Universities: 2016 Audit Snapshot

Tabled: 7 June 2017

Audit overview

There are eight public universities in Victoria, which control a further 51 entities. We conduct the financial audits of all of these 59 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 frameworks in place for identifying and managing the risk of fraud, and comment on the financial sustainability of the sector.

Conclusion

Financial sustainability, reporting and internal controls in the university sector are generally sound. There are opportunities to build on what has been achieved and improve further.

Findings

Audit opinions

We issued audit opinions to 55 of the 59 university sector entities on their financial reports for the year ended 31 December 2016. We had yet to complete our audits of the remaining four entities at the date of this report.

All but three of our opinions were clear. We qualified the 2016 financial reports of Deakin University, the University of Melbourne and the Australian National Academy of Music (ANAM). We also qualified the 2015 ANAM financial report after our report Universities: 2015 Audit Snapshot was tabled in Parliament.

In our opinion, the accounting for grant revenue in these four financial reports does not comply with the requirements of Australian Accounting Standards.

Revenue recognition is a longstanding issue in the university sector. New accounting standards, which adopt a different approach to revenue recognition and measurement, are due to apply in coming financial years. This is an opportune time for the sector to review and realign their revenue accounting policies, as they will need to do a significant amount of work to be able to comply with these new standards.

Internal controls

To the extent we tested them, we assessed the internal financial controls at the universities to be adequate for reliable financial reporting. We raised 47 internal control issues across the eight universities. Most of these issues related to their information technology environments.

Universities are taking corrective action on the issues we report to them, with 80 per cent of issues from prior years resolved in 2016.

This year we conducted a focused review of the fraud control frameworks at universities—an important element of their internal control environment.

The universities take a comprehensive view on what constitutes fraud, consistent with Australian standards. They have up-to-date and sound policies and procedures in place to manage their fraud risks.

Most had in place all of the key elements we would expect to see in an effective fraud control framework, but there were some important components missing:

  • none of the eight universities has a documented fraud control plan in place
  • no university has training in place to ensure that contractors and volunteers are aware of their codes of conduct and policies relating to fraud
  • most universities have not complied with their legislative reporting requirements for reporting fraud to the Auditor-General.
Financial sustainability

The university sector as a whole remains financially strong. Assets in the sector totalled $20.8 billion at 31 December 2016 compared with liabilities of $4.8 billion.

The universities have large cash and investment holdings and relatively low debt. The composition of their balance sheets has shifted over the past five years, with universities investing their surplus money in more long-term instruments for better returns.

At the same time, universities have taken on more debt to fund capital investment. This has caused the short-term liquidity ratio for the sector to decline, although the ratio remains above one, which means the sector has enough liquid assets to meet current obligations as they arise.

The universities' strong financial performance is underpinned by year-on-year growth in student enrolments, which has led to revenue growth. However, the net result margin at the sector level is declining. This indicates that universities could do more to identify opportunities to improve their cost‑effectiveness and efficiency.

To cater for the growth in enrolments, the rate of capital investment in the sector has grown since 2014. The sector has taken advantage of low interest rates, and has increased its borrowings to fund capital projects.

Despite this, we noted that for three of the eight universities the expenditure on renewing and maintaining their physical assets in 2015 and 2016 was lower than the assets' decline in value through use. If this trend continues over a longer term, those universities face an increased risk that their assets may not be in a suitable condition to meet operational needs.

Recommendations

We recommend that universities:

1. prepare for the new accounting standards for revenue by:

  • working together to share technical advice and implementation issues
  • updating their policies, process and systems as required (see Section 2.2)

2. strengthen their fraud risk management by:

  • documenting a fraud control plan as part of their risk management framework
  • making contract staff and volunteers aware of their codes of conduct and policies on fraud through training
  • reporting all significant and systemic frauds to the Auditor-General as soon as they become known (see Section 3.2.2)

3. review their long-term plans for asset renewal and replacement to satisfy themselves they will be able to be maintained and replaced when needed (see Section 4.2).

Responses to recommendations

We have consulted with the Department of Education and Training and the eight public universities in Victoria, 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 universities and asked for their submissions and comments.

The following is a summary of those responses. The full responses are included in Appendix A.

We received four submissions from the sector and a response from the Department of Education and Training. The Department of Education and Training and La Trobe University accepted our recommendations and provided details about how they will be addressed.

Deakin University and the Australian National Academy of Music do not agree with our interpretation of the nature of their revenue that led to their reports being qualified. This is discussed further in Part 2 of the report.

Victoria University highlighted that their liquidity ratio has decreased due to their change in investment strategy, which is consistent with our comments on the sector in Part 4.

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