In the technical and further education (TAFE) sector, there are 12 state-owned TAFE institutes, which control a further 16 entities that operate in the vocational education and training (VET) sector. We conduct the financial audits of all of these 28 entities. This report outlines the results of, and our observations from, these financial audits for the year ended 31 December 2016. We also discuss the performance reports that TAFEs prepare and we audit, and analyse the financial results and outcomes for the 12 TAFEs.
Financial and performance reporting are generally sound. Following a period of financial challenge, our assessment indicates that financial outcomes, such as net operating results, are improving.
We issued clear opinions on the 2016 financial reports and performance reports that 11 TAFEs provided to us to audit. Our unmodified opinions mean that users can have confidence in these reports.
We have finalised the audit of the 2014 and 2015 financial reports of Federation Training. We disclaimed their 2014 financial report—in effect we gave no opinion on the transactions and balances in that report.
Management at Federation Training have worked to address issues identified in our audit of their 2014 statements. For 2015 they resolved all issues except those relating to their student management system. Although this is a positive outcome, it meant we were unable to get the evidence we needed to form an opinion on the 2015 numbers for student revenue, debtors, doubtful debts and revenue in advance. As a result, we issued a qualified audit opinion on their 2015 financial report.
We have begun our audit of their 2016 financial report and we expect the 2017 Federation Training financial report to meet the time frames in the Financial Management Act 1994.
To the extent we tested them, the internal financial controls at the TAFEs were adequate for reliable financial reporting. We identified a small number of new control issues in our 2016 financial audits, and most of the issues we raised in prior years had been followed up and resolved.
The short-term financial health of the TAFE sector is improving. Their net operating results over the past two financial years have improved, and there is more liquidity across the sector as a whole.
The improvement is largely due to the increase in government grants to the sector in 2015 and 2016. TAFEs received $278.6 million in government grants in 2016, up from a low of $74.6 million in 2014.
Falling student numbers over these years has meant that most of their other sources of revenue, including student fees and government contestable funding, have declined. The increase in government grant funding has more than offset the decline in other sources of revenue, allowing the TAFE sector to be more financially stable.
However, there are opportunities for the TAFEs to be more efficient and effective. The TAFEs' performance reports show that most are not achieving the ratio of training revenue to staff costs that they are aiming for.
The TAFE sector has a challenge to fund asset maintenance and renewal for their large asset portfolios. This year we focused on TAFE management, governance and oversight of their asset maintenance.
Eight TAFEs had asset maintenance strategies in place, although there were areas where these strategies could be improved. In particular, the life span of these strategies was short when compared to the life cycle of the TAFEs' major infrastructure assets and the requirements of the Department of Treasury and Finance's Asset Management Accountability Framework. Four TAFEs do not have an asset maintenance strategy.
All 12 TAFEs report to management, boards and audit committees on asset maintenance, although the frequency and detail vary. Five TAFEs report only on the amount they spend, which makes it difficult to have sound oversight of asset maintenance.
TAFEs' ability to report on asset maintenance in more detail is limited because they do not have systems in place to capture, record and report on asset planning. Only five TAFEs have asset maintenance software, and only one of these five is able to provide detail on maintenance and condition at an individual asset level.
In their oversight role for the sector, the Department of Education and Training is doing work on asset maintenance in TAFEs. Their analysis shows that the sector is spending on average 0.7 per cent of total asset replacement value annually on maintenance. This is significantly lower than the benchmark of 2–2.5 per cent considered necessary to maintain asset condition.
Our capital replacement indicator shows a decline in the amount spent on assets when compared to depreciation from 2012 to 2015. There has been an improvement in this indicator in 2016, but this is due to spending on specific projects that received significant government funding.
An ongoing lack of asset maintenance creates a maintenance backlog that can affect asset condition. We see this as an emerging risk for the sector. The TAFEs' self‑assessments of asset condition have confirmed that there are some present risks for their asset portfolios.
While seven TAFEs' asset portfolios have been assessed as being in a good condition overall, there are five whose portfolios have been rated as in fair or poor condition. Government funding of $41.6 million for asset maintenance will be provided to TAFEs in 2017 to address these issues.
We recommend that technical and further education institutes:
1. develop asset maintenance strategies if they do not already have them (see Section 3.2.1)
2. expand their asset management strategies to include short-term (one to three years), medium-term (four to nine years) and long-term (10+ years) plans (see Section 3.2.1)
3. work with the Department of Education and Training to identify a suitable software solution to effectively capture and record asset information to support strategic asset planning (see Section 3.2.2).
Responses to recommendations
We have consulted with the Department of Education and Training and the 12 TAFEs, and we considered their views when reaching our audit conclusions. As required by section 16(3) of the Audit Act 1994, we gave a draft copy of this report to those agencies and asked for their submissions and comments.
The following is a summary of those responses. The full responses are included in Appendix A.
The Department of Education and Training and Federation Training responded, and accepted the recommendations.