Technical and Further Education Institutes: 2016 Audit Snapshot

Tabled: 7 June 2017

3 Internal controls

Effective internal controls help entities to meet their objectives reliably and cost‑effectively. Strong internal controls are a prerequisite for delivering sound, accurate and timely external and internal financial reports.

In our annual financial audits, we consider the internal controls relevant to financial reporting and assess whether entities have managed the risk that their financial reports will not be complete and accurate. Poor internal controls make it more difficult for management of entities to comply with relevant legislation, and increase the risk of fraud and error.

3.1 Assessment of internal controls

To the extent we test them, we found that the internal controls at technical and further education (TAFE) institutes for financial reporting were adequate for ensuring that their financial reporting is reliable. However, we found some instances where important internal controls need to be strengthened, and financial reporting matters need to be addressed.

During our 2016 audits, we identified 25 internal control weaknesses and financial reporting issues across the 11 TAFEs, excluding Federation Training. This is a small number of issues and is a positive outcome for the sector.

We communicated all internal control weaknesses and financial reporting issues identified at TAFEs to their management and audit committees. Figure 3A shows the risk rating of the issues we identified, excluding the seven low-risk issues we reported. Low-risk issues are normally minor control weaknesses or opportunities to improve existing processes or internal controls. We define our risk ratings in Appendix C.

Figure 3A
Reported issues by area and risk rating

Area of issue

Risk rating

Extreme

High

Medium

Total

Property, plant and equipment

1

4

5

Expenditure/accounts payable

2

2

Financial reporting

2

2

Governance

1

1

2

Information technology (IT) controls

1

3

4

Revenue/receivables

2

2

Reconciliations

1

1

Total

3

15

18

Source: VAGO.

Common issues across the sector related to:

  • identification and recording of property, plant and equipment at some TAFEs
  • IT controls, which are needed to protect computer applications, infrastructure and information assets from threats to security and access.

Some of the issues we reported related to poor access controls, and weaknesses in system user security.

Status of matters raised in previous audits

As part of the financial audit process, we monitor internal control weaknesses and financial reporting issues identified in previous audits to ensure they are promptly resolved. We provide information to TAFE management and their respective audit committees about the status of these issues.

Figure 3B shows the number of internal control weaknesses and financial reporting issues raised in previous audits, with the resolution status by risk.

Figure 3B
Prior year issues by resolution status at 31 December 2016

Status of prior period issue

Risk rating

Extreme

High

Medium

Total

Resolved

1

4

10

15

Unresolved

3

2

5

Total

1

7

12

20

Source: VAGO.

Twenty issues remained open at the start of 2016. Encouragingly, 75 per cent of these matters were resolved during 2016, including one extreme risk relating to a breach of the Standing Directions of the Minister for Finance in the Financial Management Act 1994, regarding delegations.

TAFEs are responding to the issues in our management letters, and as a result are strengthening the effectiveness of their internal control environment and financial reporting.

3.2 Asset maintenance

Each year we select one area of internal control and perform a more detailed review of the controls and related operating environment. For our 2016 audits we focused on asset maintenance, which underpins the value and useful lives assigned to assets.

TAFEs need well maintained assets to help them deliver educational services to the community efficiently and effectively. They also need to ensure that the assets they use are safe, in line with a legal and expected standard.

At 31 December 2016, the TAFE sector owned a portfolio of property, plant and equipment assets valued at $1.95 billion. Seventy per cent of these assets require ongoing maintenance, and include buildings, plant and equipment, classroom fitout facilities and IT equipment.

Asset maintenance involves continuously monitoring the state of an asset, and undertaking works to keep it in a pre-determined state. To do this, each TAFE should have a sound asset maintenance framework in place.

The key elements of an effective asset maintenance framework are detailed in Figure 3C. We created Figure 3C from the following sources:

  • Sustaining Our Assets policy, Department of Treasury and Finance, 2012
  • Guidelines for Developing an Asset Management Policy, Strategy and Plan, Department for Victorian Communities, 2004
  • Better Practice Guide on the Strategic and Operations Management of Assets by Public Sector Entities, Australian National Audit Office, 2010
  • Asset Management Accountability Framework, Department of Treasury and Finance, 2016.

Figure 3C
Elements of an asset maintenance framework

Component

Key elements

Asset management policies and strategies

An asset maintenance strategy is in place that aligns with business strategy and comprises:

  • a maintenance plan
  • regular reviews
  • a funding plan
  • a risk management plan
  • appropriate reporting to board and executive management.

An asset maintenance policy exists that includes:

  • regulatory requirements
  • roles and responsibilities—including authorisation requirements
  • an approach to asset maintenance and replacement—including when maintenance is required and what procedures need to be undertaken
  • the requirement to maintain an asset register
  • systems and procedures for measurement of asset performance
  • methods of disposal
  • adequacy of maintenance spending
  • life cycle maintenance and costing—including future requirements
  • funding requirements
  • contingency plans for maintenance of assets after natural disasters.

Management practices

  • Adhering to asset maintenance policies and relevant legislative requirements
  • Evaluating asset performance, through assessment of physical condition, utilisation, functionality and financial performance
  • Periodic review of policies, practices and processes
  • Comprehensive review of assets held, condition of significant assets, and the replacement cycle
  • Ranking and evaluating acquisition proposals to determine the most effective use of limited capital funding
  • Comprehensive reporting to the board and executive

Governance and oversight

  • Monitoring compliance with policy requirements
  • Reviewing and approving the asset management strategy
  • Assessing the risks associated with asset maintenance
  • Engaging internal audit to review policy compliance and practices

Source: VAGO

Having an appropriate asset maintenance framework in place helps TAFEs plan and undertake targeted asset maintenance at the appropriate time for each asset. It also helps TAFEs comply with their legislative framework.

Under the TAFE Commercial Guidelines—which help TAFEs to comply with section 5.2.1 of the Education and Training Reform Act 2006—TAFEs must have an asset management plan in place. The plan needs to provide general guidance on the acquisition, operation and maintenance, renewal and disposal of assets.

Identifying the necessary level of investment in assets is important, but having enough money to meet this investment can be a challenge. This has been particularly so in the TAFE sector, which has faced significant financial challenges over the past three financial years. We discuss the spending on asset maintenance and the maintenance gap in Part 4 of this report.

3.2.1 TAFE asset maintenance frameworks

We observed many better practice components of an asset maintenance strategy in place at TAFEs. All TAFEs with asset maintenance strategies had incorporated them into their strategic plans. The linking of these key documents means capital works plans take into account the life of each asset, its potential maintenance needs and the time frame for replacement.

However, four TAFEs did not have an asset maintenance strategy in place during 2016. Of those TAFEs that did have asset maintenance strategies, we found that some did not have all elements of better practice.

The common weaknesses across the plans included:

  • aspects of asset maintenance procedures not specified, such as who conducts and approves maintenance
  • qualifications and experience not documented of those assessing asset maintenance requirements
  • no contingency plans for maintenance of assets after natural disasters
  • the level of accepted asset maintenance and associated risk not stated.

We noted that the asset maintenance strategies in place were focused on the short to medium term. These plans typically looked at time frames of five years or less. The Department of Treasury and Finance Asset Management Accountability Framework requires an asset maintenance strategy to incorporate plans for the short term (one to three years), medium term (four to nine years) and long term (10+ years). Given that most depreciating assets have a useful life of between five and 50 years, a long-term plan would enable TAFEs to make more accurate decisions about their asset maintenance and replacement needs.

All TAFEs have developed an asset maintenance program outlining the level of work to be achieved in a year. The actual delivery and spending against this program is regularly reported to management. At 10 TAFEs, the asset maintenance program contains detailed current information on asset condition. This is updated at least yearly, which assists with asset planning.

Other components of better practice we found at TAFEs included the existence of a current asset register and regular reporting to the board.

3.2.2 Governance and oversight

Management oversight of a TAFE's asset maintenance strategy, plan and spending is essential for ensuring that asset performance remains at appropriate levels to support the TAFE's goals.

All 12 TAFEs report information on asset maintenance to management, their boards and audit committees. At five TAFEs, this reporting is limited to just the amounts spent on asset maintenance. The frequency and detail of the reporting varied significantly between TAFEs.

Asset maintenance reporting could be improved by:

  • better monitoring and reporting of compliance with policy requirements, including acquisition, operation and disposal policies
  • periodically engaging internal audit to review compliance and practice
  • including long-term maintenance requirements and progress against those requirements.

A lack of system support to capture, record and report on asset planning and maintenance contributes to limitations in reporting. Although five TAFEs use asset maintenance software, only one was able to provide us with:

  • maintenance expenditure per asset
  • ranking of assets based on risk
  • condition assessment information for each asset.

For those TAFEs without asset maintenance software, manual reporting on asset performance such as budgeting and tracking expenditure against individual assets, condition assessments and life cycle information is time consuming and difficult.

DET is aware of this gap in the sector, and is currently considering options as part of its work on TAFE asset management.

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