Part 4: Matters we identified during our audits

Results of the 2018 school audits.

In this Part, we set out matters that we identified during the 2018 school audits and make some recommendations for the Ministry.

The Ministry has made good progress on many of the recommendations from our previous reports. However, we will not see the benefits of some of the Ministry’s changes until we carry out our 2019 school audits. For some recommendations, the Ministry has made little progress. Where appropriate, we have repeated our recommendations and will follow up on them in next year’s report on the 2019 school audits. Appendix 2 updates progress on the recommendations in our report Results of the 2017 school audits.

Publishing annual reports

Since 2017, the Education Act has required schools to publish their annual reports online.6 A school’s annual report consists of an analysis of variance, a list of trustees, financial statements (including the statement of responsibility and audit report), and a statement of KiwiSport funding. After our auditors raised concerns last year that schools were not aware of this requirement, we asked auditors to check during this year’s audit whether schools had published their 2017 annual reports.

What we found was disappointing. At the time each 2018 school audit was completed, 773 schools (32%) had not published their 2017 annual reports online. Of the schools that had published their annual reports, 457 were published late, usually after the auditor had reminded the school. It is important that schools publish their annual report as soon as possible after the school’s audit is completed. This ensures that schools do not breach legislation and are properly accountable to their community.

Our auditors reminded all schools in their management letters this year that they need to publish their annual reports online. If a school does not have a website, the Ministry will publish the annual report on its Education Counts website.

The Ministry has responded to our recommendations in last year’s report by continuing to emphasise schools’ reporting obligations in its annual reporting communications and reminding schools of the obligation when they submit their completed financial statements to the Ministry. The Ministry also told us that its finance advisors will monitor compliance for the 2018 annual reports. We encourage school communities to contact the school board if their school’s annual report has not been published online.

Recommendation 1

We recommend that the Ministry of Education actively monitor schools’ compliance with the legislative requirement to publish their annual reports online.

School payroll

The school payroll information is a significant part of a school’s financial statements. Since Novopay was introduced, schools have needed additional payroll reports to give them the information they need to complete their financial statements. This has contributed to the delays in school audits in recent years.

For the 2018 audits, the Ministry led a project team that included representatives from the Ministry, Education Payroll Limited (which administers the payroll on the Ministry’s behalf), and the auditors. The project team successfully delivered payroll reports and guidance to schools by the agreed time frame. This resulted in the Ministry providing financial information to schools and their service providers earlier than in previous years. However, this did not result in better timeliness for school audits because of other factors that were not related to payroll. We will work to the same time frame for the 2019 school audits.

Our appointed auditor of the Ministry carries out extensive work on the Novopay system centrally. This includes carrying out data analytics of the payroll data to identify anomalies or unusual transactions. We write to the Ministry every year setting out our findings from this work. Although we continued to see improvements in data quality and fewer errors being raised on school error reports, we continued to identify weaknesses in the controls in the system.

Because of the lack of data entry controls in the Novopay system and at the pay centre, the responsibility is on schools to check for and detect errors. Schools do this by reviewing the fortnightly payroll reports. However, our auditors continue to identify many schools that do not regularly review these payroll reports. This could result in schools paying employees the wrong amount and increases the risk of fraud.

Another common weakness is that schools do not have the appropriate payroll documentation, with evidence of approval, for all payroll transactions or amendments. This includes recording and authorising pay for relieving teachers and changes to payroll data, such as changes of bank accounts. Payroll legislation requires schools to keep proper payroll documentation.

School boards need to oversee the school’s monthly payroll expenditure, as they do with other expenses. This should form part of the board’s financial monitoring and include consideration of banking staffing balances, which gives a balance of staff entitlements. If a school does not manage this entitlement, it might find it owes funds to the Ministry, which will reduce the operations grant it receives for the next school year.

An improvement project is under way, including improvements to the user interface of Novopay, to allow more data entry directly at schools. However, this currently does not include additional data entry controls at schools. Schools must still rely on reviewing fortnightly payroll reports to detect errors. We urge the Ministry to ensure that appropriate internal controls are incorporated into the payroll system, where possible, to help prevent instances of fraud or error.

As part of their audit work locally, our auditors follow up any anomalies identified from the data analytics work that the Ministry cannot resolve. We have seen the extent of these exceptions decrease over the years, but some matters reoccur. This is often because of a lack of knowledge at the school of how certain transactions should be processed. Currently there is no feedback loop so that schools get the necessary guidance to ensure that issues are not repeated.

Recommendation 2

We recommend that the Ministry of Education:
  • ensure that changes to the Novopay system include adding appropriate controls for schools, where possible, to help prevent fraud and error and ensure that all transactions are approved within the school’s delegations; and
  • follow up unusual transactions or anomalies identified as part of the payroll audit so they do not reoccur, including giving boards additional support and guidance on payroll matters if necessary.

Cyclical maintenance

Schools must keep the Ministry-owned school buildings in a good state. They receive annual funding for this as part of their operations grant. Although school buildings need painting only periodically, it can be a significant cost. Schools need to plan and provide for this so they have funds available when the painting is needed. The requirement to paint the school building is disclosed in a school’s financial statements as a cyclical maintenance provision.

Our auditors are still finding the cyclical maintenance provision challenging to audit. As previously reported, many schools do not understand the cyclical maintenance provision and do not have the necessary information to calculate the provision accurately. This year, there was a significant increase in the number of schools that did not have enough information to confirm that their cyclical maintenance provision was reasonable. As a result, our auditors issued modified opinions for 13 schools for 2018 and two schools for 2017 (see paragraph 2.15).

A school board must prepare a cyclical maintenance plan for the next 10 years as part of its 10-year property plan, as well as consider capital works. The cyclical maintenance plan then forms the basis for calculating the school’s cyclical maintenance provision. However, in previous years, the Ministry did not check that the submitted 10-year property plans included a maintenance plan.

After recommendations in our report last year, the Ministry has changed its annual property visits to include discussion of school maintenance plans. We hope to see an improvement in the quality of cyclical maintenance provisions for the 2019 school audits from this. However, it is ultimately each school board’s responsibility to ensure that it has proper maintenance plans in place and to consider how it will fund future maintenance. Without these plans, there is a risk that schools will not be able to fund necessary maintenance.

Based on the Ministry’s guidance and our knowledge of the sector, we expect that schools will paint their schools about every 10 years. If we compare the cyclical maintenance provision balance in a school’s financial statements to its annual cyclical maintenance charge, we can estimate how many years through its maintenance cycle the school is. Using this proxy, we identified 293 schools that we expect would need to paint their buildings in the near future.

Of these 293 schools, about half have enough working capital (current assets less current liabilities) available to fund the painting costs. Of the rest, 41 have less than 50% of the necessary working capital and 27 have less than 10% (nine of which are in financial difficulty). Including non-current investments (those that will be available in more than 12 months) reduces the number to 38. This shows that a small number of schools might have difficulty meeting their maintenance requirements in the near future.

Kura Kaupapa Māori

In last year’s report, we continued to highlight concerns that we have raised since 2012 about financial management and the appropriateness of spending in some kura.7 We also raised concerns about the number of outstanding audits for some kura.

Although some of the older audits have been completed in the past year, the list of audits in arrears still includes a high proportion of kura. Eighteen kura (25% of all kura) have audits from 2018 outstanding, and 10 have audits outstanding for other years, some for multiple years. We will continue to work with these kura and the Ministry to ensure that the outstanding audits are completed.

In the last two years, we could not give an opinion on the 2015 financial statements of two kura because of poor record-keeping, one of which was because of a fraud. When schools have not reported for several years, they are not properly accountable to their community. There is also a lack of visibility of the school’s processes and controls.

Weaknesses in controls can increase the risk of inappropriate spending or fraud. Although our audits are not designed to identify fraud, they do identify weaknesses in controls that are relevant to the audit and recommend improvements to controls that can help the school prevent against fraud.

We have recommended for several years that the Ministry monitor how effectively kura and other small schools follow its guidance on financial matters and, if necessary, provide more targeted guidance. We still have concerns about the financial reporting of some kura, so we repeat that recommendation below.

The Ministry told us that it is working with Te Runanga Nui (the national collective body of Kura Kaupapa Māori Te Aho Matua communities) to better support kura with financial matters. We would like to work with Te Runanga Nui and the Ministry to better understand what is preventing kura from completing their audits and help facilitate their completion. We would like to see agreed time frames for completing the audits put in place in the first half of next year, to allow the kura to bring their audits up to date (including the 2019 audits) by the end of 2020.

Recommendation 3

We recommend that the Ministry of Education:
  • monitor how effectively kura follow the Ministry of Education’s guidance and, if necessary, provide more targeted guidance; and
  • continue to work with those kura that have audits outstanding to help facilitate the completion of those audits.

Sensitive payments

We refer to some sensitive payments in Part 2 where we considered them significant enough to mention in the school’s audit report. If an auditor does not consider a matter significant enough or it relates mainly to school policies and procedures, the auditor will raise the matter in the school’s management letter. This year, auditors brought fewer matters about sensitive payments to our attention, and our auditors referred to fewer of these types of matters in their audit reports.

Although auditors continue to raise concerns about sensitive payments in school management letters, the incidences and amounts involved have reduced, consistent with last year. Concerns that auditors raised included:

  • gifts to staff that were either without board approval or inconsistent with the school’s gift policy; and
  • hospitality and entertainment expenses that seemed excessive.

Our auditors have referred to poor controls over credit cards in many school management letters (we also mentioned this in last year’s report). Credit cards are susceptible to error and fraud or to being used for inappropriate expenditure, such as personal expenditure. We are seeing an increase in the use of credit and other cards in schools. In many schools, we noted that:

  • there was no review and approval of the Principal’s credit card; and/or
  • receipts for amounts spent on the school credit card were not being kept.

Credit card payments might not go through a school’s normal payment processes because schools often pay credit card balances directly from their bank account. Also, the money is spent before any approval. However, it is important that expenditure on credit cards is subject to the same controls as other spending.

We recommend that schools use a “one-up” principle when approving expenses, including credit card spending. This means the board chairperson would need to approve the Principal’s expenses. It is also important that credit card users provide supporting receipts for the approver and an explanation for the expenditure. This also applies to fuel cards or store cards.

Overseas travel

The Ministry updated its guidance on overseas travel in early 2018. It asked that schools complete a checklist to document their decisions on overseas travel and disclose details of the travel in their financial statements. The Ministry expects a board to approve all overseas travel in line with the school’s travel policy. As well as considering the educational outcomes of any travel, the board needs to consider whether the proposed travel is the best use of the funds available.

Although we drew attention to spending on overseas trips in two audit reports (one was for a 2017 audit), fewer of these matters were referred to us for consideration during our 2018 audits. Details of any significant overseas travel by a school are disclosed in the notes to its financial statements, usually under the locally raised funds note for student trips, the learning resources note for professional development trips, or the international students note for marketing trips. This should give details of the trip, the costs, and how it was funded.

Our auditors identified instances of some schools providing either cash or a pre-loaded foreign currency card for use abroad. As with all school expenditure, receipts should be kept where possible. A reconciliation of amounts spent should be provided after the trip and any unspent funds returned directly to the school. Auditors noticed that this sometimes was not done in a timely way.


Boards are allowed to borrow from any source, as long as the annual repayment cost (principal and interest) is less than 10% of their operations grant. If they wish to borrow more than this, boards need the approval of the Ministers of Finance and Education.8 This is to ensure that schools do not over-commit and get into financial difficulty.

The number of schools breaching the borrowing limit each year is relatively small. Although the number of breaches did go down slightly this year, it has been increasing in the past few years. Breaches usually happen because a school has several different types of borrowing. Common types of borrowing for schools can include loans, finance leases, and painting contracts (where the school pays for the painting of its school over several years). The digitalisation of education means that schools are entering into more leases for equipment. Our auditors find that most of these are finance leases, which is a type of borrowing.

Annual finance lease payments as a proportion of payments for all school borrowing due in the next 12 months have increased in the past few years. In 2015, annual finance lease payments as a proportion of all borrowing due in the next 12 months was 74%. In 2018, it was 94%. The value of annual finance lease payments increased from $13.4 million in 2015 to $43.2 million in 2018. We saw a significant increase in the value of finance lease payments in 2016 to $34.5 million, because many leases that were previously considered to be operating leases were reclassified as finance leases.

If schools breach the borrowing limit, this does not mean they will get into financial difficulty. Schools might have other sources of funds to pay the debt with. However, schools need to be cautious if these sources of funds are discretionary.

We have also found that some schools have entered into lease agreements without following proper delegations. This means that the board might not be aware of the amount the school has committed to and that it has breached legislation until the audit identifies this.

Appendix 4 includes the 42 schools that breached the borrowing limit in 2018.

By looking at the payments due on all types of borrowing in the next 12 months compared with the operations grant for all schools, we identified that 66 schools could exceed their borrowing limit in 2019. We predict that half of those schools will breach the borrowing limit by less than 1.5% of their operations grant, so these schools might not go on to actually commit a breach. For those that have potentially larger breaches, they will not commit a breach if they obtain ministerial approval for the borrowing.


Section 87(3)(i) of the Education Act requires a school to include budgeted figures in its financial statements. Our auditors commonly find that many schools prepare only a budgeted income statement of their revenue and expenditure for the year. Schools must also produce a budgeted Statement of Financial Position (their assets and liabilities) and a budgeted Statement of Cash Flows.

These statements are required by legislation, and they are important for good financial management. As noted above, if a school does not monitor its working capital position (its cash available less its current liabilities), it might find itself unable to make payments when they fall due. It is also important for schools to understand when cash flows will occur.

Many schools also do not include teachers’ salaries in their budget. Although teachers’ salaries are funded by the Ministry, the school needs to ensure that its employee costs are budgeted for and monitored, because this is part of the school’s financial picture.

Recommendation 4

We recommend that the Ministry of Education provide additional guidance to schools on how to budget effectively, including how to prepare a budgeted balance sheet and cash flow budget.


As part of our audit, we collect information every year on fraud or suspected fraud in schools that we are told about. Many incidences are relatively minor, such as the theft of small amounts of cash or equipment. However, there have been several more significant frauds in the past few years. We report on fraud trends on our website each year. This includes details of the methods and reasons for fraud, types of fraud, and how the frauds were detected.

We find that most fraud happens because a person has overridden an internal control or policies and procedures have not been followed. However, many types of fraud are found eventually by schools’ internal controls.

Effective controls require good segregation of duties (needing more than one person to complete a task). Schools, particularly small schools, can find it difficult to segregate duties. This is often because they have few administration staff, such as staff to deal with receipting locally raised funds through the school office. These situations require careful monitoring and oversight by management.

The most common fraud reported to us is the theft of small amounts of cash by staff at schools, because there are weak physical controls and a lack of segregation of duties. We recommend that schools:

  • encourage electronic payment for fees or large invoices, rather than cash payments;
  • store cash in a secure location that few employees have access to; and
  • minimise the time they hold cash on their premises.

Procurement-related theft, carried out mainly through false invoices, is less common, but the amounts involved tend to be larger. To mitigate against false invoices, a board needs to ensure that it has adequate internal controls. Schools should:

  • require a second person to authorise all changes to supplier bank accounts after confirming the change with the supplier;
  • have adequate supporting documentation for all expenditure; and
  • investigate all suspicious invoices.

During our audits, we look at controls that are relevant to the audit. If auditors identify weaknesses in controls, they mention these in the management letter sent to the board after the audit, along with recommendations on how to make improvements. We expect boards to discuss this letter at a board meeting and the auditor will follow up the recommendations in the next year.

We made some recommendations to the Ministry about improving its guidance on internal controls and fraud to schools in previous reports. The Ministry told us that it would update the guidance in this area in its Financial Information for Schools Handbook. It has not done this yet, and we repeat the recommendation below.

Recommendation 5

We recommend that the Ministry of Education:
  • improve its guidance on what good controls look like; and
  • continue to encourage schools to have fraud policies and to report suspected fraud to the appropriate authority.

Non-compliance with the Holidays Act 2003

The issue of non-compliance with the Holidays Act 2003 has arisen because entities might have incorrectly interpreted clauses of the Holidays Act or employment agreements when calculating holiday entitlements.

The Ministry has identified that there is an issue with holiday pay for employees on the school payroll, but it has not yet quantified the issue or the schools affected. Because the Ministry could not reliably estimate the amounts owing, it disclosed this as a contingent liability in its financial statements for the year ended June 2018.

Even though the Ministry pays most teachers (except those funded from a school’s operations grant), school boards are the employer of all teachers. Until further detailed analysis has been completed, the potential effect on any specific individual or school and any associated liability will not be known. Work in this area is still ongoing. For 2018, all school financial statements disclosed a contingent liability for non-compliance with the Holidays Act 2018.

As at June 2019, the Ministry has recognised a provision for holiday pay non-compliance in its financial statements. However, the effect on individual schools has yet to be determined, so schools will also be required to disclose a contingent liability in their 2019 statements.

6: Section 87AB of the Education Act.

7: Education sector: Results of the 2010/11 audits.

8: Clause 29 of Schedule 6 of the Education Act and Regulation 12 of the Crown Entities (Financial powers) Regulations 2005.