"To discharge offenders without conviction is a slap in the face to victims. It leaves offenders with blemish-free records and provides no deterrence to future reoffending,'' she said.
At the sentencing, Judge Phillipa Cunningham said he was a talented New Zealander, who "makes people laugh''.
"Laughter is an incredible medicine and we all need lots of it,'' she said.
She also said he had stopped drinking, paid a high price in his personal and work life, and had shown remorse.
However, the Crown sought a review of the decision, alleging the judge made a number of errors.
Sexual offending against children usually carries a sentence of imprisonment of up to 10 years.
Justice Gilbert agreed with the Crown's submission that the consequences of conviction did not outweigh the gravity of the offending.
The judge had to determine whether the consequences would be "out of all proportion'' to the gravity of the offence:"Without such a determination the judge had no power to discharge Z without conviction''.
Justice Gilbert also agreed the sentencing judge made errors in her assessment of the gravity of the man's offending as low.
Auckland District Court was told the man went to bed with his partner after returning home drunk from a Christmas work party in December 2009. After he fell asleep, his four-year-old daughter came into the couple's bedroom and got into bed with them.
The police summary said the man laid his daughter on her back, pulled down her pyjama pants and nappy and kissed her.
The man's partner woke up and asked him what he was doing. He replied: "I thought it was you.''
He later told police that he remembered nothing of the incident.
