Part 2: The types of audit opinions we issued

Results of the 2016 school audits.

2.1
Mostly, we issue 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.

2.2
We modify our opinion when we cannot get enough evidence about an issue or we conclude there is a misstatement in the financial information. If we believe the matter is fundamental to understanding the financial information, we may issue an adverse opinion or not give an opinion on the financial statements (a disclaimer of opinion).

2.3
We draw attention to matters of importance where the matter is of public interest, schools are in financial difficulty, or schools have not followed legislation about accountability.

Modified opinions

2.4
Of the audits completed for 2016, 16 audit reports contained a modified audit opinion. We also issued a further 10 modified opinions for prior-year audits in arrears. Reasons for the modified opinions were:

We could not get enough assurance about locally raised funds revenue in 11 schools because of limited controls over this revenue. This included opinions for a 2013 and a 2015 audit.
We could not get reliable evidence to support the cyclical maintenance provision for three schools. This provision is an estimate of the board’s obligation to maintain the Ministry’s buildings.
We did not have enough information on related party transactions for one school and could not determine whether the school had disclosed all of these in its financial statements. For this school, we also drew attention to other significant matters in our audit report (see paragraph 2.8). This was a 2014 audit.
Two schools did not prepare consolidated financial statements that included the transactions and balances for their subsidiaries.
One school did not recognise a settlement payment between the school and an employee as a liability in its financial statements.
We disagreed with the calculation of the Use of Land and Buildings revenue and expenditure for one school.
We disclaimed the opinion on a 2014 audit because a significant number of financial records were destroyed as a result of fraud. The lack of supporting documents meant we could not get enough evidence to support the amounts in the financial statements.
We could not get enough assurance over expenditure for two schools. One school had three opinions issued during the year, for 2013, 2014, and 2015, all with this limitation. The other school was a 2012 audit.
For one school, because we issued a qualified opinion for the previous year, we could not provide assurance on the comparative figures in the 2016 financial statements. We were also unable to form an opinion on the comparative information for a 2015 activity centre audit because this was the first year the activity centre had reported as a separate entity.

2.5
Appendix 2 lists the schools that received modified opinions and the reasons for the modification.

Matters of importance that we have drawn readers’ attention to

2.6
In certain circumstances, we include comments in our audit reports to either highlight a matter referred to in a school’s financial statements or note a significant matter that is not referred to in a school’s financial statements. We do this because the information is relevant to a reader’s understanding of the financial information. Such comments are not modifications of our opinion, that the financial information fairly reflects the performance and position of the school. Rather, they point out important information such as a matter of public interest or a breach of legislation.

Matters of public interest

2.7
During 2017, we issued nine audit reports where we referred to matters of public interest. Some of these reports related to earlier years.

Potential conflicts between school Board of Trustees and proprietor

2.8
Al-Madinah School (2014) – We issued a modified opinion on the school’s financial statements because we could not tell whether the financial statements included all the related party transactions. We also referred to a potential conflict of interest in our audit report. The proprietor of the school, who is not a public entity, has two representatives on the school's Board of Trustees (board), and a third board member was also a senior representative of the proprietor.

2.9
We also found a potential lack of clarity about the school’s fundraising. The proprietor collects funds from parents, including an activity fee collected for the school board. During the year, the board allowed the proprietor to keep the school's portion of the funds collected, totalling about $28,000. The school should receive all funds collected for the benefit of the school.

Overseas trips

2.10
Te Kura Kaupapa Māori o Tamaki Nui A Rua (2015) – The kura funded a trip to Rarotonga for 27 students, four staff, and four parents. The purpose of the trip was to achieve educational experience and personal development of the wharekura girls and boys. The kura spent $56,246 but collected only $13,294 from those who went on the trip.

2.11
Te Kura Kaupapa Māori o Hoani Waititi Marae (2016) – Two hundred and fifty-one students, staff, and associated caregivers visited Rarotonga. The purpose of this trip was to achieve educational outcomes connected with the founding principles of “Te Aho Matua”. To meet the $399,104 cost of the trip, the kura fundraised $50,455, received $82,066 from whanau contributions, and used $21,466 from the transport allowance. The kura funded the balance of $249,632, which contributed to the kura’s deficit.

2.12
Blockhouse Bay Intermediate (2016) – The school paid $26,000 towards the total cost of $82,000 for a trip to Korea for 18 students and three teachers.

2.13
Manurewa West School (2016) – The school paid for five members of staff to visit Kuala Lumpur, as part of a trip to tour schools in Singapore. No evidence of educational outcomes was presented to the board for this part of the trip.

2.14
We consider it unusual for schools to fund trips of this nature. We are pleased to see that the Ministry has re-instated its guidance to schools about the need to specifically fundraise for overseas travel for students,¹ as recommended in our letter to the Secretary for Education last year.

Gifts and hospitality

2.15
Blockhouse Bay Intermediate (2016) – The school spent $12,000 on hospitality in the year. This included $7,000 for a farewell party and a $3,000 leaving gift for the principal, which exceeded the $1,000 the board had approved.

2.16
Kingsford School (2016) – The board gave vouchers to the value of $10,000 to the principal as a leaving gift.

2.17
Puhinui School (2016) – The board gave the principal a $8,500 ride-on mower when he left the school. Although the board approved the gift, it was not consistent with the school’s gift policy, which allowed a gift to the value of $1,000.

2.18
We consider this level of expenditure on hospitality and gifts to be relatively high for a school. Spending on farewells and retirements should be both moderate and conservative, and suitable for the occasion.

Expenditure not clearly for school purposes

2.19
Te Kura Kaupapa Māori o Te Kura Kokiri (2012) – We modified our opinion on the kura’s financial statements because it had limited controls over payments. We issued a similar qualification for 2011. We also drew attention to:

inadequate documentation and no evidence of approval for the repayment of expenses paid out of a personal account that were considered to be school payments;
unusually high levels of fuel expenses, food and groceries, and koha payments;
repairs and maintenance paid on cars not owned by the school;
payments for a trip to Rarotonga; and
satellite television subscriptions paid by the school.

2.20
The audit reports for 2013, 2014, 2015, and 2016 are still outstanding for this kura.

Other matters

2.21
Blockhouse Bay Intermediate (2016) – As well as the issues noted above, we drew attention to the school not passing on $3,700 collected specifically for Fiji flood victims. The school kept the funds and used them for school purposes. Also, the school paid $2,500 for expenses incurred for overseas trips without suitable receipts.

2.22
Wellington College (2016) – The school employed a fundraiser who mainly raised funds for a foundation, an independent entity with close links with the school. The foundation has not reimbursed the school for the services it received from the fundraiser. It is inappropriate for the school to use public money to pay an employee to raise funds for a private entity.

2.23
Manurewa West School (2016) – As well as the expenditure on overseas trips mentioned above, the school made additional payments to the principal without getting permission from the Ministry. The payments included; home broadband and telephone, well-being payments, and a “revitalisation and refreshment sabbatical grant”.

Matters raised in management letters

2.24
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 concern that auditors have raised in school management letters include:

schools that did not have sensitive expenditure policies for expenditure such as travel and gifts;
gifts to staff, either without board approval or inconsistent with the school’s gift policy (in these instances, we did not consider the amounts involved to be significant enough to include in the audit report);
hospitality and entertainment expenses that seemed excessive;
overseas trips for professional development, where the benefit to the school was not clear; and
staff entering into contracts outside their delegated authority.

Schools in financial difficulties

2.25
If 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, it is appropriate for the school to complete its financial statements as a going concern.

2.26
However, if the financial difficulty is serious, we draw attention to it in the school’s audit report. We drew attention to financial difficulties in the audit reports of 29 schools for 2016 (25 for 2015), and a further five audit reports issued for prior years. Appendix 3 lists the schools whose audit reports mention financial difficulties.

2.27
Once again, we drew attention to potential financial difficulties in Kia Aroha College’s audit report. The school is not currently in financial difficulty, but significant deficits during the past five years and poor controls over discretionary spending at the school are not consistent with financial sustainability. For this school, we have issued a similar audit report for four of the last five years.

Laws and regulations

2.28
As part of the annual audits of schools, we consider whether schools have regard to particular laws and regulations about 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 laws and regulations that they should consider.

2.29
Either schools disclose breaches of the Education Act 1989 and Crown Entities Act 2004 in their financial statements or our auditors report on them in their audit reports. During the 2016 audits, we identified that:

41 schools (2015: 33) borrowed more than they were allowed (clause 29 of Schedule 6 [section 67]);²
21 schools (2015: 31) did not use the Ministry’s payroll service to pay teachers, which they must use for all teaching staff (section 89(2));
15 schools (2015: 18) made loans to staff, which they are not allowed to do (clause 28 of Schedule 6 [section 73]);
three schools (2015: 9) invested money in organisations without the Ministry’s approval (clause 28 of Schedule 6 [section 73]);
12 schools (2015: 8) had conflicts of interest (section 103 and clause 40(8)-(10) of Schedule 6 [clause 8(8) of Schedule 6]);
two schools (2015: 3) did not comply with the banking arrangements (section 158 of the Crown Entities Act 2004); and
four schools (2015: 6) breached legislation for other reasons.

2.30
Appendix 4 sets out the schools where our auditors identified breaches of the Education Act 1989 and Crown Entities Act 2004.

2.31
We have noted an increase in the number of conflicts of interest reported. Three of these breaches were permanent members of staff that were not staff representatives being on the board. Under the Education Act, this disqualifies a person from being a trustee.

2.32
Auditors also told us about other instances where staff members on fixed term contracts were on the board. Although this was not a breach of law, because the staff are not permanent employees, any potential conflicts must be carefully managed by the board.

2.33
We also identified seven situations where a school had entered into a contract with a trustee (or a company controlled by a trustee) for more than $25,000 without getting the Ministry’s consent. This also disqualifies a person from being a trustee. Most often, these situations occur when the school is managing property projects for the Ministry. Although there is guidance about this on the Ministry’s website, the Ministry needs to ensure that all parts of the Ministry give the same advice about these matters.

1: Ministry of Education Circular 2009/08 – Annual Reporting circular.

2: References are to the Education Act 1989 unless stated. Where the section number changed after the Education Update Act 2017, we have included the previous section number in square brackets, because this will be the reference in the school’s financial statements.