Results of Audits for Entities with other than 30 June 2008
Balance Dates
1. Report summary
1.1 Background
Each financial year, three reports are presented to Parliament
containing the results of financial audits completed during the
year.
This is the third and final report for 2008–09. Principally it
deals with the audit of public sector entities with financial
statement balance dates other than 30 June 2008. The other results
reported are for entities with 30 June 2008 balance dates
(2008–09:14) and Local Government: Results of 2007–08 audits
(2008–09:12).
This report covers 123 entities from the Higher Education,
Vocational Training, Alpine Resorts, Health, and Community
Development sectors. These entities are outlined in Figure 1A.
The majority are from the Higher Education and Vocational
Training sectors, which accounts for 113 entities.
There are also 11 entities included, whose financial statements
were submitted for audit after our close off for reporting on
entities with 30 June balance dates. This meant they were not
included in the audit report tabled on 3 December 2008
(2008–09:14).
1.1.1 Reporting framework
The public sector must comply with a range of legislative and
accounting requirements when preparing its financial statements to
be tabled in Parliament, as shown in Figure 1B.
The Financial Management Act 1994 requires entities to
submit annual reports for tabling in the Parliament, within four
months of the end of the financial year, including financial
statements which must be prepared and audited within 12 weeks.
These FMA requirements also apply to the majority of entities owned
or controlled by the universities and TAFEs, who are required to
finalise their financial statements, including the consolidation of
their subsidiaries, within 12 weeks.
For companies owned or controlled by public sector entities, the
governing legislation is the Corporations Act 2001. This
Act requires them to report to their members within four months
after the end of their financial year.
Financial statements are required to be prepared in accordance
with Australian accounting standards.
In October 2007, DIIRD issued an executive memorandum to the
TAFEs, universities with TAFE divisions, and two training entities,
requesting they disclose the approved key performance indicators in
a concise performance statement. This statement was to be audited
and included in their annual reports.
In addition there was an increased focus on internal controls
and financial sustainability during the audits, as part of the
audit planning process.
1.2 Key findings
1.2.1 Results of audits
At 15 April 2009, 115 of the 123 financial statements had been
finalised (94 per cent). Of the 115 opinions issued 111 were clear
and four required qualification, compared to 126 audit opinions at
30 April 2008, of which four were qualified.
The entities qualified and reasons why are summarised in Figure
1C.
The independent audit opinion adds credibility to the financial
report by providing reasonable assurance that the information in
the statements is reliable.
A qualified audit opinion means that a statement has not been
prepared in accordance with the relevant reporting framework and,
therefore, is less reliable and useful as an accountability
document.
Deakin University and The University of
Melbourne have again had their financial statements
qualified. This is because their accounting policies for recording
non‑reciprocal research grants do not accord with current
Australian accounting standards.
These universities are not recording this revenue when received,
which is when they gain control, consistent with Australian
Accounting Standards Board AASB 1004 ‘Contributions’. Rather
they are recording grant receipts as a liability until they spend
the grants.
The AASB has not issued any amendments to the applicable
accounting standards, so the qualifications remain.
The type of qualification issued to the Anti-Cancer
Council of Victoria is one generally attached to the
financial statements for entities that have significant ‘public
appeal’ based fundraising activities, where it is particularly
difficult to meet the evidentiary standards for revenue
verification.
Clear audit opinions were issued on the 19 performance
statements submitted for audit. An audit opinion was not issued on
the performance statement of Holmesglen Institute of
TAFE as it was not certified by the governing body and was
not submitted for audit.
As reported last year, the requirement for TAFEs to prepare
audited performance statements is not mandatory.
Holmesglen Institute of TAFE is a significant
entity in the sector with the result that consistent credible
performance information is not universally reported for the $1.2
billion sector.
With the current government reforms to improve choice and
contestability by supporting a broader range of providers in the
vocational training market, there is now further argument for a
robust monitoring framework to operate across this sector.
1.2.2 Quality of reporting
An important attribute of the quality of financial reporting is
its timeliness and accuracy. It is important that public sector
entities prepare and publish timely financial information. The
later the reports are produced and published after year-end, the
less useful they become.
Overall, 28 of the 34 entities or 82 per cent reporting under
the FMA finalised their statements within the 12-week statutory
timeframe (76 per cent in 2007). Of the 89 non-FMA entities, 82
entities or 92 per cent finalised their statements within the
required four months (98 per cent in 2007). At 15 April 2009, there
are seven entities that are yet to finalise their financial
statements, which are detailed in Figure 2B.
Higher education and vocational training entities generally
performed well with 89 of the 113 entities or 79 per cent
completing their financial statements within the required 12 weeks
(81 per cent in 2007). However, four TAFEs and one training entity
have not met the timetable (one TAFE in 2007).
Alpine resorts significantly improved their timeliness of
reporting in 2008, with all five entities completing their
financial statements within 12 weeks (all resorts were late in
2007).
Another measure of report quality is the number and size of
adjustments required to finalise the financial statements. When the
audit process reveals errors in the draft financial statements,
they are raised with the entity. If the errors are considered
material, adjustments are requested.
The 2008 results are comparable to the previous year, however
the quality control over reporting in most TAFEs and ARMBs could
improve.
1.2.3 Financial performance
Universities as a group generated a total operating surplus of
$27 million. This is a decrease of $337 million or 93 per cent from
2007.
The significant reduction in the result is due mainly to $356
million of impairment losses on investment assets.
TAFEs generated a collective operating surplus of $53 million,
which was a reduction from 2007 of $26 million or 33 per cent.
Generally, operating expenses grew faster than revenues in 2008.
TAFEs were also affected by the global financial crisis where
impairment losses on investments accounted for $15 million of the
decline in the operating surplus.
Alpine resorts collectively generated a combined operating
surplus of $533,000, a decrease of $3.3 million or 86 per cent from
2007. All the alpine resorts recorded an operating deficit, except
Falls Creek, which recorded an operating surplus.
1.2.4 Impact of global financial crisis
The current global financial crisis has significantly reduced
the values of equities traded on share markets during 2008. Some
Victorian universities and TAFE institutions hold substantial
investment portfolios of Australian and international equities.
A significant issue this year was the impairment losses on
investment assets. In total, $371 million of impairment losses were
expensed by the higher education and vocational training sector.
The following entities recorded impairment losses:
- four universities – The University
of Melbourne, Monash University, Swinburne University of
Technology and University of
Ballarat
- three university controlled entities –
Melbourne Business School Ltd, Monash
University Foundation and RMIT
Foundation
- two TAFEs – Holmesglen
TAFE and East Gippsland TAFE.
Consistent with accounting standards, these losses have been
recognised as expenses in their income statements, and severely
affected their operating results. The impairment losses are due to
the general deterioration in equities invested in the sharemarket,
and are broadly consistent with the market’s decline in 2008.
1.2.5 Increase in international student fees
The trend for the past three years for universities and TAFEs
shows a steady growth in international student fees. The growing
contribution from international student fees increases the exposure
for both universities and TAFEs to the increasingly competitive
market for international students.
1.2.6 Financial sustainability
Financial sustainability information is gained from the analysis
of five selected indicators – the underlying result, level of
liquidity, debt to equity ratio, self-financing capability and the
level of capital replacement.
For higher education and vocational training entities, the
findings are similar to 2007. Most universities and TAFEs are in a
healthy condition.
While based on only three years data, the ‘self-financing ratio’
shows the weakest results of the indicators, with the entities
having limited ability to fund new assets from operating cash
flows. While TAFEs are generating small operating surpluses, they
do not generate sufficient own-source revenues to be able to build
up enough retained earnings to finance future asset replacement.
Under the current government funding approach, depreciation
expenses are generally not funded until capital requirements are
established. However, the TAFE boards are held fully accountable
for financial management and performance.
In respect of the Alpine resorts, financial sustainability
findings are similar to 2007 with Lake Mountain
and Mt Baw Baw in the weakest condition. These
ARMBs are heavily reliant on snow-related revenue and do not have
enough capacity to replace assets and fund new assets.
Bush Fires
The future operating results of Lake Mountain
and Mt Baw Baw will be affected by the recent bush
fire events. As the areas surrounding the smaller Alpine resorts
have suffered significant fire damage, this may affect their
ability to generate revenue from visitor fees.
In addition, Lake Mountain has lost assets from
the bush fires and will need to acquire replacement assets in time
for the 2009 snow season. The ARMB has yet to fully quantify the
value of these assets.
1.2.7 Effectiveness of internal controls
Internal controls should provide reliable, accurate and timely
reporting. The audit of financial reports includes an examination
of the internal control framework that relates to financial
reporting. Where significant control weaknesses or breakdowns are
identified these matters are reported to the entity’s
management.
This year our audits confirmed that entities’ systems of
internal control were overall sufficient to produce reliable
financial reports. The most significant commonly identified control
weaknesses were inadequacies in:
- preparation and review of reconciliations
- financial policy and procedure manuals
- management of information system (IS) access controls.
1.2.8 Investment management
This year as part of our cyclical approach to reviewing
significant aspects of financial management, we carried out a
review of investment management at universities and TAFEs. The
higher education and vocational training sector had $2.5 billion in
investments at 31 December 2008.
Best practice guidelines on investment policies have been
published in Queensland[1] and Western Australia[2]. These
guidelines have been used to develop criteria for assessing
investment management practices in Victorian universities and
TAFEs.
Our review found elements of the best practice guidelines were
not included in the majority of investment policies reviewed,
including:
- requirements for the governing body to actively monitor the
performance of their investments
- criteria that would trigger liquidation of their
investments
- criteria for the selection and removal of external investment
managers.
1.3 Key recommendations
These recommendations follow from the key findings outlined
above.
1.3.1 Higher education and vocational training
- Holmesglen TAFE should
prepare and publish their audited performance statement in their
annual report. (Recommendation: 2.1)
- Entities with material errors in their
draft financial statements, and those unable to achieve the
legislated timeframes, should adopt better practice initiatives for
financial reporting. (Recommendation:
2.2)
- Entities should assess their policies and
procedures against the commonly identified weaknesses within
internal and information system control environments and implement
any required changes so that their controls are operating in a
reliable and cost-effective manner. (Recommendation:
2.3)
- Universities and TAFEs should have a
current investment management policy, which is approved by the
governing body, and reviewed at least annually against the best
practice guidelines. (Recommendation
2.4)
- Governing bodies should at least annually
review the quality of reports received. (Recommendation
2.5)
- Investment policies should state the role,
function and controls in relation to the engagement of external
investment managers. (Recommendation
2.6)
1.3.2 Alpine resorts
- Each board should determine and monitor
the long term implications of financial sustainability, as there
are significant challenges for the smaller ARMBs.
(Recommendation 3.1)
- Each board should monitor the
sustainability of its revenue and expenditure policies, and model
the affect of proposed changes to these policies.
(Recommendation 3.2)
- The Lake Mountain and
Mt Baw Baw ARMBs should make further contributions
to the legislatively required ‘snow drought’ and ‘capital’
funds.
(Recommendation 3.3)
1.4 General
The total cost of preparing and printing this was $185 000.