Universities 2016 Audits

Overview

No qualified opinions were issued on the universities’ financial statements and the quality and timeliness of financial reporting continued to improve. The report found that all NSW universities recorded a surplus in 2016 with combined revenue growth exceeding expense growth by 1.1 per cent. Universities have diversified revenue sources and are now less reliant on government grants. Combined overseas student income exceeded domestic student income for the first time in 2016.

1. Executive Summary

This report analyses the results of the financial statement audits of the ten NSW universities and their controlled entities for the year ended 31 December 2016. The table below summarises key observations.  

Key observations of financial statement audits - Universities 2016

Financial performance and reporting

No significant financial reporting issues

No qualified audit opinions were issued on the ten universities’ financial statements. The introduction of early close procedures improved the quality and timeliness of financial reporting.

Financial performance indicators are improving

All NSW universities recorded a surplus in 2016. Combined overseas students’ course income exceeded domestic students’ course income for the first time in 2016.  

Course income from overseas students is concentrated to one regional area (income concentration risk). Some NSW universities' business models depend on international students' intake to be financially sustainable. These universities manage income concentration risk by focusing on increasing the geographical diversity of overseas students.

Five universities had expenditure growth increasing more than revenue growth in 2016 compared to six in 2015. Combined universities revenue growth exceeded expenses by 1.1 per cent in 2016 compared to 2015 where expenses exceeded revenue by 1.3 per cent.

NSW universities are managing their financial positions.

  • Average combined operating margin increased from 5.2 per cent in 2015 to 6.2 per cent in 2016.
  • Combined debt decreased from 9.4 per cent of equity in 2015 to 8.5 per cent of equity in 2016.
  • Combined current ratio (ability to repay short-term liabilities with current assets) decreased marginally from 1.9 in 2015 to 1.7 in 2016.

Financial controls

No high risk internal control deficiencies identified

Generally, our audits assessed universities’ internal controls to be appropriately designed and operating effectively to produce reliable and timely financial reports. However, the audits identified areas where internal controls could be improved. These were reported to management.

The main areas for improvement related to information security in password settings and administration of user access. User password settings need to be improved on the financial systems, helping to reduce the risk of data leakage and inappropriate access. Almost half of the information security risks identified in the 2016 audits were reported in previous years but not fully addressed.

Governance

Getting more from project risk governance

Our assessment of the ten NSW universities' project risk governance found planning and execution phases of projects were reasonably well managed. Overall, there are opportunities for improvement in the areas of change management, measuring project outcomes and sharing key lessons learnt.

Improving compliance frameworks at NSW universities

Seven NSW universities have a documented compliance management framework and maintain compliance registers at divisional levels. Areas for improvement include maintaining centralised compliance registers and monitoring changes in legislation.

Recommendation

NSW universities should have systems to capture all compliance matters. This includes developing processes to regularly update changes for all relevant legislative and other compliance requirements.

Teaching and research

Students fees and other income are applied to subsidise the cost of research 

From 2014 to 2016, NSW universities’ research expenses consistently exceeded research income, indicating teaching and other income was applied to subsidise research activities.

2. Introduction

This report focuses on key observations and common issues identified from our financial audits of the ten NSW universities and their controlled entities in 2016. The universities are listed in Appendix Three.

In this report, parliament and other users of universities’ financial statements are provided with an analysis of universities’ results and key observations in the following areas:

  • Financial Performance and Reporting
  • Financial Controls
  • Governance
  • Teaching and Research.

Snapshot of NSW universities

A snapshot of NSW universities for the year ended 31 December 2016 is shown below.

Sources of Revenue and Equivalent Full-Time Student Load pie charts

Status of 2015 recommendations

Last year’s Auditor-General’s Report to Parliament on NSW universities included twelve recommendations. The table below describes the status of those recommendations.

Status of 2015 recommendations
Status of 2015 recommendations

3. Financial Performance and Reporting

Financial performance and reporting are important elements of good governance. Confidence in public sector decision making and transparency is enhanced when financial reporting is accurate and timely.

This chapter outlines audit findings on financial performance and reporting of NSW universities for 2016. 

Universities_2017_Financial_Reporting_Performance

Financial Reporting

Audit results

No modified audit opinions were issued on the ten NSW universities' 2016 financial statements. No controlled entity's audit opinion was modified in 2016 (one in 2015).

Revenue to total assets

Revenue generated from asset base highest in country universities

A measure of how efficient universities use assets is the amount of revenue the assets generate. The graph below shows the revenue earned as a percentage of total assets.

Universities_2017_Financial_Reporting_Performance_Total _Revenue _Image

The University of New England and Southern Cross University generated the highest percentage of revenue from their asset bases in 2016. They achieved a return of about 62 per cent and 75 per cent respectively. This was mainly driven by the lower valuation of the asset base in the country area.

Of the Sydney metropolitan universities, the University of New South Wales generated the most revenue from its asset base, with about 58 per cent. Macquarie University and Western Sydney University generated the least revenue, returning about 38 per cent.  

Some reasons universities may have a low revenue return on assets include:

  • having surplus assets
  • new investments in infrastructure prior to optimising usage
  • increasing property values in metropolitan areas.

Revenue generated from total assets across all NSW universities was 46 per cent. The fact that some universities record assets at cost and others at fair value should be considered when comparing these ratios. Ordinarily, universities that record their assets at cost should have a higher return of revenue from their asset base.

Rate of increase in operating expenditure compared to operating revenue

Five out of ten universities' operating expenses grew faster than operating revenue\

The ‘earnings gap’ compares the growth in revenue to the growth in operating expenses. A negative earnings gap implies operating revenues may not be sufficient to fund present operations and maintain the existing assets over the medium to longer term. In 2016, combined revenue growth was 1.1 per cent more than combined expenditure growth as shown in the table below.  

Combined revenue for all NSW universities increased by 7.8 per cent and was mainly achieved from a $557.8 million increase in student fee income and $143.9 million increase in Commonwealth Government grants.

Combined operating expenses for all NSW universities increased by 6.7 per cent. This was primarily due to employee related expenses increasing by $263.1 million.  

Universities_2017_Financial_Reporting_Performance_Total _Image_1

Southern Cross University had the highest positive earnings gap result at 10.7 per cent. The result was mainly due to revenue growth, driven by an increase of $13.4 million in Commonwealth Government Education Investment Fund capital grants and $11.9 million rise in student income.

Five out of ten universities had a negative earnings gap in 2016. Charles Sturt University had the highest negative earnings gap. Charles Stuart University's revenue increased 8.8 per cent mainly due to student income growth. However, expenses increased 10.6 per cent because of higher contract tuition service expenses, resulting in negative earnings gap of 1.8 per cent. The University of Sydney’s negative earnings gap of 1.7 per cent was due to a $65 million increase in employee related expenses and a $39 million write down of capitalised project costs.

Operating cost per student 

Operating costs per equivalent full-time student load increased in 2016

Managing costs effectively is important for universities to operate sustainably in a competitive environment. In 2016, based on parent entity figures only, NSW universities incurred weighted average operating costs (excluding research expenditure) of $25,322 ($24,152 in 2015) for every equivalent full-time student load (EFTSL).  
Sydney metropolitan universities had the highest average operating cost per EFTSL at $26,728 ($25,991). 

Country universities had the lowest average operating cost per EFTSL at $21,211 ($20,809). Higher average costs at Sydney metropolitan universities are reflective of the courses offered.

The graph below compares the operating cost per EFTSL for each NSW university.

Universities_2017_Financial_Reporting_Performance_Total _Revenue _Image_2

Sources of revenue

Universities can reduce exposure to financial risk by diversifying revenue sources to different degrees depending on factors such as location, size, perceived standing, facilities and staff profiles.

NSW universities’ total combined revenues by source in percentages are shown below.

Universities_2017_Financial_Reporting_Performance_Total _Revenue _Image_3

NSW universities' combined Commonwealth Government grants, as a proportion of combined revenue, decreased gradually over the past five years.

Commonwealth Government grants increased in 2016

Commonwealth Government grant revenue increased $144 million in 2016. Commonwealth Government grants (operating and capital) are a major source of revenue for NSW universities. They accounted for 36.0 per cent of revenue in 2016 (37.0 per cent in 2015).

Southern Cross University and the University of New England’s Commonwealth Government grants accounted for 49.8 per cent and 49.1 per cent of their total revenues respectively. As funding pressures increase, universities need to supplement Commonwealth Government grant income through other revenue streams and constrain expenditure growth.

Macquarie University and the University of Technology Sydney had the most balanced and diverse revenue sources. Macquarie University received 24.1 per cent of its revenue from non-core revenue sources and 23.7 per cent from overseas students. The University of Technology Sydney received 32.7 per cent of its revenue from overseas students.

Revenue from overseas student course fees surpassed domestic student fees

Student course fees were a significant source of revenue in 2016, representing 45.8 per cent (42.9 per cent in 2015) of NSW universities' total combined revenues.  

The University of Technology Sydney and Charles Sturt University recorded the highest percentage of total revenues from student course fees at 53.1 per cent in 2016 (52.1 per cent) and 47.7 per cent (45.6 per cent) respectively. The University of Newcastle had the lowest percentage at 31.9 per cent in 2016 (31.1 per cent for University of New England).  

Student course fees are received directly from students or through Higher Education Loan Programs. Total student course fees for NSW universities from 2012 to 2016 are shown below.

Universities_2017_Financial_Reporting_Performance_Total _Revenue _Image_4

Total revenue from overseas students surpassed the total revenue from domestic students for the first time in 2016. Revenue from overseas fee-paying students increased $458 million (24.9 per cent) and has increased 71.4 per cent since 2012. This continued to be a significant revenue stream for universities, representing 24.4 per cent (21.0 per cent in 2015) of total revenues.  

Total revenue from domestic students increased $99.8 million (5.2 per cent) compared to 2015 and $453 million (29 per cent) since 2012. In 2016, domestic student course fees represented 21.4 per cent of total university revenues, which has remained relatively consistent over the last four years.

Financial performance

Sustainability indicators

NSW universities' sustainability indicators improved marginally

Universities manage their finances so they can meet current and future spending commitments to provide high quality education, invest in future growth, adapt quickly to emerging threats and remain financially sustainable.

Universities_2017_Financial_Reporting_Performance_Total _Revenue _Image_5

The table below summarises the performance of NSW universities against some commonly accepted sustainability indicators for the year ended 31 December 2016.

Universities_2017_Financial_Reporting_Performance_Total _Revenue _Image_6

A definition of each sustainability indicator is provided in Appendix Two.

NSW universities recorded an overall operating surplus of $631 million in 2016. The University of New South Wales had the highest surplus of all NSW universities in 2016 at $146 million ($160 million in 2015 for the University of Sydney).

Southern Cross University recorded an operating surplus of $16.8 million, a significant turn-around from a deficit of $3.7 million in 2015. This was mainly driven by $13.4 million increase in Commonwealth Government capital funding for the Education Investment Fund and $11.9 million rise in overseas students’ revenue.

Current ratio

Ability to repay short-term debt is steady

The current ratio measures an entity’s ability to repay short-term liabilities. A ratio of less than one suggests sufficient resources may not be available to settle short-term debt obligations when they fall due.  

Annual leave and long service leave liabilities expected to be settled more than 12 months after 31 December 2016 are excluded from current liabilities.

The average current ratio for all NSW universities over the last five years is shown below.

Universities_2017_Financial_Reporting_Performance_Total _Revenue _Image_7

The average current ratio for the ten NSW universities has remained between 1.6 and 1.9 over the last five years. The Commonwealth Government Department of Education and Training’s (the Department) ‘Benchmarking: A Manual for Australian Universities’ considered a ratio between 1.5 and 3.0 as good practice (the manual has been withdrawn by the Department).

The current ratio for each NSW university over the last five years is shown below.

Universities_2017_Financial_Reporting_Performance_Total _Revenue _Image_8

At 31 December 2016, four universities (three at 31 December 2015) had current ratios of less than 1.5, and two universities (two at 31 December 2015) more than 3.0.  

Southern Cross University and the University of Newcastle both had the lowest ratio of 0.9 in 2016. Whilst a ratio of less than one suggests there may not be sufficient resources to pay short-term obligation, Southern Cross University had access to a $24.0 million unused bank loan facility at 31 December 2016 to meet any short-term obligation. The University of Newcastle had the ability to liquidate $268 million of investments intended to be held long-term and access to a $10.0 million unused bank overdraft facility at 31 December 2016.

Borrowings

Debt to equity improved marginally

Universities’ borrowings totalled $1.4 billion at 31 December 2016, a decrease of $41.9 million from 31 December 2015.

The debt to equity percentage indicates whether a university is more reliant on borrowings (debt) or equity (reserves and retained earnings) to fund asset acquisitions and other activities. A higher percentage generally indicates a greater risk exposure to interest rate changes and economic downturns. The graph below shows the percentage of debt to equity for each NSW university at 31 December over the last five years.

Universities_2017_Financial_Reporting_Performance_Total _Revenue _Image_9

At 31 December 2016, Macquarie University and the University of Technology Sydney had the highest debt to equity percentages of 17.3 per cent (20.5 per cent at 31 December 2015) and 12.2 per cent (16.3 per cent) respectively.  

The University of Technology Sydney’s debt to equity of 12.2 per cent reflects the university’s borrowing to fund its campus development capital program. Whilst Macquarie University had the highest debt to equity percentage, its average interest coverage rate is improving.

The University of Wollongong and Southern Cross University measure property, plant and equipment assets at cost. The University of Sydney’s campus land and building assets are recorded at cost. Other NSW universities measure these assets at fair value. The different accounting treatments impact the debt to equity and operating margin percentage indicators.

Interest coverage ratio is steady

Consistent with NSW universities debt levels over the last five years, the combined interest coverage ratio decreased from 25 times in 2012 to 20 times in 2016.

The University of New South Wales and the Charles Sturt University had the highest interest coverage ratios of 124.9 and 89.0 times respectively, reflecting low levels of borrowings and strong capacity to service debt.

Macquarie University had the lowest interest coverage ratio of 7.2 times, reflecting its higher level of debt compared to other NSW universities.

Operating margin

A university’s operating margin is the ratio of its operating result to total income, excluding capital grants. A negative operating margin means an entity's operating expenses are greater than its operating revenues.

The overall average operating margin of all ten NSW universities increased from 5.2 per cent in 2015 to 6.2 per cent in 2016. The 2016 operating margin for each NSW university is shown below.

Universities_2017_Financial_Reporting_Performance_Total _Revenue _Image_10

The University of Newcastle recorded the highest operating margin of 9.0 per cent (7.8 per cent in 2015 for University of Sydney) primarily due to a $24.7 million realised gain on disposal of investments.  

Southern Cross University recorded the lowest operating margin of 0.1 per cent (negative 3.0 per cent in 2015). The turnaround was mainly driven by $11.9 million rise in overseas student’s revenue.

Stress testing and scenario analysis

Universities' ability to be financially resilient in the face of uncertainty

The NSW universities' ability to manage their financial resources could be impacted by uncertainties from Commonwealth Government tertiary education reforms. Stress testing and scenario analysis can be useful in ensuring a university’s ability to remain financially resilient and respond to different uncertainties such as changes in government policies, concentration risk of overseas students and the impact of technological disruption amongst others.   

Universities are addressing the continued downtrend in Commonwealth Government grants by diversifying revenue and stress testing various scenarios to understand and plan appropriate responses.

Controlled entities

Thirty per cent of controlled entities are not financially viable as standalone entities

Thirty per cent of university subsidiaries are not financially viable without the support of the parent university.  

Universities_2017_Financial_Reporting_Performance_Total _Revenue _Image_11

4. Financial controls

Appropriate financial controls help ensure the efficient and effective use of resources and the implementation and administration of university policies. They are essential for quality and timely decision making.

In 2016, our audit teams made the following key observations on the financial controls of NSW universities.

Financial_controls_universities_Image_1

Internal controls

No high risk financial control deficiencies identified

We reported deficiencies in internal controls, matters of governance interest and unresolved issues identified during our audits to management and those charged with governance of NSW universities. We reported these through letters to management, which included our observations, assessment of the implications, our recommendations and risk ratings.  

The 2016 audits did not identify high risk issues common across the NSW university sector. Generally, internal controls were working effectively to produce reliable and timely financial reports. However, issues creating moderate or low risk to the financial statements were identified. The table below describes the three most common issues across NSW universities.

Financial_controls_universities_Image_2

In 2016, 99 (123 in 2015) management letter recommendations were reported to NSW universities. Of these, 29 (42) were identified in previous audits and had not been fully actioned by management. Some issues take longer to address due to the complexity of the issue and/or resource constraints. Audit and risk committees continue to monitor and advise university management on the implementation of audit recommendations.

The most common repeated audit findings related to weaknesses in information security controls (as detailed below).

Information security

Universities continue to face challenges in managing information security

Recommendation:
Universities should review the design and effectiveness of their information security controls to ensure intellectual property, staff and students data are adequately protected.

The 2016 information system audits of universities focused on information technology (IT) processes and controls supporting the integrity, availability and security of financial data used to prepare the financial statements.

The audits identified opportunities to improve information security in password settings and administration of user access. User password settings need to be improved on the financial systems, helping to reduce the risk of data leakage and inappropriate access. Almost half of the issues identified in the 2016 audits were reported in previous years and had not been fully addressed.

With increasing technology disruption and the requirement to protect intellectual property (IP) derived from research, there is a need for cyber-security readiness. Strong information security risk management and controls help prevent cyber security threats. The 2016 Threat Report of the Australian Cyber Security Centre, identified intellectual property as a potential target for cyber criminals. Universities generate a significant amount of intellectual property through their investment of public and commercial funds into research. The report also noted that cyber criminals are using increasingly sophisticated ways to elicit this high value information.

A well-managed and effective IT control environment should:

  • have a robust information security management framework
  • focus on effectively managing IT security risks during times of change
  • ensure financial systems can support critical business processes in a disaster
  • regularly review system controls and associated business processes, especially in a changing environment
  • define and monitor user accountabilities and responsibilities
  • continuously educate users about the emerging techniques employed by cyber criminals.
Source: 2016, Australian Government, Information Security Manual, Controls.

Human resources

Excess annual leave

Managing excess annual leave balances remains a challenge for universities

NSW universities are finding it challenging to reduce annual leave balances of employees to suitable levels. The percentage of academic staff with excess annual leave balances increased to 7.2 per cent in 2016 (6.8 per cent in 2015). For general staff, the percentage increased to 3.6 per cent (3.2 per cent in 2015).

The implications of excessive leave balances include:

  • possible work health and safety issues
  • disruption to service delivery if key employees are absent for lengthy periods to reduce leave balances
  • undetected employee fraud
  •  increased financial costs as salaries increase.

At 31 December 2016, all universities had staff with annual leave balances exceeding 40 days. In total, 1,642 (1,493 in 2015) or 5.1 per cent (4.7 per cent) of all university staff had over 40 days of annual leave.The graph below shows the percentage of academic and general staff with annual leave balances exceeding 40 days at 31 December 2016 at each university.

Financial_controls_universities_Image_3

Asset management

Asset maintenance

Backlog maintenance decreased nine per cent to $596 million

Conclusion

Universities have an obligation to ensure assets used in service delivery operate safely and reliably over their expected useful lives. For effective management of backlog maintenance, it is important to have asset lifecycle planning strategies that ensure all assets are funded and maintained to a desired service level. 

Universities' estimated backlog maintenance decreased nine per cent to $596 million in 2016 ($653 million). The University of New South Wales, the University of Sydney and the University of Newcastle had the highest percentages of their asset value with backlog maintenance at 7.6 per cent, 10.6 per cent and 10.6 per cent respectively.

Universities spent $193 million in 2016 ($185 million) maintaining their buildings and equipment to ensure the safety of users and to optimise service potential of their investment in these assets.  

Wear and tear on universities' assets, as represented by depreciation, was $632 million in 2016 ($603 million). This is $439 million higher than funds spent on maintenance. This difference may be acceptable for newer assets, however the gap between maintenance and depreciation should be carefully monitored for ageing assets. This gap may help universities plan strategies in managing backlog maintenance.  

The table below compares depreciation rates and maintenance expense rates across NSW universities. The rates are calculated as a percentage of property plant and equipment excluding land.

Financial_controls_universities_Image_4

Universities' estimated backlog maintenance decreased nine per cent to $596 million in 2016 ($653 million). The University of New South Wales, the University of Sydney and the University of Newcastle had the highest percentages of their asset value with backlog maintenance at 7.6 per cent, 10.6 per cent and 10.6 per cent respectively.

Universities spent $193 million in 2016 ($185 million) maintaining their buildings and equipment to ensure the safety of users and to optimise service potential of their investment in these assets.  

Wear and tear on universities' assets, as represented by depreciation, was $632 million in 2016 ($603 million). This is $439 million higher than funds spent on maintenance. This difference may be acceptable for newer assets, however the gap between maintenance and depreciation should be carefully monitored for ageing assets. This gap may help universities plan strategies in managing backlog maintenance.  

The table below compares depreciation rates and maintenance expense rates across NSW universities. The rates are calculated as a percentage of property plant and equipment excluding land.

5. Governance

Governance refers to the high-level frameworks, processes and behaviours that ensure universities meet their intended purpose, conform with legislative requirements, and meet expectations of probity, accountability and transparency.

This chapter outlines audit findings on the governance of NSW universities and their controlled entities. 

Financial_controls_universities_Image_6

Project risk governance

Projects governance capabilities in NSW universities is improving

We reviewed ten projects valued at $0.5 billion across all NSW universities, examining governance arrangements over the project lifecycle comprising:

  • project planning
  • project execution
  • monitoring and review
  • culture.

Our review identified strengths and opportunities for improvement as detailed below:

Financial_controls_universities_Image_8
Financial_controls_universities_Image_9

Effective risk management breaks down silos

Silos create artificial boundaries between faculties and may result in duplication of efforts, wasted resources and jeopardise achievement of the University’s overall goals.

Over the last two years, we assessed and reported the risk management maturity of all universities. Our findings indicate that most universities have designed enterprise wide risk management structures that align faculty objectives to the university’s strategic goals. When risk management reaches optimal maturity, and is embedded in decision-making, it would foster cross-function collaboration to ensure all initiatives support the university’s strategies, and therefore breaking down the silos.  

Some methods for universities to break down silos include:

  • bringing people together across functions, levels and geographical locations to solve problems and make decisions by promoting collaboration within the University
  • a rigorous risk management process to ensure all projects, programs and initiatives throughout the university are assessed against a unified vision
  • improving governance arrangements by identifying the root cause creating the silo mentality to ensure appropriate solutions are designed to improve the culture
  • developing an incentive structure for executives and management who successfully establish common goals and promote collaboration.

Research integrity and ethics

Research integrity includes honesty in research, excellence in research practice, transparency, open communication and a duty of care towards research subjects. Research ethics involves analysis of ethical issues facing research participants. A Research Ethics framework or policy supports the university community's efforts to act ethically and in the public interest.

Good research integrity and ethics include:

  • providing guidelines on responsible conduct of research including the code of conduct and complaints handling procedures
  • publishing a research ethics and integrity commitment statement
    dedicating an ethics committee to protect participants and obtain relevant approvals
  • Reporting research integrity issues to those charged with governance. Integrity issues include; research misconduct, plagiarism and other research practices that undermine research outcomes.
  • Promoting open and transparent communication of issues across the University.
  •  This would encourage awareness and highlight the impact and consequences of breaching research integrity and ethics.

The Audit Office Governance Lighthouse includes ethics as a key component of good governance. It also includes guidance on ethics which is based on ‘Principle 3: Acting Ethically and Responsibly’, issued under the governance principles of the Australian Securities Exchange (ASX). Universities can refer to this guidance when considering broad ethical requirements on our website .

Culture

Student complaint and grievance handling procedures are a mechanism to promote a positive culture within a university. In the university context, risk culture is the shared perception and values among staff and students that define desired attitudes and behaviours.

Student complaints and grievances are particularly important as they weigh on a University's reputation and the potential of negative media coverage.

A well-managed student complaint and grievance mechanism should:

  • clearly define student complaints procedures covering complaint reporting, resolution and appeal processes
  • analyse student complaints and grievances by themes
  • develop a strategy to address the issues
  • report to the council on issues and themes to help assess emerging risks, promote positive students' experience and create an open and transparent culture at the university.

Strategic risks across NSW universities

Most NSW universities maintain a risk register that articulates risks associated with their business focus and long term strategies. The risk mitigation strategies, and measures of performance are monitored through metrics and reported to those charged with governance.

Five common strategic risks from across NSW universities are summarised below. All universities include the potential impact of government policy change as one of their key risks.

Financial_controls_universities_Image_10

Universities’ strategic risks were broadly aligned to their strategic priorities. However, the link between some universities’ strategic risks to their strategic priorities was not clear. For example, some universities reported that driving research quality and excellence was one of their strategic priorities, but they had no reference to it in their strategic risk registers. Another example was a focus on academic excellence and student centricity, with no associated risks appearing in the strategic risk register.

Strategic risks of controlled entities were not consistently elevated to the respective university's strategic risk register. The inclusion of controlled entities' risk management processes under the University's Enterprise Risk Management Framework would ensure their strategic risks are adequately captured and reported.

Compliance management

Effective compliance management is a key component of the overall governance framework. It is broader than just ensuring legal obligations to regulatory bodies are met. It includes compliance with the internal code of practice and policies to meet contractual obligations.

Seven universities have a documented compliance management framework and compliance registers at divisional levels.

Some areas for improvement include:

  • maintaining an integrated centralised compliance register
  • updating compliance issues on a regular basis
  • notifying any changes in legislation and compliance issues to those charged with governance.
Recommendation
NSW universities should have systems to capture all compliance issues. This includes developing processes to regularly update changes for all relevant legislative and other compliance requirements.

6. Teaching and Research

Teaching and research are core activities of universities. The quality of teaching is a key driver for growth and attracting students. Through research, universities contribute to economic growth, lead innovation and improve their global rankings.  

This chapter reports on teaching and research in NSW universities for 2016.

Financial_controls_universities_Image_11

Teaching income

Teaching and other income subsidise research shortfalls

NSW universities’ data from 2014 to 2016 indicates research expenditure consistently exceeded research revenue. The method of allocating indirect costs of research varies across universities making it difficult for comparison. Whilst revenue can be reliably allocated to teaching and research, allocating indirect expenditure is more difficult. When universities apply teaching income to subsidise research, students’ experience may be impacted.  

Universities need to design an appropriate process to capture and track all direct and indirect costs associated with research activities and determine appropriate funding mechanism for the deficits. This could reduce any risk of diverting teaching income to fund research activities.

Overseas student enrolments continue to rise

The number of full time students increased by 7,216 (2.7 per cent) in 2016. Full time students are measured as equivalent full-time student load (EFTSL) which includes part-time students. Total EFTSL numbers and percentage of overseas students over three years is shown in the table below.

Financial_controls_universities_Image_12

Total EFTSL increased by 11,168 since 2014. Overseas EFTSL increased by 15.9 per cent over the same period.  

Sydney metropolitan universities had the highest proportion of overseas EFTSL at 26.7 per cent in 2016, an increase of 10,234 overseas students since 2014. University of Sydney and the University of NSW overseas EFTSL grew by 45.8 per cent and 25.3 per cent respectively. Over that same period, their domestic EFTSL decreased 1.8 per cent and 1.5 per cent respectively.

The increasing number of overseas students can have significant financial benefits to a university. However, there are associated risks, including pressure on capacity constraints and the need to maintain teaching quality. There is also a concentration risk from reliance on overseas students from the same geographical location in the event of an economic downturn from that region.

Student enrolments

Students' course enrolment not aligned with skills shortages

In 2016, the Commonwealth Department of Employment (Department) published data showing occupations, assessed specifically for New South Wales, where shortages or some recruitment difficulty were evident. These include:

  • health and welfare support workers
  • ICT professionals
  • health professionals
  • design, engineering, science and transport professionals.

Courses with the highest proportion of enrolled students such as creative arts, society and culture do not mirror the skills shortage requirements in NSW for health, ICT and engineering. Aligning students' enrolment with the fields of skill shortages within the State would ensure funds are directed to educate graduates that can be employed.  

Society and Culture, Management and Commerce had the highest enrolments

The graph below shows the breakdown of total students enrolled in NSW universities split by course category in 2015 (based on the latest information published by the Department).

Financial_controls_universities_Image_13

The following course categories had the highest proportions of enrolled students in 2015:

  • society and culture (24.6 per cent)
  • management and commerce (23.1 per cent)
  • health (13.2 per cent) 
  • education (8.6 per cent).

Students' experience

Three NSW universities have student to academic ratios below the national averages

Ensuring students receive a positive educational experience is an important purpose and responsibility of Australia's universities. There are several factors that contribute to students' experience in universities including the number of students per class, teaching quality, learning resources and student support.

The table below shows each NSW university's student to academic ratio from the Department of Education data.

Financial_controls_universities_Image_15

For 2015, the latest information published by the Department, the average student to academic ratio across all NSW universities was 31.2. The three-year trend shows the student to academic ratio was stable in the Sydney metropolitan and increased in major regional and country areas. Only three universities in NSW had ratios below the national average in 2015 (four in 2014).

A lower student to academic ratio may indicate a better teaching experience. Some universities believe this ratio is misleading because it does not consider other factors such as distance learning. The information in this report should be considered in this context.

Three universities scored above the national average for student experience

In February 2016, the 2015 Quality Indicators for Learning and Teaching (QILT) released the survey results of about 145,000 Australian university students. QILT's survey measures the overall student satisfaction in six areas:

  • overall quality of educational experience
  • teaching quality
  • learner engagement
  • learning resources
  • student support
  • skills development.

The information collected helps universities and the Government improve teaching and learning outcomes, while reporting on multiple facets of the student experience. QILT noted that care should be taken when interpreting survey results as the accuracy varies based on the number of students completing the survey.

The overall result for each NSW university and the national average are shown below.

Financial_controls_universities_Image_16

Three out of five universities located outside of the major metropolitan areas achieved results above national averages of 80.1 per cent in the QILT survey. They include the University of New England (84.8 per cent), the University of Wollongong (83.9 per cent) and the University of Newcastle (82.6 per cent).  

Other universities scoring above the national average were Macquarie University for teaching quality (82.2 per cent), Charles Sturt University and Southern Cross University for student support (74.1 per cent and 77.3 per cent respectively).  

Research income

NSW universities' research income increased to $1.1 billion in 2015

Most universities' research income is from Commonwealth Government grants. Each year, NSW universities provide the Department with research income data. The data is used to assess university research performance and determine the allocation of Commonwealth Government Research Block Grants. These grants reward universities for their success in obtaining non-government grants to support further research.

The graph below shows total research income received by NSW universities from 2011 to 2015. Research income data from the Department for 2016 was unavailable at the time of preparing this report.

Financial_controls_universities_Image_17

Research income received by NSW universities increased to $1.1 billion in 2015, an increase of 13.5 per cent over five years. The proportion of research income for each university remained relatively consistent over that period.  

The University of Sydney and the University of New South Wales continue to be the top two recipients, receiving 36.1 per cent and 30.4 per cent of total research income respectively. Most came from Commonwealth Government competitive grants, other public sector sources and industry research grant funding.

In 2017, $1.9 billion ($1.8 billion in 2016) in block grants will be provided to eligible Australian higher education providers by the Commonwealth Government. NSW universities will receive $557 million or 29.3 per cent of Commonwealth Government block grants.

Measuring research impact

Industry research income is a measure of research success

Measuring and assessing the impact of research on the economy and the society in general is difficult. The Commonwealth Government supports research as a key contributor towards improving Australia's productivity over the long term.

Research income generated by universities is a performance measure used by the Commonwealth Government to calculate various performance based research funding allocations.

A measure of research impact is the ability of universities to attract non-government research funding. Attracting non-government research funding is influenced by demonstrating how research is transferred into beneficial outcomes for industry.

The table below shows total research income from industry and other sources (non-government) over three years for each university.  

Financial_controls_universities_Image_18

The University of Sydney and University of New South Wales attracted the most funds from industry and other sources. University of Newcastle attracted the most industry research fund in NSW outside of the Sydney metropolitan universities.

University world rankings

Overall, NSW university world rankings have improved

World university rankings, such as the Times Higher Education and QS World University rankings are another way the quality of research can be assessed. Both organisations consider research in their overall rating with 60 per cent of the Times Higher Education World University Ranking and 20 per cent of the QS World University Ranking tied to research.

The ratings for each NSW university for 2015–16 and 2016–17 are shown below (lower rankings are better).

Financial_controls_universities_Image_19

Overall, NSW universities world rankings have remained relatively consistent. The University of Newcastle's overall world ranking improved in both the Times Higher Education and QS World Ranking surveys in 2016–17.

Rankings calculated by QS and Times Higher weight the following factors:

  • teaching (the learning environment) 30 per cent
  • research (volume, income and reputation) 30 per cent
  • citations (research influence) 30 per cent
  • international outlook (staff, students, research) 7.5 per cent
  • industry income (knowledge transfer) 2.5 per cent.

It is important to note that weighting is given to factors such as reputation which is highly subjective and hard to measure.