Agenda

• Audit completion status
• Key themes noted in 2010 audit
• Top sector gross risks – auditors’ views
• Key 2010 ITGC audit findings
• Accounting matters
• OAG sector brief – expected focus for 2011
• TEI sector iShare initiative
• Questions and general discussion

Audit completion status

• Overall comment
  • A qualified success, no modified opinions for TEI parents, well-done
  • Comparable result with 2009 if it were not for the earthquake impacts
• Parent entity level
  • Two TEIs did not meet the statutory reporting deadline
  • TEI 1 – completion of subsidiary audits hinged on decisions about their future, flow-up impact on parent
  • TEI 2 – physical access issue caused by the Canterbury earthquakes
• Subsidiary entity level
  • A number of entities did not meet the deadline
  • Main reasons: impact of the Canterbury earthquake and failure to submit draft annual reports for audit timely
  • Affected entities mainly immaterial to the parent TEI or inactive

Key themes noted in 2010 audit

• Top three themes – no surprises here
  • Financial viability and sector reform
  • Capital asset management
  • Procurement
• Financial viability and sector reform
  • Government spending restrictions across all sectors
  • Performance reporting benchmarks – TEI FM numbers need close monitoring – funding impact and consequential accounting impact
  • Global financial crisis – impact on student enrolments
  • Cost reduction initiatives, restructuring activities across a number of TEIs
• Capital asset management
  • Despite tough times, significant investment in premises still being made
• Procurement
  • Remains a key area for TEIs and auditors given the size of planned capital spend

Top sector gross risks - auditors’ views

• PPE: valuations, campus development and capital projects
• Sustainability, financial viability and going concern, and the effect of the global economic situation
• Quality of service performance reporting and compliance with EPI requirements
• Governance, management of subsidiaries and the quality of governing bodies
• Personal view: great opportunity for TEIs themselves to further improve entity-wide risk management practices from assessment, mitigation, reporting, monitoring and annual refresh of risks
• Effective audits result from auditors and TEIs being able to freely share views on risk matters

Key 2010 ITGC audit findings

• Lack of user computing policies and procedures
• Lack of an IS risk management framework and consequential IS governance issues
• Non-existent or weak change and project management policies and procedures
• Emergency change management procedures not formalised
• Lack of periodic review of users and access rights and adequacy of password security

Accounting matters

• Accounting matters advised in 2010 still relevant for 2011
  • Disposal of Crown assets
  • Disclosure of budget figures in the annual report
  • Funding from capital appropriation
  • Multi-parent subsidiaries
  • Non-active companies
• Developments in financial reporting standards
  • NZ IAS24: Related parties – changes to definition
  • Update on IASB work programme
  • http://www.ifrs.org/Current+Projects/IASB+Projects/IASB+Work+Plan.htm

Disposal of Crown assets

• Advice has been provided to TEC on how TEIs shall account for the disposal of Crown-owned assets
• Crown-owned assets to be disposed shall be reclassified as held for disposal in accordance with NZ IFRS 5 once:
  • A MoU is in place between the TEI and the Minister of Education; and
  • The TEI is not continuing to use the asset
• Note disclosure shall be made about:
  • the disposal process; and
  • if the net proceeds to be kept by the TEI will be less than 100%: that an equity distribution will be made to the Crown upon sale
• An example of the journal for a disposal is as follows:

  Dr Cash		$xx
  Dr Distribution to the Crown*		$xx
  	Cr Gain on disposal	$xx
  	Cr Non-current assets held for disposal	$xx
  Dr PPE revaluation reserve		$xx
  	Cr Accumulated funds	$xx

*Recognised in the statement of changes in equity

Note: this example assumes that: the net sales proceeds exceed the asset carrying amount; the proceeds received are GST exclusive; and the TEI keeps less than 100% of the net sales proceeds.

Disclosure of budget figures

• Section 154 of CEA requires the forecast financial statements prepared at the start of the financial year to be included in the financial statements
  • OAG legal advice confirmed this also applies to subsidiaries of TEIs that are Crown entities
  • If the subsidiary of a TEI is a trust or a company controlled by a trust, then the subsidiary is not a Crown entity
• Revised budget figures can be presented in addition to the budget at the start of the year
  • The reasons and contextual information for this must be disclosed

Funding from capital appropriations

• TEIs can receive funding that is for capability building and is provided under a capital appropriation
• It will seldom be appropriate to account for this as revenue
• Depending on documentation, account for as:
  • Contribution from the Crown (recognised in the SME)
    • This would be the most common scenario; or
  • Liability
• Care needs to be taken when reviewing documentation as the substance of the arrangement needs to be considered
• If not accounted for appropriately, likely to impact audit report regardless of the amount involved

Multi-parent subsidiaries

• Companies controlled by a single TEI are not required to prepare an SOI and SSP
• Companies that meet the definition of a Crown entity and are jointly owned by several TEIs are required to prepare an SOI and SSP under the CEA
  • Unless an exemption from doing so has been given from the Minister of Finance
  • The SSP must be audited
• An example: Massey and Victoria Universities each own 50% of the NZ School of Music Limited (NZSoM)
  • As both Universities are Crown entities, NZSoM is 100% owned by Crown entities and is therefore subject to the accountability requirements of the CEA as it is a multi-parent subsidiary

Non-active companies

• A non-active company controlled by a TEI that is a Crown entity must prepare financial statements under the CEA
  • Even if they meet the non-active criteria of Financial Reporting Act 1993
• Companies controlled by a Trust (that is controlled by a TEI) are not a Crown entities
  • These non-active companies can seek to exempt themselves under the FRA
• A non-active company (that is not a Crown entity) can exempt itself from preparing financials if:
  • the non-active entity definition of the FRA is satisfied; and
  • the Directors, within the specified period, deliver to the Registrar a completed declaration.

Related parties: Changes to definition and disclosures

• Definitions in NZ IAS 24 have been clarified:
  • Now somewhat easier to understand
  • Consistency in definition
• IAS 24 has exemption for government-controlled entities
  • NZ exemption has been deleted
  • But new exemption not as all-encompassing as it was before
  • So more disclosures for Crown entities and departments
• Effective: 11D

NZ IAS 24: Associates and subsidiaries

NZ IAS 24: Key management personnel

Update on IASB work programme

Standards close to being completed

OAG sector brief

• Good news – sector brief for 2011 expected by 31 July 2011, so more time for TEIs and auditors to prepare
• Continued focus expected on performance information reporting
  • Auditors now required to report on the appropriateness of performance information in 2012 (TEI sector not ready, deferred from 2011)
• OAG currently performing a desk-top review of 2010 SSPs
  • Sector-wide analysis
  • Individual report for each TEI also planned
• Collaboration between OAG/Audit New Zealand and the TEC on improving performance reporting by TEIs - critical and is happening

TEI sector iShare initiative

• Auditor-General’s priority
• Two pilots – Transport and TEI sectors
• Harness the knowledge gained by the Office for the benefit of everyone
• Want to consult and engage the stakeholders - NZ Universities, NZITP, selected TEIs, the TEC, NZQA, MOE, OAG
• Your input welcome

Questions and general discussion

Email Julian Tan through our enquiries mailbox: enquiry@auditnz.govt.nz

Page last updated: 23 June 2011