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Report: Missing $1.55 million in Censor’s Report

The Society for Promotion of Community Standards Inc.

20 November 2006

[Updated] Report: Missing $1.55 million in Censor’s Report

Chief Censor Bill Hastings tabled his Office’s 2006 Annual Report with parliament on Friday 10 November. The Society is shocked at the gross waste of taxpayers’ money used to fund the Office’s massive operating deficit of $1.2 million – a shortfall created by gross inefficiency within the Classification Unit and the Office’s Executive.

The Society has calculated efficiency as 27.5% for all work done to achieve “Output 1” (defined as “Examination, Classification and Registration of Publications”). The $1.2 million deficit is calculated by deducting the total business income (generated from classification fees), from the total overhead costs of the Office of Film and Literature Classification (OFLC) involved in achieving Output 1.

The method approved by Audit New Zealand referred to in recent OFLC Annual Reports, resulted in the notional allocation of 82.21% of all overhead costs including Executive salaries to the production of Output 1 and the notional allocation of 17.79% of all overhead costs including Executive salaries to the production of Output 2 (“Information Services). This has been confirmed in a letter from the head of the OFLC Information Unit to the Society, dated 16 November 2006.

In 2005/06 the total costs of all activities related to the achieving of Output 1 and 2 was $3,075,274. Of this $2,528,182 related to Output 1. If total third party revenue ($1,298,692 sourced from Labelling Body fees and other classification fees) is deducted from this amount ($3,075,274), we have $1,229,489 of cost overheads that are over and above the only business income generated by the OFLC (that generated by fees).

The Minister of Internal Affairs, the Hon. Rick Barker, recently released data enabling the Society to calculate reasonably accurately, the true costs involved in the OFLC achieving Output 1. As the OFLC stated in its letter dated 16 November 2006:

“… answers [were] provided by the Minister of Internal Affairs to questions raised by Sandra Goudie MP. Data on time spent on classification, examination and registration activities were gathered… in order to record all the time directly spent on examining and classifying each publication they dealt with over a six month period in 2006. Direct costs including classification of salaries, and overhead costs, were allocated for the amount of time it specifically took to classify each publication”.

Based on these average costs provided for each one of the categories of publications dealt with by the OFLC (DVDs, videos etc), the Society has calculated the cost to the OFLC of achieving Output 1 – the examination, classification and registration of the 2,164 publications dealt with in 2005/06. The cost was $975,311 and this takes into account all staff salaries of those involved in the processes and all overheads.

If this cost of services ($975,311) is deducted from the cost of services calculated using the method approved by the Audit Office ($2,528,182) there is a gap of $1,552.871. This means that $1.55 million of overheads is unaccounted for in the OFLC Financial Statements.

The $1.55 million gap cannot be justified under the Audit Office approved formula on overhead costs allocations. It cannot be justified, as the OFLC has sought to do in correspondence with the Society, by implying that the Minister’s data on costs have been misused by the Society in their operating cost calculations. The OFLC argues that the costs were not provided to Sandra Goudie MP by the Minister “for the purpose of providing an overall financial picture of the Office’s performance.”

The truth is that the Minister’s figures, as he stated in his written answer to Sandra Goudie MP, took account of all “personnel costs and overheads” in achieving Output 1. If his figures actually underestimate the true cost to the OFLC of achieving Output 1, as the OFLC imply, then this highlights further embarrassment for the OFLC and the Minister. It means that the efficiency of the OFLC based on time records data released is much lower than the 27.5% calculated by the Society!

The fact that $1.55 million of OFLC expenditure (to achieve Output 1) remains unaccounted for in the OFLC Financial Statements is a scandal. What were the Chief Censor, the Deputy Chief Censor, the 14.3 full-time equivalent staff and two casuals responsible for achieving Output 1, doing during “off task time” that the Society calculates amounts to 21,508 hours? The total time available for these staff members to achieve Output 1 has been calculated as 29,665 hours (see appendix below)

The time taken to examine, classify and register the 2,164 publications (excluding time spent on the 3 CD Roms, 2 VCDs and 1 piece of artwork) has been calculated by the Society as 8,157 hours, based on data provided by the Minister himself to parliament.

The time taken to achieve Output 1 amounts to only 27.5% efficiency in an Office that is awash with Crown revenue ($1,371,894), interest review ($177,291), and Third Part Revenue ($1,298,693) – a grand total of $2,847,878 revenue directed to achieve Output 1. This is an appalling record for an Office that has a true operating loss of $1.2 million in achieving Output 1, and fails to provide an account of $1.55 million of its expenditure towards Output 1.

In apparent conflict with the negative picture presented by the above analysis, the OFLC Financial Statements (2005/06) record a net operating surplus of $360,709 which covers all its activities (Output 1 and 2). How could this be, given that Information Services (Output 2) generates no business income but is only funded via a Crown Revenue grant? Furthermore, how could this be, given that the OFLC budgeted for a 2005/06 deficit of $13,995?

The answers simple: (1) The OFLC “net operating surplus” is not an operating surplus is any business sense! The massive injection of taxpayers’ money disguises its massive (business) operating loss and the latter does not show up in the presentation of Financial Performance, (2) The OFLC was sitting on $2.9 million of taxpayer funds in the form of investments which earnt it $170,799 in interest in 2005/06, and (3) Capital expenditure which was budgeted for $205,000 in 2005/06 remained only half spent by 30 June 2006, the end of the financial year.

Under Section 16 of he Public Finance Act 1989, the minister of Finance may require repayment of any operating surplus. The OFLC has not been notified of any such request and has never had to repay any surpluses while Bill Hastings has been Chief Censor since October 1999. For this reason taxpayer funds have remained at very high level in the OFLC account generating large amount of interest revenue each year which is used, along with Crown Revenue, to help offset the massive operating deficits that go unrecorded.

Why should the OFLC not be operated largely on the basis of user-pays principles and philosophy? It is clear from the above analysis that New Zealand taxpayers are massively subsiding the OFLC in its core business (Output 1). The fees paid for by distributors of publications that need to be classified as restricted, are very modest (for e.g. $1,100 for DVD and $1,000 for a video) given what the taxpayer is paying to fund the activities related to their examination, classification and registration.

On the other hand, the gross inefficiency in the Chief Censor’s Office highlighted by the Society, in terms of the Classification Unit and the OFLC executive, points to a need for greater efficiency and a cutback in Crown Revenue. When a business has easy access to funding revenue it often becomes less efficient. Business executives almost always strive for greater efficiency when money is tight and there is a truly competitive market. The OFLC has a cosy monopoly in the field of classification and is awash with taxpayers’ funds.

ENDS


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