The Education cluster delivers and regulates education and training services for NSW students, workers and industry. This includes the early childhood education and care sector, government and non-government schools, and the vocational education and training sector.

According to the 2019–20 NSW Budget Papers, the Education cluster's aim is to deliver and regulate education and training services for students, workers and industry in NSW. The cluster comprises four entities - the Department of Education (the Department), the NSW Education Standards Authority (NESA), the NSW Skills Board and the Technical and Further Education Commission (the TAFE Commission).

The State Outcomes delivered by the Education cluster are shown below.

The cluster was impacted by natural disasters and the COVID-19 pandemic

The 2019–20 bushfires in New South Wales were unprecedented in their extent and intensity, causing widespread damage in both Northern and Southern NSW. Around 192 schools and 17 TAFE locations in affected regions suffered varying degrees of damage including lost fencing, outdoor play equipment and contamination from ash and fire retardant. Three schools valued at $2.3 million were destroyed. The February 2020 flood events caused the temporary closure of 60 schools and four TAFE locations in parts of NSW – disrupting service delivery during the period.

The COVID-19 pandemic further challenged agencies in the Education cluster. Social distancing and other infection control measures disrupted the traditional means of teaching students and impacted other aspects of service delivery including cancellation of the annual NAPLAN assessments.

The snapshot below shows the financial positions at 30 June 2020 and the financial results for the year then ended for all agencies comprising the Education cluster.

Audit opinions

Unqualified audit opinions were issued on the 30 June 2020 financial statements for all agencies in the cluster. Sufficient audit evidence was obtained to conclude the financial statements were free of material misstatement.

The number of misstatements identified in agencies' financial statements decreased from the prior year

A misstatement is an error in amount, classification, presentation or disclosure in the financial statements initially submitted for audit.

In 2019–20, the number of monetary misstatements we identified through our audits of cluster agencies' financial statements decreased to 14 (23 in 2018–19). We also observed a reduction in the number of corrections made to disclosures in the financial statements submitted for audit – from 19 in the prior year to 12.

The table below shows the number and quantum of monetary misstatements.

Year ended 30 June		2020		2019
Less than $50,000		--	1	--	--
$50,000 to $249,999		1	--	1	1
$250,000 to $999,999		2	3	1	6
$1 million to $4,999,999		--	2	--	10
$5 million and greater		5	--	--	4
Total number of monetary misstatements		8	6	2	21

---

Image

Corrected monetary misstatements.

Image

Uncorrected monetary misstatements.

Source: Engagement Closing Reports issued by the Audit Office

Reported corrected monetary misstatements increased from two in the previous year to eight in 2019–20 with an impact to the cluster agencies' collective net worth of $62.4 million. Conversely, reportable uncorrected monetary misstatements decreased from 21 in 2018–19 to six with an impact to the cluster agencies' collective net worth of $2.0 million.

While the number of corrected monetary misstatements has increased, it is important to note these corrections provide parliament and other users of the financial statements increased confidence in the accuracy and presentation of an agency’s performance and financial position.

Emergency measures ensured funds continued to flow to cluster agencies

The financial statements of cluster agencies are prepared on a going concern basis. This means that an agency is expected to continue its operations 12 months from when they sign their financial statements.

The COVID-19 Legislation Amendment (Emergency Measures–Treasurer) Act 2020 allowed the NSW Treasurer to authorise payments from the consolidated fund until the enactment of the 2020–21 state budget, which was tabled 18 November 2020. This enabled the financial statements of the Department, and by extension, cluster agencies to be prepared on a going concern basis.

Financial statements were submitted by the revised statutory timelines

All cluster agencies met the revised statutory deadlines for completing early close procedures and submitting financial statements.

			Timeliness of financial reporting
			Early close procedures	Financial statements			Audit report
Principal department
Department of Education			Image	Image			Image
Agencies related to the Department
NSW Education Standards Authority			Image	Image			Image
NSW Skills Board			N/A	Image			Image
Technical and Further Education Commission			Image	Image			Image
Key		Statutory reporting deadline was met				Statutory reporting deadline was not met

AASB 15 'Revenue from Contracts with Customers' and AASB 1058 'Income of Not-for-Profit Entities' changed how the Department and cluster agencies report income in 2019–20

AASB 15 and AASB 1058 became effective for all NSW public sector agencies from 1 July 2019.

The introduction of AASB 15 and AASB 1058 required the Department and cluster agencies to reassess the way they accounted for revenue, depending on whether it arises from contracts for sales of goods and services, grants and other contributions. Revenue from contracts for services is now recognised only when performance obligations have been satisfied.

The adoption of these new standards meant the Department and cluster agencies had to review their revenue contracts and adjust how they had previously been accounted for. The Department and cluster agencies were not required to restate their prior period financial statement figures. The cumulative effect of applying the standards on prior periods is presented as an adjustment to opening retained earnings at 1 July 2019.

The new revenue standard mainly impacted the TAFE Commission – accounting for a $3.1 million impact on its opening retained earnings.

AASB 16 'Leases' changed how the Department and cluster agencies treat operating leases in 2019–20

AASB 16 became effective for all NSW public sector agencies from 1 July 2019. AASB 16 changes how lessees treat operating leases for financial reporting. Previously, leased assets and lease liabilities under operating leases were not recognised in the statement of financial position, even though the entity had control over the asset and was committed to making those future lease payments. Lease obligations were merely recorded as a commitment in the notes to the entity’s financial statements. Under AASB 16, operating leases are now recorded, with a few exceptions, in an entity’s Statement of Financial Position through the recognition of a right of use (ROU) asset and a corresponding lease liability. It also changes the timing and pattern of expenses recorded in the Statement of Comprehensive Income by recognising depreciation on the ROU asset and the financing cost of the lease.

AASB 16 requires different and more extensive disclosures about an entity’s leasing activities. The objective of the disclosures is to provide users of financial statements with a basis to assess the effect of leasing activities on an entity’s financial position, performance and cash flows.

On 1 July 2019, the Department and cluster agencies collectively recognised ROU assets of $487.7 million and lease liabilities of $490.0 million on adoption of AASB 16 with the Department accounting for 94 per cent of ROU assets and 95 per cent of lease liabilities.

Oversight of information provided by third parties can be improved

Property NSW (PNSW) is the lead agency responsible for managing most of the Department's and NSW Education Standards Authority's (NESA) leased real estate property portfolio. Under this arrangement, PNSW provides leasing information back to these agencies to report in their financial statements.

Our financial audits found issues with the leasing information reported in the financial statements of the Department and NESA. Both agencies remain responsible for the completeness and accuracy of this information, despite the outsourcing arrangement and would have benefited from a more thorough quality assurance, validation and review process over the information provided by PNSW before they placed reliance on it. Inadequate scrutiny of the accuracy of the underlying data and the resultant balances can elevate the risk of error leading to misstatement or omissions of material disclosures in the financial statements.

The Department and the TAFE Commission will undertake a fair valuation of their land and buildings in 2020–21

In 2019–20 the Education cluster collectively reported $36.9 billion in property, plant and equipment used to provide education-based services to the citizens of NSW. The Department and the TAFE Commission account for nearly all the property, plant and equipment reported in the cluster. These assets are measured at fair value in accordance with Australian Accounting Standards and NSW Treasury financial reporting requirements. Carrying amounts are reviewed annually using publicly available indicators from the Australian Bureau of Statistics or by engaging a valuation specialist.

In 2019–20, the fair value assessments conducted by the Department and the TAFE Commission indicated cumulative increases of around four per cent or $1.3 billion in the value of land and buildings since the last comprehensive valuation in 2017–18. The Department and the TAFE Commission did not adjust the carrying values of their land and buildings at 30 June 2020. The pandemic added significant volatility to the key indicators used in assessing fair value.

In line with Treasury directives, both the Department and the TAFE Commission will perform a full valuation of their land assets in 2020–21 and have committed to performing a desktop valuation of their buildings.

Shared locations between the TAFE Commission, the Department and external parties

Our review of land and buildings held by both the Department and the TAFE Commission, as well as the first-time implementation of the new leasing standard, identified several instances where land and buildings are shared between the TAFE Commission, the Department and, in some cases entities outside of the NSW public sector. Occupancy arrangements or agreements are not formally in place for many of these sites and as a result, the basis for recording these assets in the financial statements of either the Department or the TAFE Commission is unclear.

The Department and the TAFE Commission have been working closely and are committed to reviewing the basis of recognition and measurement of these sites in each entity's respective financial statements. The outcomes of their work will form part of the comprehensive revaluation exercise on land scheduled for 30 June 2021.

Ongoing issues with the implementation of the TAFE Commission's Student Management System

In 2017–18 the TAFE Commission started implementing a new student management system. This system was originally planned to be completed by May 2019. Significant delays have occurred in implementing this system, mainly due to the complexity of the requirements of the TAFE Commission. This resulted in additional processes to verify the accuracy and completeness of revenue they report from student fees.

The TAFE Commission has since refocussed and reset the strategy for implementing the student management system, including:

• revising the estimated budget from $89.0 million to $110.9 million
• revising the implementation and roll out dates, with completion anticipated by 30 June 2022
• continuing to design business processes, internal controls and user security setup
• integrating the system with the users in the reorganised TAFE Commission structure.

The TAFE Commission is increasingly reliant on grants and contributions to support its operations

Since 2015–16 the amount of income generated from the sales of goods and services (predominately course fees) has declined by 43 per cent. As sales of goods and services fall, the TAFE Commission is relying on government funding in the form of subsidised enrolments and grants to sustain its operations. The proportion of income the TAFE Commission generated from the sale of goods and services reduced from 32 per cent in 2016–17 to 19 per cent in 2019–20. Over the same period, the proportion of grants and contributions increased from 68 per cent to 81 per cent.

This year, the TAFE Commission received an additional $313.0 million in other grants and contributions largely driven by higher operational based funding for the modernisation and product initiatives, capital investments for new facilities, enhancement of education programs and the additional operating cost of providing a comprehensive training program across the State.

Management letter findings

Effective internal controls reduce the risk of fraud and error and help agencies operate efficiently and effectively and to comply with relevant laws, standards and policies. Our audits do not review every control every year. We select a range of measures, and report on those that present the most significant risks that agencies should mitigate. We report on deficiencies in internal controls, matters of governance interest and unresolved issues to management and those charged with governance. We do this through our management letters, which include our observations, related implications, recommendations and risk ratings.

The table below presents the number of management letter findings for each agency within the cluster.

In 2019–20 we identified a total of 33 issues for cluster agencies, including 18 new issues and 15 issues repeated from previous years. We have classified these issues into common categories as follows:

• financial operational deficiencies
• IT operational deficiencies
• reporting deficiencies.

A delay in implementing audit recommendations increases the risk of intentional and accidental errors in processing information, producing management reports and generating financial statements. This can impair decision-making, affect service delivery and expose agencies to fraud, financial loss and reputational damage. Poor controls may also mean agency staff are less likely to follow internal policies, inadvertently causing the agency not to comply with legislation, regulation and central agency policies.

The table below describes the common issues identified across the cluster by category, risk ratings and implications.

Table: Common issues reported in cluster agencies’ management letters

Operational - Financial
	Moderate:	5 new	6 repeat
	Low:	3 new	2 repeat
Common issue		Findings	Implications
Policies, processes and procedures		Agencies have not established policies, have gaps in processes or have policies that are past their scheduled review date.	There is heightened risk that outdated policies and procedures may be followed, that policies, processes and procedures do not reflect better practice, or where processes are not documented, an agency is at risk from the loss of corporate knowledge when responsible staff leave the agency.
Review and update of delegations		Management practices have not kept in step with changes to recent legislation.	Potential non-compliance with the requirements of the Government Sector Finance Act 2018.

Operational - IT
	High:	1 new
	Moderate:	3 new	4 repeat
	Low:	2 new	1 repeat
Common issue		Findings	Implications
General controls		IT control deficiencies are related to IT governance, user access administration, program change and computer operations.	Inadequate control over the IT environment could create opportunities for fraud and error.
Application controls		Application controls are procedures that operate at a business process level designed to ensure the integrity of accounting records.	Inadequate segregation of duties increases the risk of recording unauthorised or non-existent transactions.

The Department's monitoring of privileged user activity requires improvement

Privileged users have higher levels of access to systems, and in some instances, may include conflicting access which, if reviews of access logs are not fully embedded in the control environment, elevates the risk of unauthorised transactions occurring and not being detected in a timely manner.

A high-risk issue was reported at the Department relating to the inadequate monitoring and follow up of privileged user activity in its enterprise resource planning system – SAP.

In response, the Department initiated a review of the identified instances of privileged user activity. This was completed prior to the certification of the financial statements. We also extended our audit procedures and concluded the control deficiency did not present a risk of material misstatement to the Department's financial statements.

Reporting
	Moderate:	2 new	2 repeat
	Low:	2 new
Common issue		Findings	Implications
Reconciliation controls		Lack of oversight over externally provided data and documentation to support arrangements between cluster agencies.	Misstatement of assets carried by agencies.

Our Internal controls and governance 2020 report (tabled November 2020) expands on the matters identified and also covers the findings and recommendations from our 2019–20 financial audits at 40 of the largest agencies in the NSW public sector. These 40 agencies included the Department, the Technical and Further Education Commission and the NSW Education Standards Authority.

The Department established a separate bushfire relief directorate and a COVID-19 Taskforce

The 2019–20 natural disasters and COVID-19 pandemic continue to have a significant impact on the people of New South Wales.

While these emergencies are having a significant impact today, they are also likely to continue to have an impact into the future.

In February 2020, the Department established a separate directorate to assist and support school communities affected by the 2019–20 fires. The directorate was also responsible for developing the Department's Bushfire Relief Strategy Framework that would enhance the preparedness for future bushfire seasons and other disaster events that may occur.

The Department is the largest provider of education in Australia, with responsibility for delivering public education to two-thirds of the NSW student population. The State's 2,210 public schools are spread across NSW, servicing around 806,000 students and employing around 69,000 teachers.

The financial results of NSW public schools are included in the Department’s financial statements each year and as such follow the financial and internal control framework set out by the Department.

The table below describes common findings observed through our review of the internal controls at these schools.

Purchasing cards are an efficient means of payment, especially for low-value and routine purchases. They provide better transparency and accountability for expenditure and can realise significant efficiencies over traditional high cost purchase-to-pay processes.

When effectively controlled, purchasing cards are a cost-effective payment method and efficient tool for low value, high volume procurement of goods and services.

The Department's use of purchasing cards has steadily grown

Since 2015 the NSW Government was committed to increasing the use of purchasing cards by public sector agencies for low value, high volume procurement of goods and services. This includes delegated staff working at the Department and across the State's 2,210 schools.

In 2019–20 the Department incurred expenditure totalling $152.9 million from the use of purchasing cards. This has increased from $96.9 million or 58 per cent in 2018–19. The use of purchasing cards allows delegated staff to make timely and appropriate procurement decisions and to make sure they have the equipment and stores they need to deliver services.