Report highlights
What the report is about
Result of the Education cluster financial statement audits for the year ended 30 June 2022.
What we found
Unmodified audit opinions were issued for Education cluster agencies.
An 'other matter' paragraph was included in the TAFE Commission's independent auditor's report as it did not have a delegation or sub-delegation from the Minister for Education and Early Learning to incur expenditure from cluster grants.
What the key issues were
Annual fair value assessments of land and buildings showed material differences in their carrying values. As a result, the Department of Education and the TAFE Commission completed desktop revaluations of land and buildings, collectively increasing the value of these assets by $1.2 billion and $4.7 billion respectively.
The Department of Education and the NSW Education Standards Authority accepted changes to their office leasing arrangements managed by Property NSW. These changes resulted in the collective derecognition of $270.6 million of right-of-use assets and $382.9 million in lease liabilities.
What we recommended
A high-risk matter was reported in the management letter for the TAFE Commission highlighting non-compliance with policies and procedures guiding appropriate use of purchasing cards.
We recommended cluster agencies prioritise and address internal control deficiencies.
Fast facts
1. Introduction
This report provides Parliament and other users of the Education cluster’s financial statements with the results of our audits, analysis, conclusions and recommendations in the following areas:
- financial reporting
- audit observations.
1.1 Snapshot of the cluster
2. Financial reporting
Financial reporting is an important element of good governance. Confidence and transparency in public sector decision-making are enhanced when financial reporting is accurate and timely.
This chapter outlines our audit observations related to the financial reporting of agencies in the Education cluster (the cluster) for 2022.
Section highlights
|
2.1 Cluster financial information 2022
| Agency |
Total assets |
Total liabilities $m |
Total income* $m |
Total expenses** $m |
| Principal department | ||||
| Department of Education | 42,920.8 | 2,875.3 | 20,576.8 | 20,001.4 |
| Other cluster agencies listed in Appendix A of Treasury Direction TD21-02 | ||||
| NSW Education Standards Authority | 74.5 | 29.0 | 194.9 | 177.2 |
| NSW Skills Board | 2.6 | 0.08 | 2.3 | 1.2 |
| TAFE Commission | 5,249.3 | 446.2 | 1,879.8 | 1,889.5 |
** Includes other losses.
Source: Agencies audited 2021–22 financial statements.
2.2 Quality of financial reporting
Audit opinions
Unqualified audit opinions were issued on agencies' financial statements
Unqualified audit opinions were issued on all cluster agencies' 30 June 2022 financial statements. Sufficient and appropriate audit evidence was obtained to conclude the financial statements were free of material misstatement.
An 'other matter' was included in the TAFE Commission's audit opinion
'Other matter' paragraphs are included in an agency's independent auditor's report for matters that have not been explicitly presented or disclosed by the agency in its certified financial statements. Whilst they do not constitute a qualification, they do highlight matters that are, in our judgement, relevant to Parliament's understanding of the audit.
An 'other matter' paragraph was included in the TAFE Commission's audit opinion for 30 June 2022 because they did not have a delegation or sub-delegation from the Minister for Education and Early Learning to incur expenditure from cluster grants, which are monies appropriated out of the consolidated fund through the Appropriations Act 2021.
The number of identified monetary misstatements remains consistent with 2020–21
The number of monetary misstatements identified during the audit of the financial statements for the cluster remained consistent with 2020–21. Seven monetary misstatements were identified in 2021–22. A monetary misstatement is an error in amount recognised in the financial statements initially submitted for audit.
The table below shows the number and quantum of monetary misstatements for the past two years.
| Year ended 30 June | 2022 | 2021 | ||
| Corrected misstatements | Uncorrected misstatements | Corrected misstatements | Uncorrected misstatements | |
| Less than $249,999 | -- | -- | -- | -- |
| $250,000 to $999,999 | -- | -- | 1 | -- |
| $1 million to $4,999,999 | -- | -- | 1 | -- |
| $5 million and greater | 5 | 2 | 4 | 1 |
| Total number of misstatements | 5 | 2 | 6 | 1 |
The table below shows the number of corrected and uncorrected monetary misstatements for the past two years by cluster agency.
| 2021–22 | 2020–21 | |||||
| Corrected | Uncorrected | Total | Corrected | Uncorrected | Total | |
| Department of Education | 4 | 2 | 6 | 3 | 1 | 4 |
| NSW Education Standards Authority | -- | -- | -- | 3 | -- | 3 |
| NSW Skills Board | -- | -- | -- | -- | -- | -- |
| TAFE Commission | 1 | -- | 1 | -- | -- | -- |
| Total | 5 | 2 | 7 | 6 | 1 | 7 |
Reported corrected misstatements decreased from six in 2020–21 to five with a gross value greater than $5 million related to the following:
| Agency | Description of corrected misstatements > $5 million |
| Department of Education |
Re-classification between current and non-current receivables totalling $18.2 million related to external party debtors on long-term debt collection plans. Re-classification of two liability items totalling $73.3 million. While the re-classification did not impact the net result, the recognition and measurement principles applied in accounting for these liabilities fall under different Australian Accounting Standards. Re-classification of expenditure relating to contributions made by the department to the Teacher Housing Authority. |
| TAFE Commission | Understatement of property, plant and equipment totalling $30.9 million due to the incorrect application of indices to reflect fair value of the commission's buildings at 30 June 2022. |
Reported uncorrected misstatements increased, from one in 2020–21 to two with a gross value greater than $5 million comprised of the following:
| Agency | Description of uncorrected misstatements > $5 million |
| Department of Education |
Understatement of personal protective equipment and rapid antigen tests held by the department but yet to be distributed at balance date totalling $14.6 million. Overstatement of employee provision on-costs totalling $7.1 million relating to superannuation on annual leave loading. |
In the instances highlighted above, the department concluded that the effect of not correcting the misstatement was immaterial, individually and in aggregate to its financial statements as a whole.
Two staff agencies were exempted from financial reporting in 2021–22
Part 3A Division 2 of the Government Sector Finance Regulation 2018 (GSF Regulation) prescribes certain kinds of GSF agencies not to be a reporting GSF agency. For 2021–22, the following cluster agencies have assessed and determined they met the reporting exemption criteria under the GSF Regulation, and therefore were not required to prepare annual financial statements:
| Exempted agencies | GSF Regulation reference | Basis for reporting exemption |
| Special purpose staff agencies | ||
| NSW Education Standards Authority Staff Agency | Part 3A, Division 2, Section 9F of the GSF Regulation | GSF Regulation prescribes that a GSF agency that comprises solely of persons who are employed to enable another particular GSF agency to exercise its function not to be a reporting GSF agency. |
| TAFE Commission (Senior Executives) Staff Agency | Staff agencies satisfy this requirement and therefore are exempted from preparing financial statements in 2021–22. These exemptions are standing in nature and continue from the previous year. | |
2.3 Timeliness of financial reporting
Early close procedures
Early close mandatory procedures were submitted on time for all cluster agencies
NSW Treasury introduced early close procedures to improve the quality and timeliness of year-end financial statements. In April 2022, NSW Treasury reissued Treasurer’s Direction TD19-02 ‘Mandatory Early Close as at 31 March each year’ (TD19-02) and released Treasury Policy and Guidelines TPG22-11 ‘Agency Direction for the 2021–22 Mandatory Early Close’. These pronouncements require the GSF agencies listed in Appendix A of TD19-02 to perform the mandatory early close procedures and provide the outcomes to the audit team by 27 April 2022.
All cluster agencies met the statutory deadline for submitting their 2021–22 early close financial statements and other relevant mandatory procedures. The 17 mandatory early close procedures and the details of the non-applicable procedures are listed in Appendix one.
A full impairment assessment by the department was delayed as a result of significant flooding in New South Wales
The department was required to perform a thorough impairment assessment over its physical non-financial assets as part of its early close submissions. However, due to severe flooding events experienced in New South Wales, the department was unable to perform an in-depth assessment in time for early close. An exemption from this requirement was sought by the department from NSW Treasury, which was subsequently granted. In lieu of a comprehensive impairment assessment, the department provisionally estimated impairment losses totalling $36.6 million in its 31 March 2022 submissions.
At 30 June 2022 the full impairment assessment was completed by the department. Eight schools, with a carrying value of $35.3 million were destroyed and subsequently written-off. An additional 13 schools were assessed to have sustained partial damage, resulting in an estimated $18.4 million impairment write-down to the carrying value of these assets.
Year-end financial reporting
NSW Treasury required all agencies to submit their financial statements by 1 August 2022
In June 2022, NSW Treasury issued a suite of Treasurer's Directions and Treasury Policy and Guidelines for 2021–22 financial reporting requirements and timetables:
- Treasurer's Direction TD21-02 'Mandatory Annual Returns to Treasury' (TD21-02) and Treasury Policy and Guidelines TPG22-16 'Agency Direction for the 2021–22 Mandatory Annual Returns to Treasury' require agencies listed in the Appendix A of TD21-02 to submit their 2021–22 financial statements to both NSW Treasury and the Audit Office by 1 August 2022
- Treasury Policy and Guidelines TPG22-17 'Agency guidelines for the 2021–22 Mandatory Annual Returns to Treasury for NSW public sector agencies that are not included in TD21-02' requires NSW public sector agencies not listed in Appendix A of TD21-02 to submit their draft 2021–22 financial statements to NSW Treasury by 1 August 2022
- Treasurer's Direction TD21-03 'Submission of Annual GSF Financial Statements to the Auditor-General' requires reporting GSF agencies that are not listed in Appendix A of TD21-02 to submit their annual financial statements for audit within six weeks after the year-end.
The following agencies obtained NSW Treasury's approval to extend submission of their 30 June 2022 annual report:
| Cluster agencies | Revised deadline | Reason |
|---|---|---|
| NSW Education Standards Authority | 21 November 2022 | Re-prioritisation of resources amidst operational challenges due to the pandemic. |
Financial statements were submitted on time for all cluster agencies
Cluster agencies met the reporting deadlines for submitting their 2021–22 year-end financial statements.
The Government Sector Audit Act 1983 does not specify the statutory deadline for issuing the audit reports. At the date of this report, the audits of all cluster agencies financial statements have been completed.
The table below shows the timeliness of the year-end financial reporting for cluster agencies.
| Cluster agencies | 2021–22 Financial statements submission | Date audit report was issued |
| Department of Education | Treasury's reporting deadline was met | 19 October 2022 |
| NSW Education Standards Authority | Treasury's reporting deadline was met | 21 November 2022 |
| NSW Skills Board | Treasury's reporting deadline was met | 21 September 2022 |
| TAFE Commission | Treasury's reporting deadline was met | 27 October 2022 |
2.4 Key accounting issues
Asset accounting
In 2021–22 agencies within the Education cluster collectively reported $45.3 billion in property, plant and equipment. Land and buildings, measured at fair value in accordance with Australian Accounting Standards and NSW Treasury financial reporting requirements, represent over 99% of these assets and are controlled predominantly by the department and the TAFE Commission.
The buildings controlled by the department and the TAFE Commission are for the large part, specialised in nature and are used to provide education-based services to the citizens of New South Wales. Due to their nature, the fair value of these specialised assets is determined with reference to their current replacement cost.
The value of land, which is not a specialised asset, is determined with reference to market prices taking into account any restrictions that apply to that land. At a whole-of-government level, the land and buildings controlled by the department and the TAFE Commission represent 39% of the total land and buildings classes within the general government sector.
In 2021–22 the department and the TAFE Commission adjusted the carrying values of land and buildings, collectively increasing the value of these assets by $1.2 billion and $4.7 billion respectively.
Fair value assessments by the department and the Commission highlighted material differences between the carrying values and fair value of buildings
The department and the TAFE Commission last performed comprehensive revaluations of their land in 2020–21 and their buildings in 2017–18. Comprehensive revaluations are performed in three-year and five-year cycles for land and buildings respectively, with fair value assessments undertaken during the intervening years to determine whether the carrying amounts of the assets are materially different to fair value at each reporting date.
This year's fair value assessments by the department and the commission had identified material departures between the carrying value and fair value of their land and building assets since these assets were last valued. The predominant driver of these valuation uplifts, specifically in buildings, was inflation of construction costs, which affected the Australian domestic economy more broadly over the past 12 months.
The graph below shows the carrying value of buildings reported in the audited financial statements of the department and the TAFE Commission marked against the annual managerial fair value assessments at reporting date.
Since the last comprehensive revaluation exercise in 2017–18, through to 2019–20, fair value assessments have shown that the reported carrying values have increased by an average of four per cent per annum. However, from 2019–20 onwards, fair value assessments have shown a substantial deviation from the carrying values reported, by an average of ten per cent per annum. As a result, management adjusted the carrying values of their buildings by $4.7 billion to better reflect the fair value of these assets at balance date.
The department and the TAFE Commission are scheduled to comprehensively revalue buildings next year
The department and the TAFE Commission are scheduled to perform comprehensive revaluations of their buildings in 2022–23. Notwithstanding, the department and the TAFE Commission need to reconsider their policy settings governing the nature and timing of revaluation exercises given the ongoing volatility within the current macroeconomic environment. This will help ensure carrying values more accurately reflect the fair value of the assets at each balance date.
Errors identified in the TAFE Commission's desktop valuation underscore the need for a robust quality assurance regime to be in place
The TAFE Commission engaged the services of an external valuation expert to conduct an independent review of the carrying amounts of the TAFE Commission's land and buildings at 30 June 2022. This review resulted in a cumulative increase of $273.6 million in the carrying value of building assets and $109.1 million for land assets since the last comprehensive valuations were performed. Our audit procedures over the basis for the valuation identified a $30.9 million understatement of the fair value of the TAFE Commission's buildings at 30 June 2022 which was subsequently corrected by management.
Agencies are responsible for the asset valuations included in their financial statements and are required to assess the reasonableness of those valuations independently of the valuation expert. An absence of appropriate evidence to support key judgements, or a lack of thorough quality assurance processes can delay the outcomes of a valuation and/or cause incorrect or unsupported valuations.
Recommendation
- Given the ongoing volatility in the current macroeconomic environment, agencies should reconsider their policy settings governing the nature, frequency, and timing of revaluation exercises. This is to ensure that the carrying values reported in the financial statements more accurately reflect fair value at each balance date.
- In anticipation of the comprehensive revaluation exercise scheduled for 2022–23, agencies should have in place the governance, systems, processes and quality assurance regimes to ensure that the valuations are timely, well supported by appropriate evidence, and are complete and accurate.
Intra-government property leases managed by Property NSW
The changes in office accommodation arrangements with Property NSW resulted in the derecognition of right-of-use assets and lease liabilities
Property NSW (PNSW) is responsible for managing most of the state government agencies leased real estate property portfolio. During 2021–22, PNSW made some changes to its intra-government lease arrangements, including rewriting the standard client acceptance letter (CAL) to include a 'Relocation and substitution right' clause. This clause allows PNSW to relocate agencies to other premises and removes the agency's right to occupy the identified accommodation on an ongoing basis. As a result, the new CALs no longer constitute a lease under AASB 16 ‘Leases’. The changes became effective from 30 June 2022.
The department and the NSW Education Standards Authority accepted the changes to their office accommodation arrangements with PNSW. This has resulted in:
- the derecognition of $270.6 million of right-of-use assets
- the derecognition of $382.9 million of lease liabilities
- $112.3 million of gains on derecognition recorded in the statement of comprehensive income.
Going forward, these agencies will recognise the office accommodation payments as expenses in the Statement of Comprehensive Income. Agreements between the agencies and PNSW mean agencies will continue to recognise leasehold improvement (or fit-out) assets and liabilities for the makegood of premises.
2.5 Key financial statement risks
Department of Education
The Department of Education (the department) is the largest provider of public education in Australia with responsibility for delivering high-quality public education to two-thirds of the NSW student population.
| Key financial statement risk | Audit response | |
| Property, plant and equipment - $40.8 billion |
The department's property, plant and equipment consists of specialised assets such as school buildings and gymnasiums, which are measured at fair value based on their current replacement cost. Our audit risk rating for property, plant and equipment is higher because these assets are proportionately significant to the financial statements of the department and are subject to management judgements and estimates when determining their fair values. These judgements and estimates often require the assistance of a qualified valuer upon revaluation. |
Our audit procedures included reviewing the accuracy and completeness of asset registers; reviewing the appropriateness of the valuation methods, assumptions and judgements applied; and reviewing the presentation in the financial statements in accordance with Australian Accounting Standards. |
| Payroll expenses - $11.5 billion |
The department's payroll consists of payments made to teachers, school administrative and support staff, and corporate staff. Our audit risk rating for payroll is higher because these expenses represent a significant proportion of the department's overall expenditure. The payroll system of the department processes a high volume of transactions that incorporate various remuneration structures and industrial awards. |
Our audit procedures evaluated and tested on a sample basis, the design, implementation and operating effectiveness of key controls over payroll processes and systems. In addition, our procedures included testing a sample of employees to ensure that employment details, award types and conditions in calculating payroll have been agreed to underlying supporting evidence. |
NSW Education Standards Authority
The NSW Education Standards Authority (the authority) is an independent statutory authority reporting to an independent board and the NSW Minister for Education and Early Learning, overseeing teacher quality, curriculum, assessment and school standards.
| Key financial statement risk | Audit response | |
| Grants and other contributions -$164.7 million |
The authority is predominantly funded by grants from the Department of Education to support its activities to oversee teacher accreditation, curriculum review, and assessments including NAPLAN and the HSC. Our audit risk rating is higher because these grants and other contributions are proportionately significant to the authority's financial statements. There is also an element of management judgement that is applied in recognising these grants appropriately under the relevant Australian Accounting Standards. |
Our audit procedures included understanding and reviewing grant agreements to confirm that the recognition, measurement and presentation principles of the accounting standards have been correctly applied. |
NSW Skills Board
The NSW Skills Board (the board) provides independent, high-level, strategic advice on the NSW vocational education and training system to NSW Government.
| Key financial statement risk | Audit response | |
| Preparation of financial statements |
Our audit risk rating is higher because the preparation of the financial statements of the board relies on corporate support activities and information systems provided by the Department of Education, the Department of Planning, Industry and Environment and the NSW Education Standards Authority. |
Our audit procedures included understanding the controls operating at the Department of Education; the Department of Planning, Industry and Environment, and the NSW Education Standards Authority relevant to the financial statements of the board. We tested, on a sample basis, the completeness and accuracy of transactions reported in the financial statements. |
Technical and Further Education Commission
The Technical and Further Education Commission (the TAFE Commission) is the leading provider of vocational education and training in Australia. The TAFE Commission aims to contribute to job growth by delivering a highly skilled workforce that meets current and future requirements of NSW business and industry.
| Key financial statement risk | Audit response | |
|
Sales of goods and services from contracts with customers - $254.6 million Entitlement subsidies - $411.6 million |
Revenue generated by the TAFE Commission consists of student fees, course fees and entitlement subsidies from Training NSW for the Smart and Skills government assistance program. Our audit risk rating is higher because these revenue streams are proportionately significant to the financial statements of the TAFE Commission. Underlying systems process a high volume of transactions that involve complex fee structures and calculations of entitlements. There is also an element of management judgement that is applied in recognising revenue from its fees and charges as performance obligations are satisfied in accordance with the relevant Australian Accounting Standards. |
Our audit procedures involved evaluating and testing, on a sample basis, the design and implementation of controls over key revenue processes and systems as well as testing a sample of transactions to underlying supporting evidence. Our procedures also included understanding and reviewing contracts with customers and grant agreements to confirm that the recognition, measurement and presentation principles of the accounting standards have been correctly applied. |
| Property, plant and equipment - $4.5 billion |
The TAFE Commission's property, plant and equipment consists of specialised assets such as classrooms, auditoriums, theatres and laboratories, which are measured at fair value based on their current replacement cost. Our audit risk rating for property, plant and equipment is higher because these assets are proportionately significant to the financial statements of the TAFE Commission and are subject to management judgements and estimates when determining their fair values. These judgements and estimates often require the assistance of a qualified valuer upon revaluation. |
Our audit procedures included reviewing the accuracy and completeness of asset registers; reviewing the appropriateness of the valuation methods, assumptions and judgements applied; and reviewing the presentation in the financial statements in accordance with Australian Accounting Standards. |
3. Audit observations
Appropriate financial controls help ensure the efficient and effective use of resources and administration of agency policies. They are essential for quality and timely decision-making.
This chapter outlines our observations and insights from our financial statement audits of agencies in the Education cluster.
Section highlights
|
The number of findings reported to management has increased, and 31% were repeat issues
Breakdowns and weaknesses in internal controls increase the risk of fraud and error. Deficiencies in internal controls, matters of governance interest and unresolved issues were reported to management and those charged with governance of agencies. The Audit Office does this through management letters, which include observations, related implications, recommendations and risk ratings.
In 2021–22, there were 29 findings raised across the cluster (28 in 2020–21). Thirty-one per cent of all issues were repeat issues (50% in 2020–21).
The most common new and repeat issues related to internal control deficiencies in agencies’ information technology general controls, application controls, and procurement and payroll practices.
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.
A high-risk matter was reported at the TAFE Commission highlighting instances of non-compliance with policies and procedures guiding appropriate purchasing card use
As part of our audit of the TAFE Commission, we integrated the use of data analytics into the audit approach. We performed data analytics over aspects of payroll, procurement and accounts payable activities. This helped us to highlight anomalies or risks in those data sets that are relevant to the audit of the TAFE Commission and plan testing procedures to address those risks. Data analytics also assisted us in providing an insight into the internal control environment of the TAFE Commission, highlighting areas where key controls are not in place or are not operating as management intended.
Our analysis over purchasing card data supplied by the TAFE Commission for the period July 2021 to March 2022 found deficiencies in the provisioning, use and cancellation of purchasing cards. This included identified instances of:
- controls effectively bypassed when a purchasing card surrendered by a former employee had been used by another employee
- split payments, circumventing delegation / cardholder limits
- delays in the submission and approval of purchasing card transactions.
The table below describes the common issues identified across the cluster by category and risk rating:
| Risk rating | Issue |
| Information technology | |
|
High: 0 new, 0 repeat 1 Moderate: 5 new, 3 repeat 2 Low: 2 new, 1 repeat 3 |
The financial audits identified areas for agencies to improve information technology processes and controls that support the integrity of financial data used to prepare agencies' financial statements. Of note were deficiencies identified in:
|
| Internal control deficiencies or improvements | |
|
High: 1 new, 0 repeat 1 Moderate: 5 new, 3 repeat 2 Low: 4 new, 1 repeat 3 |
The financial audits identified internal control weaknesses across key business processes relevant to financial reporting. Of note were deficiencies identified in:
|
| Financial reporting | |
|
High: 0 new, 0 repeat 1 Moderate: 1 new, 1 repeat 2 Low: 2 new, 0 repeat 3 |
The financial audits identified:
|
2 Moderate risk from the consequence and/or likelihood of an event that has had, or may have a negative impact on the entity.
3 Low risk from the consequence and/or likelihood of an event that has had, or may have a negative impact on the entity.
Recommendation
We recommend cluster agencies prioritise and action recommendations to address the internal control deficiencies outlined above.