Submitting a material change audit

This case study explains when an industry participant needs to submit a material change audit and how to do it.

The Electricity Industry Participation Code 2010 (Code) requires a participant to complete an audit when there is a material change to any system or process that is regularly audited under Part 16A.

A material change audit is a focused ad-hoc audit that a participant must submit to the Electricity Authority at least five business days before the change is implemented.

What is a material change and why should it be audited?

Material change audits help consumers, industry participants, and the Authority by providing assurance that a change will not unintentionally increase the risk of non-compliance or affect the accuracy of reconciliation.

The Code does not define ‘material change’. When a participant alters its systems or processes, it needs to assess whether the change is material. When making this assessment, the participant should consider factors such as:

• Is the change significant or substantial?
• Will the change involve systems or processes that are subject to regular audits?
• Would a reasonable person think the change could affect the participant’s ability to meet its Code obligations?

Examples of changes that might require a material change audit

Participants should consider a material change audit for any material change to a system or process that could affect their ability to comply with the Code. Some examples of situations that might need a material change audit are:

• Developing a new process or ending an existing one
• Modifying a process to the extent that compliance could be at risk
• Contracting a new party to perform a process or function
• Merging with another participant (if either system will change)
• Changing the business model (eg, a retailer expands to include a new type of consumer or meter)
• Exiting staff member with experienced subject matter expertise, who was solely responsible for certain processes, leaves without a replacement.

Examples of changes that might not require a material change audit

• Changing the participant’s name, with no changes to staff or processes
• Exiting staff member leaves in circumstances that will not cause a change to existing processes.

If you have any questions, please contact your auditor or the Authority via compliance@ea.govt.nz to discuss the situation.

Material change audits support regular audits

During a regular audit, the auditor reviews the participant’s systems, processes, and actions to check their compliance with the Code. The auditor then provides a recommendation in an audit report about the participant’s compliance with its obligations under the Code.

The Authority then reviews the report and decides when the next regular audit should happen. If a participant makes a material change after a regular audit, it should have an auditor look at the processes affected by the change and submit a material change audit. The Authority uses the material change audit to decide if the next regular audit date should be brought forward.

What is in a material change audit?

A material change to a system or process is any change that could affect the participant’s ability to meet its obligations under the Code. The audit is more focused than a regular audit. It looks at the circumstances of the change and any processes that are affected by the change. The auditor then recommends whether the participant can continue to meet its Code obligations.

If the material change audit is based only on test data, this may not give the Authority enough information to make an informed decision. In that case, the next full audit may be rescheduled sooner.

When should a material change audit be submitted?

The Code requires participants to submit a material change audit at least five business days before the change is implemented. Don’t forget to account for national holidays and other non-business days when calculating timeframes. The Legislation Act 2019 provides guidance on how to measure timeframes:

“must be completed in accordance with this Part no later than 5 business days before the change is implemented”

Participants should decide whether a material change audit is required when planning any changes to systems or processes. The reasons for the decision should be documented and made available to approved auditors on request.

When planning the timing for the audit, consider whether it should be done in two parts. The first part when the auditor reviews the draft process and test data, and the second part when the change is nearly ready to be implemented (ie, the changes have been made and tested but have not yet been put into operation).

Impact of non-compliance

Failing to submit a material change audit may result in a breach of the Code. Breaches are considered in accordance with our Enforcement and prosecution policy. You can read more about the breach process.

Not completing a material change audit also increases the risk of missing issues that could affect submission information, other participants, and consumers. Depending on the scope and scale of the change, the impact could be considerable.

Distributed unmetered load material change audits

Material change audits are also required for distributed unmetered load (DUML). If a participant is responsible for a DUML database and the database changes, the participant should consider whether a material change audit is needed. A change to how information is stored or calculated could affect compliance. Because these databases are often managed by non-participants, it is important that the participant communicates with the people managing the database to ensure any changes are assessed and audited if necessary.

Code provisions

Schedule 15.1, clause 8 Changes that affect certification

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(1A) If there is a material change to a participant's systems or processes such that an audit is required under clause 16A.11, the Authority must, on receiving the audit report required by that clause, decide whether to continue the participant's certification.

(2) The Authority must, by notice to the participant, continue the participant’s certification if the Authority is satisfied that the participant will continue to meet the requirements in clause 5 after the change has come into effect.

(3) A participant’s certification is revoked if―

(a) the participant fails to provide an audit report to the Authority under clause 16A.11; or

(b) the Authority gives written notice to the participant that the Authority is not satisfied that the participant will continue to meet the requirements in clause 5 after the change has come into effect.

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Clause 16A.11 Audit required if participant makes material change

(1) If there is a material change to any of a participant's systems or processes that are the subject of regular audits under clause 10.17A, 11.8B, 11.10, 15.37A or 15.37B, the participant must arrange for an additional audit, which must be completed in accordance with this Part no later than 5 business days before the change is implemented.

(2) For the purposes of subclause (1), a material change to a system or process is a change that is likely to affect the ability of the participant to comply with any relevant provision of this Code.

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