Part 2: Results of the 2012 school audits

Schools: Results of the 2012 audits.

Up to 28 February 2014, we completed nearly 2450 audits of schools' financial statements for the year ended 31 December 2012, including school subsidiaries. This Part summarises the results of those audits and others from previous years that we completed in the year.

The Education Act requires boards to prepare annual financial statements and have them audited. The annual cost of all school audits is about $10.5 million, which is an average of about $4,200 for each school. The cost to individual schools varies between $2,000 and $15,000. The audits take about 105,000 hours of audit time, which is the equivalent of 50 full-time people, and vary between 20 and 130 hours for each school.

Our school audits are more limited than our audits of larger public entities. They are limited to an audit of the financial statements, some aspects of compliance with legislation, and matters of probity and financial prudence. They do not include auditing service performance information because schools are not required to prepare a statement of service performance.

The results of each school audit are contained in an audit report, which is a public document attached to the school's annual financial statements, and a management letter addressed to each board.

Most schools receive standard audit reports that include our opinion that the financial statements can be relied on for accountability purposes and that the audit has not found anything that our auditors consider important enough to draw to the public's attention.

Each year, our auditors provide management letters to school boards that include recommendations for improvements in financial management practices and other matters. These matters are generally considered to be less important than those included in our audit reports.

Timeliness and statutory deadlines

Each year, schools prepare their financial statements for the year ended 31 December. Schools are expected to send their draft financial statements to the auditor by 31 March in the following year and their audited financial statements to the Ministry by 31 May.

Of the 2480 audits of schools and subsidiaries that we expected to complete during the reporting period, draft financial statements for 2195 (89%, slightly less than the 93% in the previous year) were available for audit by the statutory date of 31 March 2013. However, many of these financial statements did not include payroll figures because of difficulties obtaining reliable payroll information. There were 285 (11%) that were not available by the deadline.

By the statutory deadline of 31 May 2013, 772 audits (31%) had been completed, leaving 1708 that were not completed by this date. In contrast, 95% of audits for 2011 were completed by 31 May 2012. The substantial difference in timeliness was because of the problems with Novopay. Usually, we expect less than 1% of school audits to remain outstanding more than a year after the balance date. The number at the end of 2013 was almost 2%, meaning the backlog had largely been cleared by then.

The audit reports for three schools had not been issued at the time of writing this report and had been outstanding more than two years after the balance date (they were for 2010 and 2011). The schools, and the reasons why the audit reports have not yet been issued, were:

  • Hukarere College – we noted our doubts about the financial viability of the school in our report on our 2009 audit and we found more matters of concern during our subsequent audit work.
  • Te Aute College – continuing problems with governance and administration have added to the doubts we had about the financial viability of the school that we noted in our report on our 2009 audit.
  • Te Kura Kaupapa Māori ō te Kura Kōkiri – this kura has ongoing financial management and other matters of concern, such as those noted in our report on our 2009 audit.

2.11 Problems with Novopay resulted in the number of incomplete school audits being higher than normal. This is largely because of resourcing pressures experienced by our auditors as a result of delays caused by Novopay. Figure 1 lists the schools for which we had not completed audits for 2012 by 28 February 2014.

Figure 1
School audits for 2012 not completed by 28 February 2014

Aquinas College Avondale Intermediate School
Cambridge High School Educational Trust Feilding High School
Forest View High School Hamilton's Fraser High School
Hato Paora College Hukarere College
Jacobs River School Kia Aroha College
Koromiko School Murupara School
Murupara Area School Rangitahi College
Riverslea School Rotorua Boys' High School
Rotorua Lakes High School Star Of The Sea School (Howick)
Te Aute College Te Kura Kaupapa Māori O Otara
Te Kura Kaupapa Māori O Otepou Te Kura Kaupapa Māori ō te Kura Kōkiri
Te Kura Kaupapa Māori O Waipiro Te Wharekura o Mauao
Timaru Boys' High School Tokoroa High School Trust
Trident High School Waimahaka School
Waimangaroa School Westbridge Residential School

We will complete these audits as soon as possible. Any significant matters arising from the audits will be included in our next report on the results of school audits.

Our opinions and comments on schools' financial statements

In most instances, we have issued standard audit reports on the financial statements of schools. However, we have issued non-standard audit reports on the financial statements of some schools. These non-standard audit reports contain a modified audit opinion and/or an "emphasis of matter" or "other matter" paragraph. We modify our opinion by expressing a qualified or adverse opinion, or by disclaiming an opinion (see Figure 2).

Figure 2
What happens when an auditor expresses a modified opinion

Figure 2 What happens when an auditor expresses a modified opinion.

In certain circumstances, we include additional comments in our audit reports that emphasise a matter referred to in a school's financial statements, or note a matter not referred to in a school's financial statements to draw a reader's attention to the matter because it is relevant to their understanding of the financial information. Such comments are not modifications of our opinion and are referred to as "emphasis of matter" or "other matter" paragraphs. They are used to draw attention to, for example, important information in the financial statements, a breach of legislation, or a matter of probity.

Modified audit opinions

Of the audits completed for 2012, 16 school audit reports (22 in the previous year) contained a modified audit opinion, one had a disclaimer of opinion, and 15 had qualified opinions. We issued a further four modified opinions in relation to 2010 and 2011 audits that had been in arrears.

Reasons for the modified opinions

For these schools, the auditor was not able to obtain assurance about the school's payroll figures because of Novopay problems:

  • Kawerau College;
  • Kawerau Putauaki School;
  • St Joseph's School (New Plymouth);
  • Te Kura O Te Whakarewarewa; and
  • Waihi Beach School – we issued a disclaimer of opinion because the Board would not sign the statement of responsibility.

For these schools, the auditor was not able to obtain assurance about all the school's income and/or expenditure:

  • Hamilton's Fraser High School (2010 and 2011 audits) – insufficient evidence to confirm the financial information for a division of the School;
  • Hatea-A-Rangi School (2010 and 2011 audits) – limited controls over income and expenditure;
  • Haumoana School – limited controls over locally raised income;
  • Korokoro School – limited controls over locally raised income;
  • Red Beach School – the comparative figures for 2011 were qualified because of limited controls over locally raised income;
  • Taumarunui High School and Community Trust – limited controls over locally raised income;
  • Te Kura Kaupapa Māori O Otepoti – limited controls over expenditure; and
  • Waiau School – limited controls over locally raised income.

For these schools, the auditor was not able to obtain reliable evidence to support the cyclical maintenance provision, which is an estimate of the board's liability to maintain the Ministry's buildings:

  • Wellington High School; and
  • Wellington East Girls' College.

For these schools, the Board of Trustees did not prepare consolidated financial statements, including the transactions and balances of its subsidiary, as required by accounting standards:

  • Wanganui City College; and
  • William Colenso College.

In this school, the Board of Trustees failed to comply with the Education Act, because it did not provide budgeted figures for the financial year in the Statement of Financial Position:

  • Ridgway School.

Emphasis-of-matter paragraphs on probity and similar matters

Some audit reports refer to matters that are not related to the presentation of the financial statements but are considered to be important to public accountability.

With public accountability in mind, Ministry Circular 2009/08 commented on sensitive expenditure:

The Ministry expects that no Crown funds will be used to fund overseas trips (or expensive domestic travel) for students and only in very rare circumstances for senior staff. Schools are entitled to fundraise specifically for overseas travel

During the reporting period, four audit reports referred to matters concerned with probity, prudence, or waste. These were:

  • Ferguson Intermediate School (Ōtara) – The school spent about $52,000 on sending teachers to Samoa and Tonga, conferences in Melbourne and Prague, and koha for funerals. We considered that aspects of this expenditure were indicative of waste and a lack of financial prudence by the board. We made a similar comment in the school's 2009 and 2011 audit reports.
  • Te Kura Kaupapa Māori O Whakawatea – The kura spent $5,120 on Christmas gifts and vouchers for its staff and board members bought from a business owned by the principal. In our view, spending of this nature illustrates waste and a lack of probity on the part of the board. We have suggested to the Ministry that it consider whether schools would benefit from guidance on gifts.
  • Te Kura Toitu O Te Whaiti-nui-a-toi – the kura contributed funding of $38,000 for a two-week trip to Hawaii for 13 children and six adults. We considered expenditure of this nature to indicate waste and a lack of financial prudence by the board.
  • Viscount School – The school spent $43,000 on overseas travel for nine staff for professional development in San Diego. We consider that aspects of this expenditure indicate waste and a lack of financial prudence by the board.

Schools experiencing financial difficulties

The financial statements of schools show that most schools are financially sound. For example, the latest information available indicates that most schools have a working capital surplus, which is what we would expect because the Ministry tends to fund schools in advance. However, about 120 schools have a working capital deficit, which could affect the school's ability to pay its bills. For a few, the deficit is large enough to be of concern. Deficits arise for different reasons, such as spending more on staff or assets than can be afforded.

Where a school has a large working capital deficit for its size, the auditor seeks confirmation from the Ministry that it will continue to support the school financially. Normally, the Ministry provides that confirmation. However, it is important that in appropriate circumstances we draw the public's attention to schools that are experiencing financial difficulties.

In the reporting period, we drew attention to 19 schools (significantly less than the 45 the previous year) experiencing financial difficulties (see Figure 3).

Figure 3
Schools whose audit reports draw attention to financial difficulties

Burnside Primary School Ngaruawahia High School
Fairfield College Northland College
Hamilton Junior High School Opaki School
Hato Petera College Taihape Area School
Kadimah School Taumarunui High School
Kaitaia Abundant Life School Te Kura Kaupapa Māori O Nga Maungarongo
Kaitao Intermediate School Te Kura Kaupapa Māori O Ngati Rangi
Kamo Intermediate School Te Kura Kaupapa O Te Puaha O Waikato
Kelston Intermediate School Te Kura o Ratana
Motumaoho School

Because of public interest in the financial health of schools, we have carried out a high-level analysis of the financial information for all schools for 2009-2012. We include the results in Part 4.

Compliance with legislation

As part of the annual audits of schools, we ask auditors to consider whether schools have complied with particular legislative requirements related to accountability. Most schools comply with the requirements.

During the 2012 audits, auditors identified a number of breaches of the Education Act. These breaches were either disclosed by the schools in their financial statements, or reported by our auditors in their audit reports or management letters to the affected schools.

  • 25 schools (33 in the previous year) borrowed more than they were legally permitted to (section 67 of the Education Act);
  • 14 schools (16 in the previous year) gave loans to staff (section 73);
  • nine schools (six in the previous year) invested money in organisations that had not been approved (section 73);
  • five schools (10 in the previous year) had conflicts of interest (section 103A and/or clause 8(8) of Schedule 6); and
  • 17 schools (20 in the previous year) breached for other reasons.

We have not given details of all the schools that breached legislation in 2012. However, some of the more important breaches were:

  • Kaitao Intermediate School, which is experiencing financial difficulty, borrowed $19,900 more than it was permitted to without the approval of the Ministry.
  • Kamo Intermediate School, which is experiencing financial difficulty, borrowed $47,000 more than it was permitted to without the approval of the Ministry.
  • Northland College, which is experiencing financial difficulty, borrowed $156,000 more than it was permitted to without the approval of the Ministry. It also acquired $450,000 in company shares without approval. The College is seeking retrospective approval from the Ministry.
  • Our auditors noted that a board member breached section 103A of the Education Act by providing services to the board in excess of $25,000 without the approval of the Ministry. The school made payments of $140,000 for building works to a company where one of its board members is a director and shareholder.

Other matters that arose in the 2012 audits

Each year, school auditors raise some other matters that we usually refer to the Ministry for resolution.

Use of land and buildings

Schools use land and buildings that the Ministry (or a proprietor, in the case of state-integrated schools) provides. Schools include the estimated cost of their use of land and buildings in their financial statements. This is to show the full cost of running the school.

The Ministry provides schools with the estimated costs of their use of land and buildings, which is like a notional rent charge. Some of the figures that the Ministry provided for the 2012 financial statements were significantly different from those provided for the previous year. This was mainly because of changes in the underlying information and updated assumptions used in valuing the Ministry's land and buildings.

The estimated costs have not yet been adjusted to account for the work required to repair leaky buildings or for earthquake strengthening as these costs have not been assessed.


About 40 schools have hostels for boarding students. In most instances, the schools are not legal owners of the hostels. However, the Ministry considers that the schools are entitled to the benefits of ownership of the hostels and has removed the assets from its own balance sheet. Most of the schools had included the hostels on their own balance sheets.

Transport grants

About 75 schools receive specific grants from the Ministry for the transport of their pupils. A few schools were found to be in breach of the Ministry's conditions of grant – for example, they were allowing a third-party entity, such as a trust, to retain the surplus generated from the transport operation.

This matter has been drawn to the attention of our school auditors for them to consider during the 2013 audits.

Truancy services

At the end of 2012, the district truancy services were transferred from about 80 schools to the National Attendance Service. One of the schools enquired about whether it could retain the surplus it had generated from the provision of the service. The Ministry decided that the surplus funds of $128,000 should be returned. The Ministry has not yet decided whether the other schools can retain any surplus that they might have generated.

1: In December 2013, the Ministry's database indicated that 120 schools had a working capital deficit on 31 December 2012. In December 2013, 92% of the results of schools audits for 2012 had been entered into the database.

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