Victorian Auditor-General’s report
25 May 2011

Tertiary Education and Other Entities: Results of the 2010 Audits 
Audit summary
Background
This report covers the results of the annual audit of 113 entities from the tertiary education, sustainability and environment, health, planning and community development and local government sectors, with a financial year end other than 30 June 2010. It focuses principally on 105 tertiary education sector entities, comprising the eight public universities and their 63 controlled entities, 14 technical and further education (TAFE) institutes and their 12 controlled entities, six training entities and the two entities they control. 
The report informs Parliament about significant issues arising from the audits of financial and performance reports and augments the assurance provided through audit opinions included in the respective entities’ annual reports. 
The report comments on the effectiveness of internal controls and, for the tertiary education sector, controls over creditors and the management of employee leave. It also comments on the financial sustainability of universities, TAFE institutes and alpine resort management boards (ARMBs), and their financial management and reporting activities. 
Overall conclusion
Parliament can have confidence in 107 of the 110 financial reports and all performance reports that received clear audit opinions.
The internal control structures over financial reporting within audited entities were adequate, that is they enabled production of accurate, complete and reliable information for reporting. However, controls over creditors and management of employee leave for universities and TAFEs could be strengthened by developing comprehensive policies, introducing more effective management practices, and enhancing compliance monitoring.
While financial reporting processes, overall, were adequate, the consistency and quality of financial reporting would improve if entities prepared shell financial statements early, undertook rigorous quality control and assurance procedures and prepared materiality assessments.
Overall the financial sustainability risk for the tertiary education and alpine resort sectors is low, consistent with our 2009 assessment.

Findings
Audit opinions and quality of financial reporting
Audit opinions issued on financial reports
Independent audit opinions add credibility to financial reports by providing reasonable assurance that the information reported is reliable. 
A ‘clear’ audit opinion means that the financial statements present fairly the transactions and balances for the reporting period in accordance with the relevant legislative reporting framework. A ‘qualified’ audit opinion means that the financial report is materially different to the requirements of the relevant reporting framework or accounting standards, and is less reliable and useful as an accountability document.
At 30 April 2011, audit opinions on 110 of the 113 entities’ financial reports had been issued (111 of 116 at 30 April 2010). Of the three remaining, two are yet to be finalised and one financial report was not required to have been finalised at the time of preparing this report. Of the 110 opinions issued, 107 were clear and three were qualified, compared to 108 clear and three qualified at 30 April 2010. 
Figure A shows which entities were qualified at 30 April 2011 and why.
Figure A
Qualified audit opinions issued at 30 April 2011
Entity	Status of qualification	Reason for qualification	
Deakin University	Continuing	Non-reciprocal research and capital grants were recognised as a liability, rather than as income, contrary to the requirements of AASB 1004 Contributions.	
The University of Melbourne	Continuing		
Anti-Cancer Council of Victoria	Continuing	The inherent risk involved with the collection of cash donations cannot be reasonably mitigated by further internal controls. Therefore, we were unable to obtain evidence as to the completeness of their revenue. 	
Note: AASB is Australian Accounting Standards Board.
Source: Victorian Auditor-General’s Office.
In certain circumstances an audit opinion may draw attention to, or emphasise, a matter relevant to the users of an entity’s financial report which does not warrant a qualification. 
For 2010, audit opinions on the financial reports of Monash Educational Enterprises, Monash South Africa Ltd, Driver Education Centre Australia Pty Ltd and DECA Ltd emphasised each entity’s reliance on the continuing financial support from its parent entity to sustain its operations. Without this support, the ‘going concern’ assumption used as the basis of the preparation of the financial reports, would be invalid.  
Audit opinions issued on performance reports
Fourteen TAFEs, four universities with TAFE divisions, and two training entities have been requested to prepare annual performance reports. These reports show results against performance indicators. They are audited by the Auditor-General and included in the entities’ annual reports. 
The requirement to prepare performance reports is not part of the existing legislative performance reporting framework. More than three years after the initial request for their performance indicators to be disclosed in a performance report, reliance continues to be placed on the former Department of Innovation, Industry and Regional Development executive memorandum for such information to be produced, and the requirement has no legislative basis.
For 2010 all audit opinions on the performance reports were clear.
Quality of reporting
The quality of an entity’s financial reporting can be measured by the accuracy and timeliness of the preparation and finalisation of the financial report. We found that overall, the financial report preparation processes of universities, TAFEs and ARMBs are adequate as they produce accurate, complete and reliable information. They could be improved by: 
·	preparing and providing timely shell financial statements so that issues with disclosure requirements can be identified and resolved early
·	performing rigorous quality control and assurance to improve the accuracy of the draft financial report
·	preparing a materiality assessment including assessments against quantitative and qualitative thresholds to identify potential errors in the financial statements. 
Recognising the importance of financial reports in providing accountability for the use of public monies, entities should prepare and publish their financial information on a timely basis. The later the reports are produced and published after year-end, the less useful they are for stakeholders and for informing decision-making. 
The average time taken by tertiary education entities to finalise their financial statements improved from 11.6 weeks in 2009 to 11.4 in 2010. ARMBs also reduced the average time to finalise their statements from 10.5 weeks in 2009 to 9.8 in 2010.  
Seventy-eight per cent (88 of 113) of the audited entities finalised their financial reports within 12 weeks of year end, up from 69 per cent in 2009. Specifically:
·	82 of the 105 tertiary education entities or 78 per cent achieved the time frame—a significant improvement compared to 2009 when only 68 per cent achieved the time frame
·	all five ARMBs and the Anti-Cancer Council of Victoria finalised their statements within 12 weeks, consistent with the result for 2009.
Financial results
Universities had a total operating surplus of $481 million in 2010, down $28.4 million (or 5.6 per cent) from 2009 due to expenses growing at a faster rate than revenues. Student fee revenue rose $124 million or 7.2 per cent from 2009 to $1.8 billion in 2010 and government funding rose by $246 million or 7.5 per cent from 2009 to $3.5 billion in 2010.
TAFEs had a total operating surplus of $149 million for the 2010 year, up $18.4 million (or 14.1 per cent) from 2009. This was mainly a result of increased government capital funding of $47 million or 39.6 per cent in 2010.
The five-year trend in international student fees for universities showed an increase of $493 million (or 62 per cent) to $1.3 billion in 2010, and for TAFEs an increase of $68 million (or 118 per cent) to $126 million in 2010. The growth in international student fees heightened the risk for universities and TAFEs arising from the vagaries of the competitive market for such students. 
Alpine resorts collectively made an operating surplus of $6.3 million, up $3.6 million or 128.2 per cent from 2009. Revenue from visitor fees rose by $1.7 million or 17.3 per cent from 2009, mainly due to the longer snow season in 2010.  
Bushfire relief funding of $1.6 million, insurance recoveries for assets destroyed by fires of $3.9 million, and support payments from the Department of Sustainability and Environment of $2.7 million contributed to the alpine resort sector’s surplus. Without these, the sector’s operating result would have been a deficit of $1.9 million for 2010.
Financial sustainability
The financial sustainability of the eight universities, 14 TAFEs, and five ARMBs was analysed to determine their capacity to meet current and future expenditure as it falls due. These entities must be able to absorb foreseeable changes and the effect of financial risks materialising, without significantly changing their revenue and expenditure policies.
Financial sustainability indicators and assessments can indicate departures from the norm that warrant management attention. To form a definitive view of any entity’s financial sustainability requires a holistic analysis that moves beyond financial considerations to include the entity’s operations and environment.
The five financial sustainability indicators, analysed for the five years from 2006 to 2010 were:
·	the underlying result
·	liquidity
·	debt-to-equity
·	self-financing
·	capital replacement. 
A summary of the results of our analysis of the 27 entities is provided in Figure B.
Figure B
Tertiary education and alpine resort sectors: Results of 2010 overall financial sustainability risk assessment 
Sector	High	Medium	Low	
Tertiary education sector				
Universities	0	2	6	
TAFEs	0	0	14	
Total tertiary education sector	0	2	20	
Total alpine resort sector	1	1	3	
Source: Victorian Auditor-General’s Office.
Overall the financial sustainability risk for the tertiary education and alpine resort sectors is low, consistent with our 2009 assessment.
Consistent with previous years, the analysis shows:
·	two universities were assessed as medium risk—there is a risk that they may not be generating sufficient cash from operations to fund new assets and replace existing assets over the long term
·	one ARMB was assessed as high risk and another as medium risk—these resorts show operating deficits, low liquidity and low levels of investment in assets.
All TAFE institutes were assessed as low risk in 2010. In 2009, two TAFEs were assessed as medium risk due to the results of their assessment against the self‑financing indicator. In 2010, those TAFEs received additional capital grant funding which resulted in their assessment moving from medium risk to low. 
Potential for the funding model to affect operational performance
Over and above the analysis of financial sustainability indicators, trends and risks, the ability of management and the governing body to make decisions necessary to affect an entity’s operations needs to be taken into account in assessing the entity’s performance. In the case of public sector entities, notwithstanding the application of transaction neutral Australian Accounting Standards and accrual accounting, the funding model does not progressively fund entities for the depreciation of their assets. 
The funding model allocates capital grants strategically across the sector rather than progressively to each entity. This means that funds for replacing assets are not provided until such time as the government considers replacement is appropriate given its strategic review of the sectors needs and other spending priorities. Nevertheless, the governing board of each entity is accountable for the entity’s financial management and performance. 
Therefore, the capital funding model limits the ability of governing bodies and management to exercise discretion or make decisions around asset maintenance and replacement. This could have implications for holding them to account for an entity’s operational performance. 
Internal controls
General internal controls
Effective internal controls help entities reliably and cost effectively meet their objectives. Reliable internal controls are a prerequisite for the delivery of reliable, accurate and timely external and internal reports.
The internal control structures for all entities audited were adequate for producing reliable, accurate and timely financial reports. However, entities commonly could strengthen their internal controls by:
·	reviewing masterfile standing data changes
·	preparing and reviewing key account reconciliations 
·	documenting and/or reviewing core financial policies and procedures. 
Controls over creditors 
Universities and TAFEs owed creditors $174 million at 31 December 2010 ($156 million at 31 December 2009). 
We examined controls over creditor management at universities and TAFEs and found they could be improved as:
·	42 per cent of TAFEs (six of 14) did not have a creditor management policy
·	63 per cent of universities (five of eight) and 50 per cent of TAFEs (seven of 14) could not determine the average days elapsed from invoice date to payment, and therefore, were unable to effectively manage and monitor their payment performance
·	all universities and 79 per cent of TAFEs (11 of 14) did not use external benchmarks to review the reasonableness of the age of their creditor balances 
·	88 per cent of universities (seven of eight) and 93 per cent of TAFEs (13 of 14) did not maintain and report performance statistics about the management of creditors to their governing board
·	38 per cent of universities (three of eight) and 71 per cent of TAFEs (10 of 14) had not included risks associated with the management of creditors and payment processing in their risk register. 
Management of employee leave
In 2010, 58 per cent of total spending by universities and TAFEs was on salaries and related costs. In addition, at 31 December 2010, universities had employee leave liabilities of $640 million ($589 million at 31 December 2009), and TAFE employee leave liabilities were $110 million ($105 million at 31 December 2009). 
We examined controls over the management of employee leave by these entities and found that they could be improved as:
·	25 per cent of universities (two of eight) and 71 per cent of TAFEs (10 of 14) had not established leave management policies
·	50 per cent of universities (four of eight) and 43 per cent of TAFEs (six of 14) had not benchmarked leave trends and balances against external benchmarks
·	governing bodies at 50 per cent of universities (four of eight) and 64 per cent of TAFEs (nine of 14) had not conducted a review of leave practices and processes
·	75 per cent of universities (six of eight) and 50 per cent of TAFEs (seven of 14) do not provide their governing body with reports on leave performance outcomes
·	75 per cent of universities (six of eight) and 86 per cent of TAFEs (12 of 14) have not commissioned internal audits of their leave management policies and practices during the past three years.
Recommendations
Recommendation	Page	
That performance reporting for the TAFE sector be elevated to legislative status.	23	
That universities and TAFEs continue to refine their financial reporting processes by preparing shell financial statements and conducting rigorous quality control and assurance procedures. 	23	
That universities, TAFEs and ARMBs assess their policies and processes against the commonly identified internal control weaknesses to assure they are operating in a reliable and cost‑effective manner.	71 & 90	
That governing bodies and management of universities and TAFEs improve the controls over creditor management, by:
·	establishing comprehensive creditor management policies and procedures and reviewing them periodically
·	using external benchmarks to assess creditor management performance
·	reviewing the ageing of creditors on a regular basis
·	cleansing the vendor masterfile at least annually
·	requiring comprehensive creditor payment and aged analysis reports, including benchmarked payment performance information, to be regularly provided to governing bodies 
·	engaging internal audit to periodically review creditor management practices and related policy compliance.	71	
That governing bodies and management of universities and TAFEs improve the controls over leave management, by:
·	establishing comprehensive leave management policies and procedures and reviewing them periodically 
·	introducing comprehensive leave monitoring arrangements, including benchmarking leave performance outcomes and costs
·	reviewing practices and processes periodically
·	requiring comprehensive leave management reports, including action plans for any adverse movements identified, to be provided to governing bodies
·	engaging internal audit to periodically review leave management practices and related policy compliance.	72	
That universities and TAFEs establish processes that encourage staff to take their recreation leave entitlements at planned intervals to reduce leave liabilities and maintain a healthy workforce. 	72	
That universities and TAFEs benchmark sick leave absences against industry averages to enable timely decision-making to reduce the impact on operational performance. 	72	
Submissions and comments received
In addition to progressive engagement during the course of the audit, in accordance with section 16(3) of the Audit Act 1994 a copy of this report, or relevant extracts from the report, was provided to all universities, TAFEs, ARMBs, the Department of Treasury and Finance, the Department of Education and Early Childhood Development, and the Department of Sustainability and Environment with a request for submissions or comments.
Agency views have been considered in reaching our audit conclusions and are represented to the extent relevant and warranted in preparing this report. Their full section 16(3) submissions and comments however, are included in Appendix E.