the chosen ‘solution’ and a new roleneeded to be developed. Previously VFM had a strong public accountabilityand constitutional function. However, that role was seen as less relevant—particularly by those within Treasury. Under Chapman, two alternativefunctions for VFM were developed. First, VFM was seen as an independentreview and consulting service, marketed to the management of governmentdepartments and ministries. Second, VFM or special studies were (re)p-resented as an Audit Office advisory service to parliamentary select com-mittees. While the management consulting services had no future, theendorsement from the Standing Orders Committee (AJHR 1995 I. 18A45) indicates that there is ongoing demand from the parliamentary selectcommittees for Audit Office advice. With the change in electoral systemand the growing importance of the select committees, the audit office haveclearly secured a future for VFM audit, although not necessarily onepredicted by the exponents of NPM reform.

The changing role of VFM auditing technology in New Zealand illustratesthe contestable nature of accounting technology, and indeed any technology,within the Public Sector. As in the private sector (Armstrong, 1985),accounting must compete as the ‘solution’ to the ‘problems’ faced, and itis by no means inevitable that accounting technologies will maintain theircurrent dominance. This suggests that the growing ‘accountingization’(Hood, 1995) or the rise of a ‘logic of auditability’ (Power, 1996) withinthe public sector is not inevitable. It depends on how accounting is (re)p-resented as the solution, what is defined as the problem and what op-

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portunities there are for change. An important and unexplored aspect ofthe changing role of accounting is the function of the epistemic communitieswho develop and market ‘accounting solutions’ for the economic, socialand structural problems of government.

This paper is clearly limited, focusing on one technology, in one countryover one period of time. There is a need for further research into therelationship between accounting and policy. How have other accountingtechnologies, such as financial reporting or Activity Based Costing, cometo have a place within the public sector? What are the ‘problems’ thataccounting technologies are meant to solve and what epistemic communitieshave and are advocating accounting ‘solutions’?

N

1. All official reports produced by the Audit Office are presented to the New Zealand Houseof Representatives and are published as a section within the Appendices to the Journalsof the New Zealand House of Representatives (AJHR).

2. The Audit Office had begun recruiting non-accountants as early as 1980.3. A major review of the financial management and control of government departments.4. He was later imprisoned for this.6. From a ‘first past the post’ to a ‘mixed member proportional’ system.

R

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