Part 3: Where improvements are most needed

3.1
In this Part, we comment on the more significant matters identified during the 2023 school audits:

• the Ministry needs to help schools improve their payroll processes and controls;
• schools need to have up-to-date cyclical maintenance plans;
• schools need better control of sensitive expenditure;
• schools need to prepare full budgets;
• schools need to publish their annual reports; and
• the Ministry needs to review the audit requirements for closed schools.

Payroll processes and controls

3.2
Salary costs are the largest operational cost for schools, so payroll information is a significant part of the financial statements. The Ministry of Education funded about $7.1 billion (2022: $6.4 billion) of salary and employee-related costs for 2023. Education Payroll Limited administers the school payroll on behalf of the Ministry for about 97,000 teachers and support staff every fortnight.

3.3
Schools require certain payroll reports to complete their financial statements. The appointed auditor of the Ministry of Education carries out testing centrally before these reports are distributed to schools and their auditors. This is supplemented by testing locally at schools by the individual school auditors on those aspects that cannot be tested centrally.

Centralised audit work on payroll

3.4
The appointed auditor for the Ministry of Education carries out analyses of the payroll data to identify anomalies or unusual transactions. The analytics reports cover payroll errors, overpayments, and funding code errors.

3.5
We write separately to the Ministry of Education every year setting out our findings from this work, with a view to improving the accuracy and reliability of the payroll data.

3.6
There continue to be improvements in the underlying processes operated by Education Payroll Limited, which is evidenced by the reduction in the number of anomalies and unusual transactions. Our school auditors follow up any transactions that cannot be resolved centrally by the Ministry of Education or Education Payroll Limited, because the necessary information is held by the school.

3.7
The total value and number of overpayments during 2023 has decreased compared to 2022 (from about $4.5 million in overpayments to $3.7 million). The largest cause of overpayments is late notification of changes by schools to Education Payroll Limited, and the second largest cause is inaccurate data entry by Education Payroll Limited. These causes are consistent with the reasons for overpayments in prior years.

3.8
Funding code errors result in payroll payments being incorrectly funded by either the board or the Ministry (through teachers’ salary funding) and affect the board’s discretionary funding. The value of funding code errors has been about $0.2 million for the last four years.

Audit of payroll at individual schools

3.9
School auditors carry out audit work on payroll at each school. This is because many payroll transactions are initiated by the schools, and schools are responsible for inputting pay information into the EdPay system. It is therefore important that there is a strong control environment at individual schools.

3.10
Where possible, auditors seek to rely on school’s controls because this reduces the amount of other audit testing required.

3.11
The introduction of the EdPay system in 2021 affected how schools review payroll changes. The guidance provided to schools at that stage explained that reports were being prepared to show changes to pay data. Changes were made to the reports, but the guidance to schools was not updated to reflect those changes. Because of this, many schools have not implemented satisfactory controls for pay changes. Auditors have had to perform other procedures to obtain sufficient evidence to support the payroll expenditure.

3.12
Our auditors have reported that many schools did not independently review key changes (such as bank accounts, allowances, and set up changes to non-teaching staff).⁵ Also, fortnightly payroll reports are difficult to review because they are large and contain a lot of detail. Many schools told us they would like to receive a summary of changes (commonly known as an exceptions report) to help with the effectiveness and efficiency of their review.

Recommendation 2

We recommend that the Ministry of Education and Education Payroll Limited review the adequacy of current payroll reports and update the guidance on school payroll controls, so that schools can easily implement and operate the expected payroll controls.

Non-compliance with the Holidays Act 2003

3.13
Non-compliance with the Holidays Act 2003 has been an issue for several years. The Ministry of Education has identified that this non-compliance includes school employees, both teachers and support staff.

3.14
The Ministry of Education’s 2024 annual report acknowledges a non-departmental Holidays Act provision of $456m (2022/23: $403m). The amount is an estimate of the payments required to current and former individuals paid through the schools’ payroll where they have not been paid in keeping with the Holiday Act. The ultimate amount could be significantly different to the estimated amount provided at 30 June 2024. The work is ongoing. Partial payments of $8m were made during 2023/24 (2022/23 $38.4m).

3.15
These payments were made to employees by the Ministry of Education because it decided to meet the liability on behalf of school boards, so there has been no cost to individual schools.

3.16
The value of the provision is significant. Boards, as the employer, continue to have the legal obligation for future Holidays Act remediation. Therefore, in 2023, school boards continued to disclose a contingent liability for further potential payments, the amount of which could not be reliably estimated. Such disclosures will continue in schools’ financial statements until all Holidays Act remediation payments are made.

3.17
We encourage the Ministry to progress paying what is owed to teachers and support staff to comply with the Holidays Act, and keep schools informed of the progress.

Cyclical maintenance plans

3.18
The Ministry of Education (or a proprietor for state-integrated schools) provides schools’ property. Schools must keep their property in a good state of repair. Schools receive funding for this as part of their operations grant.

3.19
A cyclical maintenance provision is included in the financial statements of schools to account for their obligation to maintain the property. Schools need to plan and provide for future significant maintenance, such as painting their buildings.

3.20
Auditing the cyclical maintenance provision has always been challenging. We have reported on this aspect of the financial statements many times. Some schools do not fully understand the cyclical maintenance provision and do not have all the necessary information to calculate it accurately.

3.21
The 10-year property plans of schools, which are now prepared by property consultants and approved by the Ministry of Education,⁶ should include maintenance plans for schools to maintain their buildings for the next 10 years. Schools typically use the property plans to calculate their cyclical maintenance provisions.

3.22
For the 2023 audits, there were 58 modified audit reports relating to cyclical maintenance (26 due to a limitation of scope, and 32 where we disagreed with the school about the accounting treatment for cyclical maintenance).

3.23
We continue to find that many schools do not have good supporting evidence for their cyclical maintenance provisions. For the 2023 audits, 14% of schools did not have a reliable plan and other evidence was needed to support the cyclical maintenance provision. This finding is consistent with 2022.

3.24
A lack of evidence for cyclical maintenance provisions is the reason for most of our qualified audit opinions this year. A qualified opinion is issued only when the cyclical maintenance provision recorded by the school is, or could be, materially wrong

3.25
When appropriate evidence is not readily available, this usually requires significantly more time and effort for both the school and the auditor, and can delay the audit.

3.26
If a school has a maintenance plan prepared by a Ministry-appointed property consultant and approved by the Ministry, auditors can expect the plan to have been prepared in keeping with the Ministry’s requirements. This reduces the amount of audit work required. However, our auditors find that maintenance plans are not always prepared.

3.27
For the 2023 school audits, there were 298 schools where auditors had concerns about the appropriateness of the underlying information used to estimate the provision. Of this, there were 150 schools where their property plan did not include maintenance estimates.

3.28
Since our report on the results of the 2021 school audits, we have recommended that the Ministry ensure that schools comply with their property planning requirements by having up-to-date cyclical maintenance plans. We are yet to see improvements.

3.29
We note a new Maintenance Guide For Schools was published in February 2024 in collaboration with the Building Research Association of New Zealand. We also note that Ministry staff have raised awareness of the cyclical maintenance requirements as part of annual property visits to schools.

3.30
We understand that, as part of the review by the Ministry, a check is done that the 10-year property plans include a maintenance plan. This control does not appear to be working effectively for some schools. We note that there is no consequence from the Ministry for a school when it does not prepare a cyclical maintenance provision.

3.31
If a school does not have a maintenance plan, it needs to source other information to calculate a reasonable cyclical maintenance provision. This can be timeconsuming for schools and auditors.

3.32
The Ministry requires the school each year to review the appropriateness of the plan and the provision. We continue to find this is not performed or not performed well. This becomes more of a problem where plans are older and property changes have occurred at the school.⁷

Recommendation 3

We recommend the Ministry of Education evaluate whether all schools’ 10-year property plans include adequate information to calculate the cyclical maintenance provision, and consider how it can help schools with reviewing plans and updating cyclical maintenance provisions.

Sensitive expenditure

3.33
Sensitive expenditure is any spending that could give private benefit to staff in addition to the benefit to the school. Problems can arise with expenditure related to travel, accommodation, and hospitality, and particular care needs to be taken with these. Problems can also arise from expenditure that is unusual or is not closely related to an organisation’s purpose or functions.

3.34
School boards are responsible for deciding whether sensitive expenditure is appropriate and for ensuring sensitive expenditure policies, procedures, and decisions are fit for purpose and will withstand parliamentary and public scrutiny.

3.35
During the past year, auditors brought to our attention many items of sensitive expenditure. Some sensitive expenditure was referred to in audit reports (see paragraphs 2.34 to 2.36). If the amount of expenditure is not significant, or the matter relates to policies and procedures underlying sensitive expenditure decisions, auditors raise any concerns in a report to the board of trustees rather than in the audit report.

3.36
Our Controlling sensitive expenditure: Guide for public organisations is the framework we use for assessing schools’ sensitive expenditure.

Funding for principals’ professional coaching and well-being

3.37
In 2022, the Ministry of Education provided well-being support funding of $12,000 to school boards where the principals had fewer than three years’ experience. About $6.3 million was paid to 524 schools. This one-off payment was made to support the well-being of the principals and staff after the disruptions and difficulties from Covid-19. Guidance was provided to the schools on how these funds should be used.

3.38
In our Results of the 2022 school audits, we questioned the appropriateness of some of the expenditure incurred with this funding and the lack of clarity about the types of expenditure that were reasonable.

3.39
Professional coaching and well-being funding became part of the collective agreements for all principals rather than only those with fewer than three years’ experience. For both 2023 and 2024, all principals can access funding of up to $6,000 each year for ongoing professional development and well-being support that assists with their leadership capability. The $6,000 is paid through the school’s operational funding but itemised to be spent for the purposes of professional coaching and support for principals.

3.40
The Ministry of Education guidance issued to schools on the use of this funding required the funds to be used in a way that improves the principal’s professional well-being and/or supports the well-being of staff and/or the wider community. The guidance was clear that the school should be mindful of its financial obligations for school expenditure and consider whether the school’s policies were adequate to cover this form of spending. It provided links to our guidance on sensitive expenditure and the Ministry of Education’s policies on sensitive expenditure and principal concurrence (getting approval from the Ministry for an additional payment or benefit to the principal).⁸

3.41
Our auditors raised concerns about some of the expenditure incurred with the professional coaching and well-being support funding. We considered examples of the expenditure and issued guidance in May 2024 to help auditors in their audit of that expenditure. Figure 5 summarises the guidance.

Figure 5
Summary of guidance provided to auditors about schools’ spending on professional coaching and well-being

Category	Examples	Audit response	Rationale
Expenditure clearly for school purposes	Funding used for: professional development courses or conferences (including overseas) linked to the principal’s role and consistent with policies a staff member’s development (relevant to staff member’s role at the school) usual school activities (i.e. spent for school purpose)	No response required.	The expenditure is related to school purposes. While expenditure is itemised to be spent on professional coaching and support for principals (including wellbeing) the funding can be used for broader school purposes.
Expenditure for professional development or wellbeing that is ‘sensitive,’ i.e. payments that provide or could provide a personal benefit	Funding used for: Koru Club Membership Electronic equipment (e.g. Mobile phone, air pods) Other equipment (e.g. backpack) Sports membership (e.g. gym, golf club, soccer club) Hobbies (e.g. piano lessons, ski passes, pilates) Health related services (e.g. massages, vitamins and supplements, GPs, chiropractors).	Report the matter to the Board because the expenditure confers some personal benefit, and the school should have requested concurrence from the Ministry. The school would also need to consider tax implications.	The Ministry’s guidance allows expenditure on wellbeing and the interpretation of this can depend on the individual involved. However, any expenditure that provides, or has the potential to provide, a personal benefit requires concurrence from the Ministry. It would also be important to understand whether the expenditure is consistent with the school’s policies.
Expenditure inconsistent with the purpose of the funding or not an appropriate use of public money	Funding used for: A lump sum payment made to the principal Personal travel, including paid personal stopovers for overseas travel for school purposes Travel for family members.	Draw attention to the matter in the audit report and report the matter to the Board	Whether we refer to these matters in the audit report depends on the amounts involved and the process followed.

3.42
There were 54 schools where auditors reported to boards about sensitive expenditure that provided a personal benefit to the principal (such as gymmemberships, pilates classes, sports events, nutritionist consultations, nutrient products, adventure tourism, guided walks, and overseas family travel). In each case, the school did not seek agreement from the Ministry.

3.43
This type of expenditure might also have occurred during 2024 without the Ministry’s agreement. In our view, the Ministry could consider why schools do not seek the necessary agreement and, given the history of issues with this type of funding, consider the effectiveness of this funding approach.

Recommendation 4

We recommend that the Ministry of Education determine appropriate actions to take when school spending on professional coaching and well-being support funding was inconsistent with the purpose of the funding or inconsistent with Ministry guidance.

Other sensitive expenditure matters

3.44
The matters that auditors raised with boards in the past year were similar to previous years. They included:

• five schools that did not have sensitive expenditure policies, including for gifts, or policies were not updated regularly;
• in 10 schools, gifts to staff that either did not have board approval, were excessive, or were inconsistent with the school’s gift policy;
• in four schools, hospitality and entertainment expenses that seemed excessive; and
• the provision of gifts and travel expenditure (see paragraphs 3.50-3.51).

3.45
Most of the concerns related to poor controls over the approval of principals’
expenses or credit card expenditure. The trend in the number of incidences has not improved. The main matters raised were:

• in 23 schools, principals approving their own expenses or having it approved by someone subordinate;
• in 32 schools, no approval of credit card expenditure or having it approved by someone subordinate; and
• in nine schools, inadequate or no documentation to support expenditure.

3.46
As we have previously reported, credit cards are susceptible to error and fraud or being used for inappropriate expenditure, such as personal expenditure. Money is spent before any approval is given, which is outside the normal control procedures for spending public money. This also applies to fuel cards or store cards.⁹

3.47
Schools should use a “one-up” principle when approving expenses, including credit card spending. This means that the presiding member (the chairperson) of a board would need to approve a principal’s expenses. It is also important that credit card users provide supporting receipts for the approver and an explanation for the spending.

3.48
We include guidance about using credit cards in our good practice guide Controlling sensitive expenditure.¹⁰ This provides guidance on making decisions on sensitive expenditure, guidance on policies and procedures, and examples of sensitive expenditure.

3.49
We also have other information on sensitive expenditure in the “Good practice” section of our website (oag.parliament.nz).

Provision of gifts

3.50
Some schools spent significant amounts on gifts. Auditors reported these instances to each school’s board. They included:

• the purchase of $10,000 of gift vouchers to thank people involved with school lunches;
• the purchase of about $20,000 of premium IT laptops and notebooks for the school prize giving;
• a $1,500 gift voucher to a board member to recognise eight years of service; and
• the payment of about $40,000 to staff (including the principal) to show appreciation for the hard work during the Covid-19 period.

Overseas travel

3.51
There were instances of overseas travel without a clear educational rationale. Auditors reported on these instances to each school’s board. They included:

• travel to Europe for international student recruitment, where the board approved $20,000 but actual expenditure exceeded $40,000;
• overseas travel for the principal that was not approved by the board;
• meeting a $30,000 shortfall in funding for a tournament trip paid for by the school; and
• a $10,000 contribution for a cultural excursion to Hawaii for 25 students, which was approved by the board but did not contain an assessment of why the expenditure was appropriate.

3.52
The Ministry has guidance for schools in its Financial Information School Handbook for this type of expenditure. The guidance requires boards to be clear about the expected educational benefits to the school from the expenditure and to approve the expenditure before the travel occurs.

Integrity in the public sector

3.53
Our work continues to focus on ethics and integrity in the public sector. For schools, managing conflicts of interest is particularly important.

3.54
Many schools are in small communities, where the risk of conflicts of interest is high. There is a particular risk of conflicts of interest occurring when appointing new employees and contractors and purchasing goods and services. This is because a school board might have few options in a small community.

3.55
Having a conflict of interest does not mean a person has done anything wrong. It is important that conflicts are known so that schools can properly manage them and do it transparently.

3.56
In schools, the principal is also charged with governance as part of the board. All boards have a staff representative and sometimes a student representative. Integrated boards also include representatives of their proprietor.

3.57
Boards need to properly manage decisions that they make on matters for which a member or members have an interest. A board member should be excluded from participating in any board discussion or decision on a matter for which the member has an interest. However, the member can attend the meeting to give evidence, make submissions, or answer questions.¹¹

3.58
A good way of ensuring that there is awareness of all potential conflicts is to maintain an interests register and a formal process for declaring any interests at the start of board meetings.

3.59
We have good practice guidance on our website, including Managing conflicts of interest: A guide for the public sector and an interactive quiz that covers a range of scenarios where a conflict of interest might occur.

3.60
We have also published guidance on integrity, Putting integrity at the core of how public organisations operate. This includes an integrity framework that aims to help organisations achieve the culture of integrity in the workplace.

3.61
Other resources on our website that may be of interest to school boards include guides on:

• good governance;
• discouraging fraud;
• procurement; and
• severance payments.

Full budgets

3.62
In past years, we have reported that many schools do not prepare budgets in sufficient detail to meet legislative requirements. Section 11(i) of the Education (School Planning and Reporting) Regulations 2023 requires each school to disclose budgeted figures for its statements of revenue and expenses, assets and liabilities, and cash flows. Schools’ financial statements are required to include those budgeted figures, which should have been approved at the beginning of the school year.

3.63
Auditors check that the budget numbers in the financial statements are from the approved budget. However, many schools do not prepare a budgeted balance sheet or cash flow statement. Our auditors identified 492 schools (2022: 343, 2021: 485) that were not preparing full budgets.

3.64
Having a full budget, including a balance sheet and statement of cash flows, is important for good financial management, including managing cash flows so that schools meet their financial obligations when they are due. If schools do not manage this properly, they can get into financial difficulty.

3.65
We understand the Ministry has developed budgeting tools for schools and kura to use. It has been working with schools that have not previously prepared full budgets and with schools’ financial service providers.

3.66
We have repeated our recommendation that the Ministry work with schools to support them to complete full budgets.

Recommendation 5

We recommend that the Ministry of Education support the schools we have identified as not preparing full budgets to ensure that their budgets for the next school year are complete.

Published annual reports

3.67
Schools are required to publish their annual reports online.¹² The annual report consists of a statement of variance,¹³ statement of compliance with employment policy, financial statements (including the statement of responsibility and audit report), and a statement of KiwiSport funding.¹⁴

3.68
The number of schools that publish their annual reports online has remained consistent since 2021. At the time of the 2023 audits, 88% of schools had published their 2022 annual report online (2021: 88% had published their 2020 annual report online).

3.69
Although the level of compliance is consistent, there are at least 225 schools that are not publishing their annual reports online. Parents and other members of a community should be able to access the school’s annual report online.

3.70
It is important that schools publish their annual report soon after their audit is completed. This ensures that they are accountable to their community and comply with legislation. If a school does not have a website, the Ministry of Education can publish the annual report on its Education Counts website.

Information on closed schools

3.71
The Ministry of Education has determined that closed schools need to prepare both a final set of financial statements at the date of closure and a liquidation statement, setting out how any remaining assets have been distributed. The Ministry requires both statements to be audited.

3.72
On closure, a Residual Agent is appointed to settle the liabilities of the school and disperse the assets as agreed with the Ministry of Education. We have raised concerns in the past about the delays in auditors receiving these statements for audit. We also find that there is a lack of underlying information needed to complete the audits once the school has closed.

3.73
Despite guidance to Residual Agents being updated a few years ago, we have not seen an improvement in information being provided for the audits of closed schools. There are currently seven closed schools with unfinished audits, the oldest one dating back to 2014 (see Figure 6). As the value of accountability reduces over time, it is likely the audited information will no longer be useful.

Figure 6
Seven schools closed prior to 2020 that still have unfinished audits

School name	Number of incomplete audits	Last audit year completed	Year of closure
Flagswamp School	2	2018	2020
Inangahua Junction School	1	2017	2018
Isla Bank School	1	2017	2018
Morven School	1	2015	2016
Wainoni School	1	2015	2016
Putaruru Education Services Trust	1	2014	2015
Tareha School	1	2013	2014

3.74
We understand the Ministry is reconsidering the need for a final audit to be completed when a school or kura closes, particularly where this would not be required under current legislation. We also understand that the Ministry is considering how to ensure that final audits are completed in a timely manner.

Recommendation 6

We recommend that the Ministry of Education complete its review of the requirements of Residual Agents and make appropriate changes to ensure timely accountability of closed schools.

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5: Separation of duties (more than one person being involved in a task, to prevent fraud or error) is a key control in financial systems. The expectation is that all changes to an employee’s pay or personal information should be reviewed and approved by a second independent person.

6: This requirement came in on 1 July 2019. Schools update their 10-year property plan every five years so each year about 20% will be updating their plan.

7: The Ministry requirement is that 10-year property plans are updated every five years.

8: “Concurrence” is agreement by the Secretary for Education to a board making an “additional payment or benefit” (a payment additional to the base salary and allowances outlined in the principal’s collective agreement or Ministry-promulgated Individual Employment Agreement (IEA)). See Circular 2020/10: Principal Concurrence – Education in New Zealand.

9: Auditors identified four schools where staff had personal expenditure funded by the school that was later reimbursed. There was also an instance of school staff obtaining cash advances from a credit card and not accounting for what the cash had been spent on.

10: Controller and Auditor-General (2020), Controlling sensitive expenditure: Guide for public organisations, at oag.parliament.nz.

11: Section 15(1) to 15(4) of the Education (School Boards) Regulations 2020.

12: See section 136 of the Education and Training Act.

13: A statement of variance is a statement where a school board provides an evaluation of the progress it has made in achieving the aims and targets set out in its Charter.

14: From 2023, boards will be required to include an evaluation of the schools’ students’ progress and achievement and a statement explaining how they have given effect to te Tiriti o Waitangi.