Tertiary Education Commission

Financial Review briefing to the Education and Science Committee 2010/11 Financial Year Tertiary Education Commission 1 28 March 2012

2 Assistance to the Committee The Education and Science Committee is conducting a financial review of the performance in the 2010/11 financial year and the current operations of the Tertiary Education Commission in accordance with Standing Order 340. The Controller and Auditor-General provides Parliament with assurance on the performance and accountability of public entities. The Office of the Auditor-General typically assists select committees with their financial reviews by providing further details on the results of the annual audit in Part A of our written briefings, and by suggesting lines of enquiry and questions relevant to the particular public entity under review in Part B of our written briefings. Our annual audits provide a high, but not absolute level of assurance about whether a public entity s financial statements comply with generally accepted accounting practice (GAAP) in New Zealand and fairly reflect its financial position and its financial and service performance for the period audited. Due to the volume of transactions, audit work is planned and performed to obtain evidence on a sample basis. Auditors use professional judgement to assess the evidence and ensure there is reasonable assurance that there are not material misstatements in the financial statements (that is, differences or omissions that would affect someone s overall understanding of the financial statements). We report, in our audit opinion, only material differences or omissions that we find. To identify lines of enquiry for Part B of this briefing, we: analyse the results of the annual audit and the accountability documents; refer to any relevant performance audit or inquiry work; and use our specific knowledge of the entity gained during the audit process and by ongoing contact with the entity. In developing the advice within this briefing document, the Office of the Auditor-General consulted with such parties as was necessary to ensure that the advice was correct. This process involved providing factual information of audit interest to the parties concerned (in either oral or written form), and obtaining confirmation of those facts, before giving advice to the Committee. The process did not involve providing to the parties concerned any contemplated or actual advice. Contact for further explanation If any member of the Committee would like further explanation or elaboration of any aspect of this briefing document, please contact Mark Evans, Sector Manager, Parliamentary Group on 04-917- 1538 or e-mail mark.evans@oag.govt.nz at the Office of the Auditor-General.

Summary of key issues 3 Part A: Results of the 2010/11 audit We issued an unmodified audit opinion on the financial statements and statement of service performance of the Tertiary Education Commission (TEC). We assessed the TEC s management control environment, and its financial information systems and controls as good. This assessment reflects our conclusion that the TEC maintains an effective management control environment. We assessed the TEC s service performance information and associated systems and controls as good. Given the major restructure undertaken during the reporting period, we reviewed redundancy payments and, based on a select sample, found that payments were reasonable and based on contractual entitlements. Part B: Advice to the Committee The key points we cover for the Committee are: Restructuring and organisational change The TEC underwent significant structural change in 2010/11. We suggest questions about how the TEC is assessing the effectiveness of this change and about the professional services model the TEC has adopted. Focus on performance The TEC reports that gains in system performance and learning outcomes have been made, and tertiary education organisations are becoming more responsive to their stakeholders. We suggest asking about the specifics, evidence and examples of these gains. Investment planning and future funding The Tertiary Education Strategy requires tertiary education organisations and industry training organisations to manage costs, seek efficiency gains, and explore additional sources of revenue. We suggest asking the TEC for its view on how well the sector is meeting these requirements. TEI group governance practices We suggest questions to the TEC about the business need for TEI subsidiaries and TEIs reporting about those subsidiaries.

4 Overview of the Tertiary Education Commission The TEC is a Crown entity established on 1 January 2003 under section 159c of the Education Act 1989. Members of the TEC Board of Commissioners are appointed by, and responsible to, the Minister for Tertiary Education. 1 The TEC s principal role is to give effect to the Government s Tertiary Education Strategy. It does this by: monitoring the performance and allocating Government funds to tertiary education organisations, and by providing advice to Government on the tertiary education sector. 2 Belinda Clark took up the position of Chief Executive of the TEC on 4 July 2011. She replaced Dr Roy Sharp, who retired in April 2011. Dr Colin Webb was acting Chief Executive in the interim. The TEC employed 220 full-time equivalent staff as at 30 June 2011. 3 The TEC s total revenue for 2010/11 was $3.189 billion. Its two principal revenue streams are grants and operating revenue: grants revenue $3.138 billion (2009/10: $3.144 billion) and operating revenue $49.976 million (2009/10:$57.977 million). 4 The TEC reported a grants surplus for 2010/11 of $10.138 million (2009/10: $13.792 million; 2008/09: $46.199 million; 2007/08: $9.827 million). The TEC s total operating surplus for 2010/11 was $6.545 million (2009/10: $16.326 million). 5 1 2 3 4 5 With the exception of a non-voting learner participant who is appointed by the Board. Members as at 30 June 2011 were Sir Harawira Gardiner (Chair, appointed 1 June 2010), Dierdre Dale, Jim Donovan, Robin Hapi, Ian Boyd, Anthony Hall, Pauline Winter, David Do (Learner Participant). TEC Statement of Intent 2011/12-2013/14, p.3. The TEC s policy function has been transferred to the Ministry of Education. TEC Annual Report for the year ended 30 June 2011, page 29. TEC Annual Report for the year ended 30 June 2011, page 59. TEC Annual Report for the year ended 30 June 2011, page 59.

Part A: Results of the 2010/11 audit 5 1 Audit opinion 1.1 We issued an unmodified audit opinion on the financial statements and statement of service performance of the Tertiary Education Commission (TEC). 2 Environment, systems and controls for measuring financial and service performance 2.1 Our conclusions on the TEC s management control environment, systems, and controls for measuring financial and service performance, for the year ended 30 June 2011, are set out in the table below. 2.2 We made our conclusions in the context of our work in forming an opinion on the TEC s financial and non-financial performance information. The purpose of commenting on the underlying environment, systems, and controls is to highlight areas for improvement identified during the audit. The grades assigned for 2010/11 reflect our recommendations for improvement as at 30 June 2011. They are not an assessment of overall management performance, or of the TEC s effectiveness in achieving its financial and non-financial performance objectives. (See the Appendix for an explanation of the grading scale and underlying assumptions.) Management control environment 2010/11 Good Improvements would be beneficial and we recommend that the TEC address these. 2009/10 Good Deficiencies we identified in 2009/10 have been largely resolved. Comment We have recommended that the TEC: continue its work updating its suite of policies to ensure relevance; and review its process and procedures to ensure that related party information is recorded completely in the Declaration of interest register for Commissioners. Other than these matters, we found no deficiencies in the areas we reviewed during 2010/11. Financial information systems and controls 2010/11 Good Improvements would be beneficial and we recommend that the TEC address these. 2009/10 Good Deficiencies we identified in 2009/10 have been partially resolved.

6 Comment Overall, we have graded the TEC s financial information systems and controls as good. Management is in the process of implementing the following recommendations: Complete development of the internal service level agreement for the different business groups across the TEC. Finalise and implement the data storage management policy. Review and, where appropriate, strengthen the ipayroll application password settings. Complete all stages of implementing its business continuity plan, as we recommended last year. Maintain all supporting documentation for payments, agreements, and changes to grants as evidence of decisions and payments being made. Service performance information and associated systems and controls 2010/11 Good Improvements would be beneficial and we recommend that the TEC address these. 2009/10 Good Deficiencies we identified in 2009/10 have been largely resolved. Comment The TEC should further enhance its Statement of Intent (SOI) and Statement of Service Performance (SSP) by: providing a narrative for targets in the Forecast SSP that are currently defined as Achieved, as this description of itself does not give the reader a proper context to explain the TEC s achievement relative to the measure; and completing implementation of auditable systems and controls to produce service performance information that supports performance measures. The above comments are based on our review of the forecast service performance reports and their supporting systems and controls, and our audit of the actual SSP and its supporting systems and controls. 3 Significant matters of audit interest 3.1 The Board of the TEC undertook a major restructure during the year to ensure that the organisation is well-positioned to deliver the Government s priorities for tertiary education as set out in the Government s Tertiary Education Strategy. 3.2 The restructure has resulted in the TEC disestablishing a significant number of staff positions. We reviewed redundancy payments on a sample basis. We found that payments were reasonable and based on contractual entitlements. In our audit for 2012, we intend to discuss with management whether the new structure has resulted in the benefits outlined in the restructuring proposal and to ensure that there was no control slippage as a result of the restructure.

4 Legislative compliance 7 4.1 We reviewed the systems and procedures that the TEC uses to identify and comply with legislative requirements. No issues arose that we need to draw to the Committee s attention.

8 Part B: Advice to the Committee 5 Restructuring and organisational change 5.1 The TEC Board of Commissioners engaged Deloitte in August 2010 to review the TEC s ability to deliver the Government s tertiary education priorities and give effect to the Tertiary Education Strategy. 5.2 A significant structural change resulting from the review was the reduction in the number of directorates from seven to three. This saw the disestablishment of the Chief Executive s Office, Māori Strategy, Policy Advice and Government Services, PTE and Community Education, Strategic Information and Evidence directorates. The new structure consolidates activities into the Tertiary Investment, Strategy Planning and Information, and Corporate services directorates. 6 5.3 The new structure came into effect on 1 June 2011. As noted above, as part of the annual audit we assessed the management control environment to gain assurance that internal controls and key financial information systems were operating as designed during the restructuring. Although the period of uncertainty had affected staff morale, we found systems were operating as designed. 5.4 The TEC reports that its organisational structure is now based on a professional services model with thought leaders in key roles rather than a more traditional management structure. The TEC aims to be an expert provider of information and will work with other education agencies to improve sector efficiency by increasing the quality of information about tertiary education organisations. 7 5.5 The Committee may wish to ask: The Committee notes the significant structural change the TEC has undertaken during 2010/11. How will the TEC assess the effectiveness of this restructure? In what ways has the restructure already enhanced effectiveness? How well have staff adjusted to the change? The Committee notes the TEC s organisational structure is now based on a professional services model with thought leaders in key roles rather than a more traditional management structure. Can the TEC key aspect of its new professional services model and comment on how it will enhance the TEC s ability to monitor the performance of the sector? 6 7 TEC Statement of Intent 2011/12-2013/14, page 7. TEC Statement of Intent 2011/12-2013/14, page 31.

6 Focus on performance 9 6.1 The TEC lists the improvement of tertiary education organisation and system as a key area of activity in its 2011/12-2013/14 Statement of Intent. 6.2 Tertiary education organisations (TEOs) are required to report on their performance as agreed in their investment plans (in accordance with (s.220(2a)(f) of the Education Act). These expectations are set out in the Plan Guidance developed by the TEC. Consistent with our broader aim of improving accountability, performance and effectiveness in the public sector, we are increasingly focused on effective non-financial performance reporting in the TEI annual audits. 8 6.3 The TEC notes the investing in a Plan process [i.e. the use of investment plans, as mentioned in paragraph 6.2] is largely bedded in, that gains in system performance and learning outcomes have been made, and tertiary education organisations are becoming more responsive to their stakeholders. 9 The TEC expects tertiary education organisations to improve the responsiveness of their programmes to stakeholders as a measure of a highperforming system. 6.4 The Committee may wish to ask: The Committee notes the TEC s view that gains in system performance and learning outcomes have been made, and tertiary education organisations are becoming more responsive to their stakeholders. Can the TEC provide specifics of the gains in system performance and learning outcomes that have been made, and can it provide evidence that tertiary education organisations are becoming more responsive to their stakeholders? 7 Investment planning and future funding 7.1 Tertiary Education Institutions (TEIs) receive funding from four sources: Government tuition funding (Student Achievement Component or SAC funding); student tuition fees; research income; and other sources (such as interest, dividends, and sub-contracting income). 7.2 Total revenue in 2010 for the TEI sector amounted to $4.4 billion. Of this: 42% ($1.883 billion) was from Government tuition funding (that is, SAC funding); 27% ($1.196 billion) was from student tuition fees; 8 9 Please refer to Office of the Auditor-General, Parliamentary Paper B.29[11e], Education Sector: Results of the 2010/11 audits: Results of tertiary education institution audits for 2010, December 2011, page 29 and Non-financial performance reporting by tertiary education institutions, pages 31-37. TEC Statement of Intent 2011/12-2013/14, page 18.

10 18% ($740 million) was from research income; and 13% ($598 million) was from other sources. 7.3 Total government funding amounted to 49.7% of total 2010 revenue. This included Performance-Based Research Fund or PBRF funding of $242 million and TEC-provided "off-plan funding" (that is, funding not received through an investment plan) of $62 million. International student fees made up 30% ($362 million) of all student fees earned during the year, while external research revenue accounted for 38% ($285 million) of total research revenue. 10 7.4 As stated in the Tertiary Education Strategy, tertiary education organisations and industry training organisations are expected to manage costs, seek efficiency gains, and explore additional sources of revenue. 11 7.5 During our 2010 audits we noted that broadening of revenue streams, generation of surpluses, and cost reductions were at the forefront of TEI management thinking. While we were satisfied about the validity of the going concern assumption for TEIs, we noted the need to continue to consider these areas in future audits. 7.6 The TEC s 2010 Tertiary Education: Performance Report 12 reports financial performance of ITPs, Universities and Wānanga, principally in terms of achieving the TEC s recommended surpluses and noting increases in revenue. Revenue increases are mainly from increased government Student Achievement Component funding and domestic and international student fees (although Treaty settlements increased reserves for Wānanga). 7.7 The Committee may wish to ask: The Committee notes that the Tertiary Education Strategy requires tertiary education organisations and industry training organisations to manage costs, seek efficiency gains, and explore additional sources of revenue Can the TEC provide its view on how well TEIs are managing costs and how effective has the sector been at finding additional sources of revenue? Where institutions are successfully finding additional sources of revenue or successfully managing costs, how does the TEC expect this will affect the proportion of government funding over time? 8 TEI group governance practices 8.1 During our 2010 audits, appointed auditors enquired about and documented the level of oversight that TEIs had over their subsidiary entities. As a result of this assessment we have developed the view that many TEIs need to improve their assessment of the business 10 11 12 Office of the Auditor-General, Parliamentary Paper B.29[11e], Education Sector: Results of the 2010/11 audits: Results of tertiary education institution audits for 2010, December 2011, pages 10-11. TEC Annual Report for the year ended 30 June 2011, page 10. An electronic copy of this report is available for www.tec.govt.nz

need for their subsidiaries, and their reporting about those subsidiaries. This would help to reduce costs for the sector. 13 11 8.2 The Committee may wish to ask: The Committee notes that, as a result of assessments during its 2010 audits, the OAG developed the view that many TEIs need to improve their assessment of the business need for their subsidiaries, and their reporting about those subsidiaries. Does the TEC have similar concerns? If so, what steps does the TEC consider it can take to address this issue? 13 Office of the Auditor-General, Parliamentary Paper B.29[11e], Education Sector: Results of the 2010/11 audits: Results of tertiary education institution audits for 2010, December 2011.

12 APPENDIX Explanation of scope and grades Management Control Environment Financial Information Systems and Controls Service Performance Information and Associated Systems and Controls Indicative Areas This is the foundation of the control environment and may include consideration of the following: clarity of strategic planning/the way the entity manages and reports performance; communication and enforcement of integrity and ethical values; commitment to competence; participation by those charged with governance for example, the involvement and influence of Audit Committee and Board (or equivalent); management philosophy and operating style; organisational structure; assignment of authority and responsibility; human resources policies and practices; risk assessment and risk management; key entity-level control policies and procedures; information systems and communication (including information technology planning and decision-making); monitoring; and legislative compliance arrangements. These are the systems and controls (including application-level computer controls) over financial performance and financial reporting and include the following: appropriateness of information provided; presentation of financial information; reliability of systems; control activity (including process-level policies and procedures); and monitoring. This concerns the quality of the service performance measures selected for reporting against, as well as the systems and controls (including application-level computer controls) over service performance reporting, and includes the following: appropriateness of information provided and reported; presentation of SSP information; reliability of systems; control activity (including process-level policies and procedures); and monitoring. Comments and grades are based on conclusions drawn from the 2011/14 SOI and the 2010/11 SSP.

Grade Very good Good Needs improvement Poor Explanation of grade No improvements are necessary. Improvements would be beneficial and we recommend that TEC addresses these. Improvements are necessary and we recommend that TEC address these at the earliest reasonable opportunity. Major improvements are required, and we recommend TEC urgently address these. 13 1. The reporting under Part A of this briefing, Environment, Systems, and Controls for Measuring Financial and Service Performance, is a by-product of the underlying audit work carried out to form an opinion on the financial and service performance statements. Its scope is limited to those areas of the management control environment, information systems, and controls the auditor has given attention to during the course of the audit. 2. Recommendations for improvement are generally limited to those findings that the auditor considers are the more notable weaknesses in the design or operation of the management control environment, information systems, or controls. The recommended improvements determine the grade assigned. A single, serious deficiency drawing a recommendation for improvement may, of itself, determine the grade. Similarly, the most serious deficiency among several will draw a stronger recommendation and affect the grade accordingly. 3. Deficiencies in the management control environment, information systems, or controls are the gaps between what auditors observe and what auditors consider, in their professional judgement, constitutes best practice (see below). Auditors professional judgement is informed by many factors, including national and international standards, knowledge of best practice, and standards and expectations for the public sector in New Zealand. 4. To help ensure the relevance to all entities of the auditor s recommendations and grading, the auditor s recommendations are made with reference to what is considered best practice given the size, nature, and complexity of the entity. Thus, notions of best practice will vary among entities because what is considered necessary, sufficient, or beneficial for some entities may not be so for others. There is therefore not a one size fits all standard across the public sector. Rather, recommendations for improvement are based on the auditor s assessment of how far short the entity is from a standard that is appropriate for the entity s size, nature, and complexity of its business. 5. Further, notions of best practice may vary over time in response to change for example, changes in the operating environment, changes to standards, and changes in general expectations. Grades assigned to entities may therefore fluctuate from year to year according to how entities respond to changes in the environment and in best-practice expectations. Grades may also be affected from year to year because of changes in emphases, in accordance with the auditor s risk-based approach to testing systems and controls. 6. Improvements are recommended only when it is considered, in the auditor s judgement, that the benefits of the improvements would justify the costs. 7. Recommendations for improvement are based on the auditor s conclusions about the state of the entity s management control environment, information systems, and controls as at the end of the financial year.