Part 4: Audit results for 2019

Audit opinions and audit reports

4.1
We issued unmodified audit opinions for 24 of the 27 TEIs. That means that we were satisfied the information we audited fairly reflected those 24 TEIs’ activities for the year and their financial position at the end of the year. Three TEIs did not meet their statutory reporting obligations.

Emphasis of matter – Covid-19

4.2
When the country was in alert levels 3 and 4, the TEIs were finalising their financial statements and we were auditing them. It was difficult to determine the full effect that Covid-19 has had on their operations.

4.3
TEIs and auditors had to consider whether the pandemic had implications for going concern assumptions. All but one TEI disclosed the possible significant effects of Covid-19 in their financial statements.²⁸ Our audit reports included an “emphasis of matter” paragraph drawing attention to those disclosures.

4.4
The disclosures by TEIs reflected their own particular circumstances. For example, wānanga do not have many international students, so they were less affected by the border closures than other TEIs.

4.5
Covid-19 was a “non-adjusting subsequent event”, which means that the figures reported in the December 2019 financial statements did not need to change. However, as the Covid-19 situation evolved, we saw increased detail in the disclosures by those TEIs that reported closer to the statutory deadline.

Emphasis of matter – reforms of vocational education

4.6
We included emphasis of matter paragraphs in the 13 ITP audit reports, drawing attention to the ITPs’ impending disestablishment in 2020. Because the subsidiary companies continued to provide vocational education, they did not need to change the way they measured or classified their assets and liabilities.

Other matters of public interest – sensitive expenditure

4.7
Sensitive expenditure is any spending by a public organisation that could be seen to be giving private benefit to a staff member, their family, or friends. Spending that is inappropriate or that lacks a legitimate business reason risks harming a public organisation’s reputation and that of the public sector more generally.

4.8
Therefore, public organisations need to manage sensitive expenditure deliberately and diligently. As with all spending, they need to be able to justify it. 

4.9
Part of the Auditor-General’s wider mandate is to monitor how public organisations spend public money, including whether the spending provides, or might be seen to provide, some private benefit.

Otago Polytechnic – study tour to Japan

4.10
As part of our testing of Otago Polytechnic’s expenditure for 2019, we reviewed spending on a Japanese study tour that took place in April 2019. The chief executive and chairperson travelled to the International College of Technology Kanazawa to sign a renewal of a memorandum of understanding.

4.11
We questioned the size of the party (21 people) that travelled to Japan. Many of these people worked in support roles, such as administration and finance. In our view, the formal business case for the trip lacked a robust reason for including so many staff. When we reviewed the itinerary for the trip, we found that most of the activities were similar to sightseeing and cultural experience tours.

4.12
The Polytechnic paid at least $2,000 for each travelling staff member. Staff who had accumulated funds in their professional development allocation used this to pay for the trip (as well as the $2,000 paid by the Polytechnic).

4.13
Staff contributed only once the costs were more than the Polytechnic’s contribution and their professional development allocation. On average, staff paid for about half of the costs. However, a small number of staff were deemed to be working full time on the trip and did not pay for any of the costs.

4.14
The Polytechnic told us that it considered it important for staff to understand the culture of international students attending the Polytechnic. It also pointed to its employee satisfaction ratings.

4.15
In our view, if there was a clear business justification, the Polytechnic could have sent a small number of staff and asked those staff to provide cultural training when they returned. This would be a more usual way to use learning and development funds.

4.16
We understand that the Polytechnic had previously run similar trips under similar arrangements. After our review, we expected the Polytechnic to reconsider its policy on overseas travel expenditure, particularly from the perspective of its reasonableness in the public sector. The Tertiary Education Commission also wrote to the new chief executive asking them to investigate and review how fit for purpose the Polytechnic’s sensitive expenditure and business travel policies were.

4.17
We understand that this has now been done. The Polytechnic has confirmed that – with a change in chief executive, a new Board, and a review of policies – a trip such as this will not occur again.

Auckland University – purchase of a house for Vice-Chancellor accommodation

4.18
In November 2019, the University of Auckland purchased a house in Parnell, Auckland. The University said the house would be used for accommodation, business-related operations, and functions.

4.19
The house cost about $5 million, and the University entered into a tenancy agreement with the incoming Vice-Chancellor from the start of her five-year term of employment.

4.20
We were interested in this matter, because it seemed an unusual purchase for the University to make. It raised questions about the University’s use of public resources and how it manages sensitive expenditure. The focus of our work was on the University’s actions and decision-making processes.²⁹

4.21
The University has not been able to show that this sensitive expenditure was appropriate in all respects. This is because the University has not been able to demonstrate that it has met key principles of managing sensitive expenditure well.

4.22
For example, the University has not been able to show a justifiable business purpose for purchasing the house. It is hard to accept that purchasing a house to provide accommodation for the incoming Vice-Chancellor, and to host an anticipated 14 events in two years, justifies the $5 million expenditure.

4.23
The University has also been unable to show that the expenditure was moderate and conservative. Although the University paid a market rate for the house, it did not assess whether it needed to spend that amount on a house, nor whether the house needed to be in that part of Auckland. It also did not consider whether it could have effectively achieved the purposes it says it bought the house for – accommodation and hosting – for less cost.

4.24
The University also did not follow its policy on sensitive expenditure, nor its processes for approving capital expenditure.

4.25
Where sensitive expenditure is concerned, we expect all public organisations to consider each situation carefully to ensure that they can justify the spending and are reasonably able to do so. To do that, we encourage every public organisation to consider our recently updated good practice guidance on sensitive expenditure.³⁰

Timeliness of reporting

4.26
Despite the operational disruptions caused by Covid-19, all eight universities, all three wānanga, and 12 of the 16 ITPs reported by the statutory deadline of 30 April 2020.

4.27
Southern Institute of Technology reported three weeks late because of constraints on the Institute and its auditor related to Covid-19. Wellington Institute of Technology (Weltec), Whitireia Community Polytechnic (Whitireia), and Tai Poutini Polytechnic are yet to report. Covid-19 is not the primary reason for these three ITPs’ delay.

4.28
WelTec and Whitireia have shared management and governance roles. They finalised their 2018 financial statements only after the Government provided a capital injection of $5 million in 2020.

4.29
We were able to give an audit opinion on their 2018 financial statements on 19 March 2020, almost 11 months after the statutory reporting date. We drew attention in our audit report to the ongoing financial difficulties they were experiencing. WelTec and Whitireia have been unable to produce a final set of their 2019 financial statements for audit.

4.30
Tai Poutini Polytechnic is in significant financial distress. It has not produced financial statements for audit since 2017.

4.31
We are concerned that the reporting delays in these three ITPs, compounded by staff turnover in the finance teams, presents an unacceptable accountability risk.

4.32
The 16 ITPs also had to provide a final set of financial statements for 1 January 2020 to 31 March 2020. This was because they were disestablished as part of the Government’s reforms of vocational education (see Part 2).

4.33 Only ten of the 16 ITPs have reported their results for the three months to 31 March 2020. Weltec, Whitireia, Tai Poutini Polytechnic, Waikato Institute of Technology (Wintec), the Universal College of Learning, and the Western Institute of Technology at Taranaki have not yet reported. 

4.34
We will report on the 31 March results when we report on the rest of the tertiary education sector’s results for the year ending 31 December 2020.

4.35
In these uncertain times, we want to focus on ensuring that organisations continue to produce robust and high-quality financial reporting, and that the audits of these reports remain robust and high quality.

4.36
Although end-of-year reporting describes events that have already happened, it provides the foundation for longer-term planning. High-quality, reliable, and independently assured information is important to maintaining the trust and confidence of Parliament and the public.

Preparing for audit

4.37
Even though a high proportion of TEIs meet their statutory reporting deadlines every year, doing so can involve hidden costs. We approved eight requests from auditors wanting to charge additional costs to TEIs because of delays and rework in auditing the 2019 financial and performance statements. These costs are also not just financial – they can include extra stress on TEI staff and audit teams.

4.38
TEIs can help the audit process to run smoothly. Having robust governance frameworks and internal controls are important to good stewardship of organisations and maintaining public trust and confidence. When they are operate effectively, these frameworks and controls can reduce the amount of work auditors need to do.

4.39
Some common issues faced by our auditors in auditing TEIs’ financial statements³¹ included:

• a lack of documentation to support critical judgements, such as on the value of assets, the forecasting of revenue, and the recovery of debt;
• auditors being unable to rely on internal controls;
• TEIs not having all the required information available at the start of the process;
• a lack of internal quality review of the annual report (including the financial statements and statements of service performance), instead relying on the auditors to find errors;
• auditors receiving multiple versions of the financial statements; and
• a lack of disclosures to explain certain figures.

4.40
Although it is always important to prepare for the audit process, it has been even more important in the context of Covid-19.

4.41
The most challenging matters for public sector organisations and auditors have been those that require a high level of judgement and estimation because of Covid-19. Because future revenue from international students is so uncertain, we expect TEIs to consider the effects of potential restructuring or changes to how they deliver services on their future costs and use of assets.

4.42
Other public organisations have carried out additional work to test and document impairment of physical assets, intangible assets, investments, and interests in associates. Some organisations have faced challenges calculating and supporting the collectability of receivables. These organisations have needed to do more work to determine expected credit losses because of a higher risk of default.

4.43
Obtaining asset valuations and understanding them has also been more challenging. In some instances, valuers have had difficulty providing valuations of assets. There is uncertainty about how Covid-19 has affected, and will affect, the value of some assets.

4.44
We encouraged TEIs to engage with valuers early. We also encouraged them to carefully consider the valuation reports so they can make good disclosures about the associated uncertainties in their financial statements.

4.45
Senior managers need to work closely with their appointed auditors to improve the end-of-financial year process. Based on our experience from other public organisations, TEIs will need significant time and expertise to form robust judgements when estimating the effects of Covid-19.

Audit recommendations

4.46
The top four types of recommendations our auditors made were for TEIs to improve:

• controls over expenditure, including payroll systems (this was the most common recommendation in 2018);
• how they applied their accounting policies or policy framework, such as spending on travel (this was the second most common recommendation in 2018);
• their processes for valuing property, plant, and equipment, including maintaining the fixed asset register; and
• their technical knowledge of, for example, accounting standards and how to present financial statements.

4.47
To protect themselves from fraud, it is important that TEIs improve their controls and ensure that staff follow policy. In 2019, TEIs notified us of the following three significant internal fraud events:

• An employee misused a purchase card by exploiting a weakness in the accounting software and spent more than $100,000 on personal items.
• A contractor’s employee who had a significant criminal history, which the TEI was unaware of, stole physical equipment.
• A senior IT manager overrode management controls, set up a false company with his partner, and stole $220,000 through false invoicing.

4.48
These internal frauds were reported to the Police. Staff in TEIs were also victims of several external scams. These included fraudsters getting TEI staff to change the bank account details of vendors or employees to divert payments.

4.49
In the instances we are aware of, the TEIs’ control systems identified these matters. However, this was at varying times after the frauds had already been committed.

4.50
With a significant increase in government expenditure because of Covid-19, there are increasing financial and reputational risks from scams and other fraud, probity, and waste matters. It is important that TEIs’ management control environment and systems of internal control remain robust to maintain the high standards of integrity expected from public organisations.

4.51
Auditors identify opportunities for improvement. They expect governors to maintain an active interest in addressing these issues despite the other challenges and risks that the sector faces. These recommendations present opportunities for TEIs to improve how they safeguard public money, which will improve trust and confidence in the public sector.

28: The University of Canterbury did not include a disclosure on Covid-19. It reported on 26 February 2020, before Covid-19 became a serious issue in New Zealand.

29: Our full report on the University of Auckland’s decision to purchase a house in Parnell can be found on our website at https://oag.parliament.nz/reports.

30: Office of the Auditor-General (2020), Controlling sensitive expenditure: Guide for public organisations, available at oag.parliament.nz.

31: TEI audits for 2019 and the additional ITP audits for the period to 31 March 2020.