Results of the 2015 school audits

Part 1: Completion of the 2015 school audits

1.1
Of the 2456 audits that we expected to complete for 2015 (which includes schools and school subsidiaries), we only completed 1843 or 75% by the statutory deadline of 31 May 2016. This was a disappointing result, given 86% of the 2014 audits met the deadline. Our usual expectation is that 95% of school audits will be completed before the deadline.

1.2
The disappointing result was because many schools struggled with implementing the new PBE accounting standards. In addition, the Ministry of Education (the Ministry) made the Kiwi Park model financial statements compulsory for 2015 . However, the Ministry did not provide guidance on the new standards and the model financial statements to the sector until the end of October 2015. This did not give the sector enough time to complete the necessary changes before the year-end.

1.3
At the end of September, we would usually expect fewer than 1% of the previous year’s school audits to be outstanding. As at 21 October 2016, we had 101 audits outstanding (4%). We also had 28 audits outstanding from earlier years. The cause of the increase in the number of audits outstanding over what we would normally expect is the large numbers of audits missing the statutory deadline. Once the statutory deadline passes, auditors face pressures resourcing the remaining audits because they have other work planned. We list the outstanding audits as at 21 October 2016 in Appendix 1.

1.4
In Figure 1, we set out the number of audits in arrears at 30 September in the years 2011 to 2016. Although the total number of arrears has reduced after the significant disruptions to audits completed during 2013 and 2014 caused by the implementation of Novopay during 2012, the number of prior-year audits in arrears continues to increase.

Figure 1
Audits in arrears as at 30 September in the years 2011 to 2016

Part 2: The types of audit opinions we issued

2.1
In most instances, we issued standard audit reports on the financial statements of schools. Non-standard audit reports can contain a modified audit opinion and/or draw attention to matters of importance to readers of the financial statements. We modify our opinion when we are unable to obtain sufficient evidence about an issue or we conclude there is a misstatement in the financial information. If we consider the matter is pervasive to the understanding of the financial information, we may issue an adverse opinion, or not give an opinion on the financial statements (a disclaimer of opinion.) Matters of importance include those where there is public interest, schools are in financial difficulty, or legislation about accountability has not been complied with.

Modified opinions

2.2
Of the audits completed for 2015, 22 school audit reports contained a modified audit opinion. We also issued a further three modified opinions during 2016 for prior-year audits in arrears. Reasons for the modified opinions were:

• We could not get enough assurance about locally raised funds revenue in nine schools because of limited controls over this type of revenue.
• We could not get reliable evidence to support the cyclical maintenance provision for seven schools. This provision is an estimate of the board’s obligation to maintain the Ministry’s buildings.
• We could not get enough assurance over related-party disclosures for one school because of limited controls in this area. This was a 2014 audit.
• We disagreed with the accounting treatment of a specific balance for three schools. Two schools did not prepare consolidated financial statements, including the transactions and balances for their subsidiaries. We disagreed with the other school’s calculation of the Use of Land & Buildings revenue and expenditure. This is an amount that represents the market rent the school would have to pay for the use of the land and buildings provided by the proprietor, and is calculated based on the valuation of those land and buildings.
• We disclaimed our opinion on a school subsidiary because the trust did not use the appropriate accounting standards to prepare its financial statements.
• Two schools did not include budgeted figures for the financial year in their financial statements, as required by the Education Act. These were both 2014 audits.
• For two schools, because we issued a qualified opinion for the previous year, we could not provide assurance on the comparative figures in the 2015 financial statements.

2.3
Appendix 2 lists the schools that received modified opinions and the reasons the opinions were modified.

Matters of public interest

2.4
In certain circumstances, we include additional comments in our audit reports that emphasise a matter referred to in a school’s financial statements, or we note a matter not referred to in a school’s financial statements, because it is relevant to a reader’s understanding of the financial information. Such comments are not modifications of our opinion.  They draw attention to important information such as a breach of legislation or a matter of public interest.

2.5
During 2016, we issued eight audit reports where we referred to matters of public interest. Some of these reports related to earlier years.

• Riverslea School (2014 and 2015) – The school paid invoices totalling $14,402 in 2013 and $10,147 in 2014 to a related party of the school, even though the school had not received the services. We also highlighted that the school failed to comply with legislation for not keeping minutes of their meetings as a record of all matters discussed and decisions made.
• Upper Hutt College (2014) – We drew attention to corrections made to the schools' financial statements, to account for losses the school suffered as a result of fraud and accounting misclassifications. We also mentioned the resulting serious financial difficulties of the school.
• Hauturu School (2015) – The school incurred expenditure of $24,796 sending 14 students and five adults on a trip to Australia’s Gold Coast and only received contributions of $2,020. The school did not keep complete records of expenditure and revenue for this trip, and the educational outcomes for the trip were unclear.
• Sacred Heart College (Auckland) (2014) – For the fifth year the audit report drew attention to the close relationship between the School, Proprietor, and the Sacred Heart Development Foundation (a related but not controlled entity), and potential conflicts of interest between these entities. For the second year, we also drew attention to expenditure on hospitality, which we considered relatively high for a school and because it is unclear whether the expenditure relates to the School or related organisations.
• Te Kura Kaupapa Māori O Te Rawhiti Roa (2014) – The opinion for this school was qualified because we could not confirm the completeness of the related-party disclosures. We also drew attention to some unusual transactions, which may indicate a lack of probity. These include an employee being paid for 3 months after they had left the school, staff members being given leave without pay to attend the Edinburgh Military Tattoo, and a staff member employed to provide the same services that a related party provides to the school. This school was also considered to be in serious financial difficulty.
• Te Kura Kaupapa Māori O Ruamata (2015) – The kura funded a trip to Hawaii for all 139 students, 21 teachers, and 73 caregivers. The cost of the trip was $695,511 and the kura received only $37,667 of contributions from those attending. The purpose of the trip was to achieve educational outcomes connected with the founding purpose of "Te Aho Matua". However, we consider it unusual for a school to spend this amount of money on a trip of this nature. We also identified that the kura had lent $311,000 to a Trust (of which the Principal is a trustee) in breach of section 73 of the Education Act 1989.
• Nelson College (2015) – The school made additional payments to staff without obtaining concurrence from the Ministry. This included an additional payment to the Principal on top of his remuneration, for duties at the Nelson College Preparatory School and for commercial activities carried out at the school. The Ministry may only give concurrence for an additional payment or benefit up to a specified limit, being a percentage of a principal’s base salary. The total additional remuneration paid to the Principal in the 2015 year is above this limit.

2.6
Although not common practice across most schools, our auditors continue to identify schools that are using Crown funding to pay to send students overseas. Our auditors consider whether trips of this nature; have a clear business case with educational outcomes, have Board approval, and the Board has received a report on those outcomes. However, it is difficult for us as auditors to judge whether the outcomes are educational. Guidance in Ministry circular 2009/08 was that schools should not use Crown funds to send students overseas, but this circular has been withdrawn. We have recommended to the Ministry that they provide clear guidance to schools about whether it is acceptable for public money to be used to fund overseas trips for students.

2.7
If an auditor does not consider a matter significant enough to include in a school’s audit report, the auditor will raise the matter in the school’s management letter. Matters of probity that auditors have raised in school management letters include:

• Gifts to staff that the Board of Trustees had not approved or were not consistent with the school’s gift policy.
• Teachers and Principals receiving additional benefits, such as payments for rent, gym membership, Christmas bonuses, and a weekend away, without seeking concurrence from the Ministry.
• The Board of Trustees not approving the Principal’s credit card expenditure, in keeping with the one-up principle.
• Overseas trips for professional development, where in some cases the school also paid for the individual’s spouse.

Schools in financial difficulties

2.8
Where a school is showing signs of being in financial difficulties, we seek confirmation from the Ministry that it will continue to support the school. If the Ministry confirms that it will continue to support the school, we can conclude that it is appropriate for the school to complete its financial statements on the basis that it is a going concern. However, if the financial difficulty is significant, we draw attention to it in the school’s audit report. We drew attention to financial difficulties in the audit reports of 25 schools for the 2015 year, and a further 4 audit reports issued for prior years. Appendix 3 lists the schools whose audit reports draw attention to financial difficulties.

2.9
We drew attention to potential financial difficulties in Kia Aroha College’s audit report. Although it is currently not in financial difficulty, the significant deficits over a number of years and poor controls over discretionary spending at the school are not financially sustainable. For this school we have issued a similar audit report for three of the last four years.

Compliance with legislation

2.10
As part of the annual audits of schools, we consider whether schools have complied with particular legislative requirements related to financial reporting. The main Acts that influence the accountability and financial management of schools are the Education Act 1989 and the Crown Entities Act 2004. We advise auditors of the legislative requirements they should consider.

2.11
During the 2015 audits, we identified the following breaches of the Education Act 1989 and Crown Entities Act 2004. Breaches were either disclosed in the school’s financial statements or reported by our auditors in their audit reports:

• 33 schools borrowed more than they were allowed (section 67)¹;
• 31 schools did not use the Ministry’s payroll service to pay teachers, which they are required to use (section 89(2));
• 18 schools made loans to staff, which they are not allowed to do (section 73);
• 9 schools invested money in organisations without the Ministry’s approval (section 73);
• 4 schools had conflicts of interest (section 103A and/or clause 8(8) of Schedule 6);
• 3 schools did not comply with the banking arrangements set out in section 158 of the Crown Entities Act (2004); and
• 10 schools breached legislation for other reasons.

2.12
Appendix 4 sets out the schools where breaches of the Education Act 1989 and Crown Entities Act 2004 were identified.

Appendix 1: School audits not completed as at 21 October 2016

2015 school audits (bolded schools have prior year audits outstanding)

Prior year school audits

Appendix 2: Modified opinions

Appendix 3: Schools whose 2015 audit reports draw attention to financial difficulties

We also made reference to the financial difficulties of the following schools in audit reports issued during 2016 for audits in arrears:

• Heretaunga College (2014)
• Te Kura Kaupapa Māori o Nga Maungarongo (2013)
• Te Kura Kaupapa Māori o Te Rawhiti Roa (2014)
• Upper Hutt College (2014)

Appendix 4: Compliance with legislation

We ask our auditors to consider whether schools are complying with particular requirements of the Education Act 1989 and Crown Entities Act 2004, which relate to financial reporting. This appendix sets out those schools where auditors identified breaches of these legislative requirements.

2015 school audits

Borrowing (Section 67 Education Act 1989)

Payments outside the Education Service Payroll (Section 89(2) Education Act 1989)

We also drew attention to payments to staff outside Novopay in the 2014 audit report of Te Kura Kaupapa Māori o Te Rawhiti Roa which was issued during the year.

Loans to staff (Section 73 Education Act 1989)

Investments (Section 73 Education Act 1989)

We also drew attention to Timaru Boys’ High School’s investment in Oxford Street Holdings (TU) Limited without the approval of the Ministers of Education and Finance, in the school’s 2013 audit report issued during the year.

Conflict of interest (section 103(A) and clause 8(8) of Schedule 6, Education Act 1989)

Banking arrangements (Section 158 Crown Entities Act 2004)

Other breaches of legislation

We also issued audit reports in 2016 drawing attention to:

• Riverslea School’s (2013 and 2014) breach of Sections 46A(1) and 51 of the Local Government Official Information and Meetings Act 1987, for failing to keep minutes of its meetings; and
• Timaru Boys High School (2013) breached section 69 of the Education Act, because a controlled entity of the Board, Oxford Street Holdings (TU) Limited purchased two dwellings in 1997.

1: References are to the Education Act 1989 unless stated.