Part 7: Results of tertiary education institution audits for 2009

Central government: Results of the 2009/10 audits (volume 1).

7.1
This Part provides some background information about tertiary education institutions (TEIs) and their operating environment. It sets out the results of our annual audits of TEIs for 2009.

7.2
The financial year for TEIs ends on 31 December each year. This aligns with their academic teaching year.

What is the tertiary education institution sector?

7.3
The New Zealand tertiary education system includes all post-school education and training, from university research and diploma and degree study courses to industry training. In 2009/10, government expenditure on tertiary education was about $2.8 billion (excluding GST).18 The tertiary education sector includes both public TEIs and private sector providers.

7.4
The Government sets policy and priorities for the tertiary education sector through its Tertiary Education Strategy and by designing the funding system.

7.5
There are 31 public tertiary education institutions providing training, education, and research services.19 We discuss the other agencies with a role in the tertiary education sector later in this Part.

7.6
The TEI sector has three distinct sub-sectors:

  • universities (eight);
  • institutes of technology and polytechnics (20); and
  • wānanga (three).

7.7
Each TEI sub-sector tends to describe itself as distinct from the other two TEI sub-sectors. The TEI sub-sectors have set up "umbrella" bodies to represent the interests of their member organisations, foster collaboration, and facilitate a point of contact with external stakeholders. TEIs also maintain relationships with stakeholders in their own right.

7.8
In addition, many TEIs have set up subsidiary organisations to carry out activities consistent with the functions and duties of a TEI, having decided that these activities can be more sensibly managed in a separate legal structure. For example, a number of TEIs have set up research companies, scholarship trusts, childcare centres, and student hostel accommodation centres. In 2009, there were 108 entities controlled or owned by TEIs.

7.9
TEIs are Crown entities20 independently governed by councils whose functions are set out in the Education Act 1989 (the Act). The precise constitution of each TEI council differs. For the 2009 financial year, each TEI council consisted of not fewer than 12 members nor more than 20 members. Most councillors are elected or appointed by stakeholder groups, although four are appointed by the Minister for Tertiary Education (the Minister). We note that the Education (Polytechnics) Amendment Act 2009 has changed the constitution of councils for institutes of technology and polytechnics, with effect from 1 May 2010. The constitution of these councils reduced from 12-20 members to eight. Four members are appointed by the Minister and the other four members by the institutes of technology and polytechnics, in keeping with their statutes.21

7.10
Unlike some other classes of Crown entities, TEIs are not directly accountable to a Minister. However, the Crown monitors the performance and viability of the TEI sector through the activities of the Ministry of Education (the Ministry), the Tertiary Education Commission (TEC), and the New Zealand Qualifications Authority (NZQA).

7.11
In certain circumstances, the Crown may actively support TEI councils to govern their institutions. Sections 195A to 195D and 222A to 222E of the Act set out a graduated set of formal intervention powers that allow for different levels of support, according to the TEIs' individual situations. The powers range from requiring a TEI to provide specified information about the operation, management, or financial position of the TEI at a given time to dissolving the TEI council and appointing a Commissioner to govern the TEI.

Roles and responsibilities of tertiary education institutions

7.12
Section 159ABA of the Act sets out the planning, funding, and monitoring framework of the tertiary education sector. This framework requires TEIs to prepare plans (currently called investment plans) that set out TEIs' responses to the Government's tertiary education priorities and to stakeholder needs. The investment plans establish the levels of Crown funding for TEIs. TEIs are also required to prepare an annual report that includes, among other information, a set of audited financial statements and statement of service performance.

7.13
Sections 180 and 181 of the Act set out the functions and duties of each TEI council. These functions include appointing a chief executive and ensuring that TEIs are managed in keeping with their investment plans. In discharging their functions, TEI councils must ensure that TEIs strive to attain the highest standards of excellence in education, training, and research, and operate in a financially responsible manner that ensures the efficient use of resources and the long-term viability of the TEI.

Other agencies with a role in the tertiary education institution sector

7.14
Three central government education agencies have a significant influence on the operation of the TEI sector.

Ministry of Education

7.15
The Ministry prepares strategic policy for the tertiary education sector, carries out relevant research and analysis, and monitors the performance and capacity of TEC and NZQA. The Ministry has little direct relationship with TEIs.

The Tertiary Education Commission

7.16
TEC interacts more directly with TEIs than the Ministry. TEC is responsible for leading the Government's relationship with the tertiary education sector. TEC implements the Government's Tertiary Education Strategy. TEC works with TEIs (and also the private providers of tertiary education) to agree investment plans that outline how they respond to the strategy.

7.17
TEC's chief executive has statutory responsibilities for monitoring and assessing the operations and ongoing viability of TEIs. To do this, TEC:

  • monitors TEIs' financial, educational,governance, and management performance;
  • advises the Minister on appointments to TEI councils; and
  • provides statutory intervention advice to the Minister and implements any decisions made by the Minister.

7.18
TEC meets regularly with TEIs to discuss their strategies, performance issues, and risks.

New Zealand Qualifications Authority

7.19
NZQA has responsibilities in both the secondary and tertiary education sectors. NZQA administers the National Certificates of Educational Achievement for secondary school students and is responsible for the quality assurance of non-university tertiary training providers.

7.20
NZQA has implemented a revised approach to quality assurance in the tertiary sector. There are three key components to the approach – regulatory arrangements, self-assessment, and external evaluation and review.

7.21
Further information about these quality assurance and monitoring processes can be found on NZQA's website.22

Recent changes to the operating environment

7.22
In recent years, significant policy changes have been implemented in the tertiary education sector and further work is under way to give effect to government policies. Changes already made affect the role of TEIs, the ways TEIs are funded, and the way quality assurance is carried out. Further changes will be implemented in the next five years, with an immediate focus in 2010 on the institutes of technology and polytechnics sub-sector. The focus of the ongoing reform process is to make tertiary education more relevant and more efficient, so that it meets the needs of students, the labour market, and the economy.23

7.23
In December 2009, the Government released its Tertiary Education Strategy 2010–2015. The strategy outlines the Government's priorities for the next five years and how it will achieve them.

7.24
The global economic downturn and recession in New Zealand provides the context for the Government's tertiary education year priorities for the next three to five years. The priorities are:

  • increasing the number of young people (aged under 25) achieving qualifications at levels four and above, particularly degrees;
  • increasing the number of Māori students enjoying success at higher levels;
  • increasing the number of Pasifika students achieving at higher levels;
  • increasing the number of young people moving successfully from school into tertiary education;
  • improving literacy, language, and numeracy and skills outcomes from levels one to three study;
  • improving the educational and financial performance of providers; and
  • strengthening research outcomes. 24

7.25
The Government has said that it is unable to provide significant funding increases to meet the growing demand for tertiary education. It has also said that it will need to move funding away from low-quality qualifications (such as those with low completion rates or poor educational or labour market outcomes) to fund growth in high-quality qualifications that "benefit New Zealanders" and contribute to economic growth.

7.26
To achieve the short-term priorities and long-term direction, the Government wants the tertiary education sector to:

  • target priority groups;
  • improve system performance; and
  • support high-quality research that helps to drive innovation.

7.27
Tertiary providers are expected to manage costs, seek efficiency gains, ensure that the qualifications they offer best meet student and employer needs, and explore additional sources of revenue. A key driver to improve the efficiency of public investment in tertiary education is to improve course and qualification completion rates.

7.28
In March 2010, the Government announced that it would introduce performance-linked funding to the tertiary education system from 2011. The TEC is currently consulting on options for making payments under the performance-linked funding framework and options for measuring the qualification completion (programme completion) indicator.25

7.29
Another development is mergers between some TEIs – for example, Tairawhiti Polytechnic and the Eastern Institute of Technology and Telford Rural Polytechnic with Lincoln University.26

7.30
In 2010, the TEC continued to work with institutes of technology and polytechnics that needed to make cost reductions to be viable from 2011.27

How tertiary education institutions are funded

Tertiary education institution revenue sources

7.31
TEIs receive revenue from government funding, research income, fees, and other sources. Government funding accounted for 50.6% of total TEI revenue in 2009. The breakdown by TEI sub-sector is shown in Figure 15.

Figure 15
TEI revenue sources in 2009
Government funding
$ million
Non-government funding
$ million
Total
$ million
Universities
1,297
1,663
2,960
Institutes of technology and polytechnics
648
373
1,021
Wānanga
169
27
196
Total
2,114
2,063
4,177

Source: TEC website – 2009 financial information for TEIs.

Tertiary education funding system

7.32
The Government determines both the total level of funding and the amount available for each tertiary education sub-sector.

7.33
Around 90% of tertiary education funding is distributed by bulk funding for three main purposes:

  • mainstream teaching and learning;
  • research; and
  • targeted training and industry training.

7.34
The remainder of the funding provides some capability funding for TEIs and scholarship funding for students.

Funds for mainstream teaching and learning

7.35
The two main sources of government funding for mainstream teaching and learning are as follows:

  • Student Achievement Component (SAC) funding is the core of the tertiary funding system. For 2009/10, $1.6 billion of SAC funding was allocated. It is the single largest source of revenue for universities, institutes of technology and polytechnics, and wānanga. It is also allocated to many private training providers and other tertiary education providers. It funds the cost of teaching and learning, and a wide range of mainstream qualifications from foundation to postgraduate level. The amount of SAC funding is agreed in investment plans for each TEI and is calculated from an agreed volume of students and mix of courses.
  • TEI Base Investment provides funding to ensure that universities, institutes of technology and polytechnics, and wānanga have the capability to provide quality and relevant research and education. The funding is available only to public education institutions and is intended to support TEIs' capability to focus on their core roles. The TEI Base Investment was worth $334 million in 2009/10.

Funds for research

7.36
The main funding for research is provided through the performance-based research fund. This is designed to promote excellence in research and research-based teaching and learning. The fund was worth $236 million in 2009/10 and is allocated and approved through the investment plan process.

Funds for targeted training and industry training

7.37
The Industry Training Fund ($167.8 million in 2009/10) funds Industry Training Organisations to, among other things, develop national qualifications and deliver workplace learning.

Tertiary education institutions' financial performance in 2009

7.38
TEI financial performance improved in 2009, with an overall surplus of 4.3% of a revenue base of about $4.2 billion (2.7% in 2008).

7.39
Figure 16 shows the surplus/deficit for each individual TEI in 2009, as a percentage of revenue, compared to the previous year.28

7.40
All sub-sector surpluses were above the 3% TEC guideline, with institutes of technology and polytechnics reporting a surplus of 6.3%, universities a surplus of 3.4%, and wānanga a surplus of 7.4%.

7.41
The TEC reports that the improved financial situation is because of an increase in student enrolments and government funding, and improved management of TEIs' financial performance.29

Figure 16
Surplus/deficit for each individual TEI in 2009
2009 Surplus/(deficit)*
$000
2009
As a % of revenue
2008
As a % of revenue
Auckland University of Technology
8,108
3.1
2.2
Lincoln University
(2,796)
(3.1)
(1.5)
Massey University
2,282
0.6
1.3
University of Auckland
28,537
3.4
3.2
University of Canterbury
9,055
3.2
5.6
University of Otago
31,098
5.6
3.6
University of Waikato
10,741
5.2
(0.9)
Victoria University of Wellington
12,803
4.1
3.2
Aoraki Polytechnic
4,322
15.8
10.8
Bay of Plenty Polytechnic
8,598
19.5
5.6
Christchurch Polytechnic Institute of Technology
9,152
10.7
9.6
Eastern Institute of Technology Hawke's Bay
2,021
5.1
3.6
Manukau Institute of Technology
4,503
4.6
3.2
Nelson Marlborough Institute of Technology
1,726
3.3
3.1
Northland Polytechnic
1,901
4.9
(3.3)
Otago Polytechnic
749
1.4
(0.7)
Southern Institute of Technology
3,641
8.1
13.3
Tai Poutini Polytechnic
377
1.4
(6.2)
Tairawhiti Polytechnic
1,468
8.6
(19.9)
Telford Rural Polytechnic
834
6.8
16.3
The Open Polytechnic of New Zealand
2,466
4.4
1.1
Unitec New Zealand
8,432
6.4
(0.1)
Universal College of Learning (UCOL)
2,032
3.7
(1.9)
Waiariki Institute of Technology
4,425
10.3
2.4
Waikato Institute of Technology
1,442
2.0
0.9
Wellington Institute of Technology
3,747
7.6
1.3
Western Institute of Technology at Taranaki
1,211
5.1
(11.6)
Whitireia Community Polytechnic
1,515
3.0
(1.1)
Te Wānanga O Aotearoa Te Kuratini O Nga Waka
8,125
5.4
4.6
Te Wānanga O Raukawa
3,770
17.1
12.9
Te Whare Wānanga O Awanuiārangi
2,476
10.2
9.1

* The surplus/(deficit) figures take into account unusual and abnormal items.

Tertiary education institutions' audit results for 2009

7.42
The Auditor-General is the auditor of all TEIs and each of their public entity subsidiaries. The Auditor-General carries out the annual audit of TEIs' financial statements and other information that each of the 31 TEIs and their subsidiaries are required to have audited. The Auditor-General's practice is to appoint auditors to conduct annual audits on her behalf.

7.43
We issue audit opinions for each TEI (usually referred to as "the parent accounts"), for each TEI subsidiary that is also a public entity, and for the combined entities that comprise the TEI group (usually referred to as "the group accounts").

Audit opinions for the year ended 31 December 2009

7.44
We have issued unqualified audit opinions for 29 of the 31 TEI group accounts in 2009. This means that the financial statements that we audited complied with generally accepted accounting practice and fairly reflected each TEI group's financial position and the results of its operations and cash flows for the year ended 31 December 2009. These audit opinions also mean that readers of the TEIs' accounts can be confident that the performance information reported by the TEIs fairly reflects their service performance achievements, as measured against the performance targets adopted for the year ended 31 December 2009.

7.45
We issued "except for" qualified audit opinions for two of the 31 TEI group accounts in 2009 – for Christchurch Polytechnic Institute of Technology and Wellington Institute of Technology. The qualifications were specific to the circumstances of each TEI.

7.46
The unqualified audit opinions of two TEIs (University of Auckland and Tairawhiti Polytechnic) contained explanatory paragraphs.

7.47
We provide more detail about each of these "non-standard" audit opinions in Part 6 of this report.

7.48
We also issued a number of non-standard audit opinions in the broader TEI sector – on the financial statements of subsidiary public entities. Part 6 also discusses the detail of these opinions.

Audit timeliness

7.49
An important aspect of the performance of public entities is issuing audited financial statements within statutory time frames. We want those interested in the accountability of public entities to receive our audit assurance as soon as possible after the end of the financial year.

7.50
For the 2009 TEI audits, the statutory deadline was 30 April 2010.30 Audits of all but one of the 31 TEI group accounts were completed within this deadline.

7.51
Figure 17 shows a pleasing decrease in audit arrears in the TEI sector when compared with the previous year.31

Figure 17
Tertiary education institution sector – audits outstanding at 30 June 2010

Total audits due in 2009/10 Arrears at 30 June 2010 Arrears at 30 June 2009 Arrears at 30 June 2008
140 32 (23%) 42 (31%) 23 (19%)

Source: Controller and Auditor-General, Annual Report 2009/10, page 33.

7.52
In the main, it is the timeliness of TEI subsidiary audits that affects the TEI sector's audit arrears figures. We asked our Appointed Auditors to work closely with TEIs during the 2009 audits to bring any public entity subsidiary audit arrears up to date, and to ensure the timely completion of all TEI sector 2009 audits. We also reinforced this message for 2010 audits.

Focus in 2009 audits

7.53
Each year, we identify particular aspects to focus on during the audit. We discuss some of these below. We have focused on procurement and capital asset management since 2007.

Procurement

7.54
Procurement covers all the business processes associated with purchasing, spanning the whole cycle from identifying needs through to the end of a service contract or the end of the useful life and subsequent disposal of an asset. We expect TEIs to follow good public sector practice when procuring goods or services.

7.55
We have issued the following good practice guides on procurement:

7.56
Other good practice guidance is available from the Ministry of Economic Development's website.

7.57
In 2008, on the whole, we were disappointed with the sector's progress in improving the quality of their procurement policies. A few TEIs still had no procurement policy. Some of our 2007 audit recommendations had been addressed, but a large number of TEIs needed to make further improvements to align their policies with good public sector practice. Therefore, in 2009, we asked our auditors to follow up on the findings and recommendations from the 2008 audit, including the extent to which the TEI has:

  • compared its policies and procedures for funding arrangements and procurement against good practice guidance; and
  • made changes as a result of the comparison.

7.58
We found, from the 30 entities checked, that five TEIs were assessed as having no issues with their funding arrangements and procurement. Of the remaining 25 entities:

  • 17 entities were still in the process of updating their procurement policies; and
  • six entities had yet to update their procurement policies.

7.59
Auditors had also noted the need to improve existing policies.

7.60
In our view, the sector has further work to do to improve its procurement policies. Our auditors will continue to follow up on any outstanding recommendations for improvement in 2010.

Capital asset management

7.61
TEIs own and manage a substantial portfolio of capital assets. Net assets in the TEI sector in 2009 totalled $7,540 million. Since 2007, the Treasury has been leading a work programme about capital asset management in the central government sector. The TEC is leading a set of initiatives in the TEI sector that is aligned to the Treasury's capital asset management work programme. These initiatives include the TEC working collaboratively with the TEI sector to encourage stronger capital asset management planning practices, and to seek better information on the TEI capital asset management stock. The TEC has been preparing an industry standard for capital asset management practices in the polytechnic subsector and intends to carry out similar work in the near future in the university and wānanga subsectors.

7.62
Capital asset management is the process of achieving optimal whole-of-life effectiveness of assets at minimal cost. Where asset management is, or should be, a significant part of an entity's activities, the asset management process should be an important part of the entity's decision-making and management control environment. The asset information, including depreciation, reported in the financial statements should be aligned with the underlying information in the asset management plan.

7.63
Given the value of the asset base of the TEI sector, the Auditor-General expects TEIs to have comprehensive capital asset management plans in place.

7.64
The findings of our previous audits suggest that, while asset-related transactions are fairly reflected in financial statements, TEIs do not, as a general rule, have comprehensive asset management plans. There was still much work to be done for the TEI sector's capital asset management practices to meet standards of good public sector practice.

7.65
Therefore, as part of the 2009 audit, we asked our auditors to follow up on the extent to which TEIs have addressed our 2008 audit findings and recommendations about capital asset management.

7.66
In 2009, auditors identified the following matters with 22 entities:

  • 15 entities were updating their integrated capital asset management policies; and
  • seven entities do not have an integrated capital asset management policy and have yet to begin to develop one.

7.67
This shows that there is work under way in many TEIs to update their capital asset management policies and plans, but there is still much work to be done for the TEI sector's capital asset management practices to meet standards of good public sector practice.

Service performance reporting

7.68
TEIs' statements of service performance (SSPs) are required to report on their performance compared with the proposed outcomes described in their investment plans. That requirement is set out in section 220(2B) of the Education Act 1989.

7.69
The measures to be included in TEIs' SSPs have essentially been decided up until the 2011 year because they have been approved as part of TEIs' current investment plans.

7.70
In 2009, we expected our annual audit work to focus on:

  • determining whether the SSP fairly reflects the performance measures and targets outlined in the investment plan adopted at the start of the financial year; and
  • checking the reported levels of achievement for the significant performance measures.

7.71
We also expected auditors to suggest improvements to the SSP, where such improvements can be made without changes to the performance measures (for example, providing meaningful explanations for variances between actual performance against targets, especially when targets have not been met).

7.72
In the past few years, we have increased our audit emphasis on performance reporting in both central and local government. We have generally found the quality of performance information to be disappointing. We consider that improving service performance information and reporting is crucial in helping to improve the effectiveness and efficiency of public sector entities and in demonstrating accountability for their performance.32

7.73
We also consider that the performance information framework used in investment plans can and should be improved. We have been working with the TEC in 2010 to achieve a performance information framework in 2011 investment plans that promotes enhanced service performance reporting by TEIs.

7.74
In the 2009 annual audits of TEIs, auditors identified a range of issues with the SSPs of 15 entities. The issues included:

  • inappropriate performance measures;
  • lack of meaningful explanations of the performance measures;
  • performance measures and targets from the 2008-10 investment plan that were not included in the SSP; and
  • a lack of robust systems for capturing and verifying non-financial performance information.

7.75
Service performance reporting will continue to be a focus in 2010 audits, as we discuss below.

Summary and focus in 2010 audits

7.76
We will focus on some of the same matters (for example, management of capital assets and service performance reporting) in the 2010 audits to ensure that TEIs continue to make the necessary improvements.

7.77
Ongoing policy changes in the tertiary education sector may further affect some TEIs' viability. Our auditors will need to understand the actions TEIs have taken, or plan to take, to respond to the changes, and satisfy themselves of the validity of the going concern assumption.

7.78
As discussed above, there are a significant number of subsidiary entities in the TEI sector. Subsidiary entities can result in additional compliance costs for the parent entity, and can place greater pressure on the parent entity to properly govern the group of entities.

7.79
We are interested in TEI councils' ongoing oversight of subsidiaries, both at a governance and management level. We have asked our auditors of TEIs to collect some information in 2010 audits on practices, including the "upwards" reporting by TEI subsidiary entities to the TEI parent.

7.80
We will report our findings to individual TEIs and in our annual report to Parliament on the results of the 2010/11 central government audits.

18: We have excluded student support initiatives (for example, student allowance and student loan amounts), which are estimated at about $1.1 billion – see www.minedu.govt.nz.

19: Figure 16 lists the 31 TEIs.

20: To preserve the academic integrity of TEIs, only certain provisions of the Crown Entities Act 2004 apply to them. The applicable provisions are set out in Schedule 4 of that Act.

21: See section 222AA of the Education Act 1989.

22: See www.nzqa.govt.nz/providers-partners/.

23: Tertiary Education Strategy 2010–2015, "Minister's Foreword", www.minedu.govt.nz/TertiaryEducationStrategy.

24: Tertiary Education Strategy 2010–2015, "Priorities", www.minedu.govt.nz/TertiaryEducationStrategy.

25: See www.tec.govt.nz/Tertiary-Sector/Reviews-and-consultation/performance-linked-funding/.

26: See www.beehive.govt.nz/release/eit-and-tairawhiti-polytechs-merge-0 and www.beehive.govt.nz/release/telford-polytech-merge-lincoln-university.

27: Tertiary Education Report: Introduction to the Key Issues in Tertiary Education, February 2010, TEC, available on the TEC website www.tec.govt.nz.

28: The amounts are taken from the audited financial statements of each individual TEI. Where the TEI has subsidiaries, the amounts are for the TEI group.

29: Further information on the financial performance of TEIs is available on the TEC website www.tec.govt.nz.

30: See section 156(2)(b) of the Crown Entities Act 2004.

31: Each arrears figure includes all outstanding audits, including any audits from prior years. The arrears percentages have been calculated using the total number of TEI audits due at 30 June for each year reported.

32: Our views on the importance and the quality of performance information and reporting are set out in our June 2008 discussion paper, The Auditor-General's observations on the quality of performance reporting.

page top