Tertiary Education Commission

Financial Review briefing to the Education and Science Committee 2008/09 Financial Year Tertiary Education Commission 1 17 February 2010

2 Assistance to the Committee The Education and Science Committee is conducting a financial review of the performance in the 2008/09 financial year and the current operations of the Tertiary Education Commission (the TEC) in accordance with Standing Order 335. The Controller and Auditor-General provides Parliament with assurance on the performance and accountability of public entities. The Office of the Auditor-General typically assists select committees with their financial reviews by providing further details on the results of the annual audit in Part A of our written briefings, and by suggesting lines of enquiry and questions relevant to the particular public entity under review in Part B of our written briefings. Our financial audits provide a high, but not absolute level of assurance about whether a public entity s financial statements comply with generally accepted accounting practice (GAAP) in New Zealand and fairly reflect its financial position and its financial performance for the period audited. Due to the volume of transactions, audit work is planned and performed to obtain evidence on a sample basis. Auditors use professional judgement to assess the evidence and ensure there is reasonable assurance that there are not material misstatements in the financial statements (that is, differences or omissions that would affect someone s overall understanding of the financial statements). We report, in our audit opinion, only material differences or omissions that we find. The lines of enquiry we suggest are informed by the Auditor-General s mandate under the Public Audit Act 2001. This mandate covers matters of performance, accountability, waste, probity, and authority within public entities. To identify lines of enquiry, we: analyse the results of the annual audit and the accountability documents; refer to any relevant performance audit or inquiry work; and use our specific knowledge of the entity gained during the audit process and by ongoing contact with the entity. In developing the advice within this briefing document, the Office of the Auditor-General consulted with such parties as was necessary to ensure that the advice was correct. This process involved providing factual information of audit interest to the parties concerned (in either oral or written form), and obtaining confirmation of those facts, before giving advice to the Committee. The process did not involve providing to the parties concerned any contemplated or actual advice. Contact for further explanation If any member of the Committee would like further explanation or elaboration of any aspect of this briefing document, please contact Pania Gray, Sector Manager, Parliamentary Group on 04-917- 1596 or e-mail pania.gray@oag.govt.nz at the Office of the Auditor-General.

Summary of key issues 3 Part A: Results of the 2008/09 audit We issued an unqualified audit opinion on the Tertiary Education Commission (the TEC) s 2008/09 financial statements. We assessed the TEC s management control environment as good and its financial information systems and controls as good. We made a number of recommendations for improvement to the TEC, many of which the TEC is now implementing. We assessed the TEC s service performance information and associated systems and controls as poor. 1 The Statement of Intent (SOI) is not a sufficient basis for assessing the effectiveness of the TEC s operations and standard of service delivery. We identified a number of major improvements for the TEC to consider in developing its next SOI. We have emphasised the importance of the TEC improving its service performance information and associated systems and controls for our future grading of its management control environment. During our audit, we became aware that, in their 2008 financial statements, a number of tertiary education institutions (TEIs) had accounted for the Quality Reinvestment Fund (QRF) money that they had received from the Crown in a manner that was inconsistent with our expectation. We consider that they should have accounted for this funding as a capital contribution from the Crown in the respective TEIs Statement of Movements in Equity. After reviewing a few of the QRF funding agreements, we concluded that there is a need for the TEC to embed better quality assurance and monitoring controls over the drafting of its funding agreements. Part B: Advice to the Committee The key points we cover for the Committee, and suggest questions on, are: Financial performance we summarise and suggest the Committee ask questions about the TEC s 2008/09 financial performance. For the first time in four financial years, revenue has exceeded the cost of the TEC s operations enabling a net operating surplus - $2.876 million. There are a number of variances that we suggest the Committee enquire into, including some that relate to the costs of the 2008/09 restructuring. Measuring and reporting non-financial performance the TEC is responsible for measuring and reporting on its own performance as well as guiding the performance reporting of the education providers it funds. Our office and the Treasury are both working with the TEC to advance the quality of its service performance reporting. We suggest a range of questions about what progress the TEC has made in addressing our recommendations and areas for improvement. We also suggest that the Committee enquire into the TEC s work programme to improve the quality of the performance information of tertiary education providers. We raise some lines of enquiry about the TEC s monitoring of the Crown s ownership interest in TEIs, and advise of our decision to defer a performance audit of the TEC s monitoring of the Crown s ownership interest in TEIs. Organisational capability we explain the recent changes to the TEC s organisational structure. We also suggest a range of questions about how the TEC identifies and manages risk. 1 We have provided a grade for the service performance information and associated systems and controls for the first time in 2008/09. We did not grade this aspect in our 2006/07 and 2007/08 audits (see paragraph 2.3).

4 Overview of TEC The TEC is a Crown entity established on 1 January 2003 under section 159c of the Education Act 1989. Under the Crown Entities Act 2004, the TEC is classified as a Crown agent it is required to give effect to government policy upon direction by its Responsible Minister. The TEC is governed by a Board of Commissioners which is appointed by, and responsible to, the Minister for Tertiary Education (Hon Steven Joyce). 2 The TEC has independent statutory powers relating to the planning and approval of government funding for individual tertiary education organisations (TEOs) 3. It operates within the strategies and policies set by the Government of the day. 4 The TEC s 2009 SOI states: The TEC works with other agencies and the wider tertiary education sector to achieve outcomes that contribute to the government s tertiary education priorities. The TEC aims to support accountable, self-managing, self-improving tertiary education organisations to deliver high-quality, relevant tertiary education. 5 The TEC received total revenue of $3.125 billion in 2008/09. 6 This included revenue of $74.511 million to fund the cost of its operations. 7 Its total operating net surplus for the year was $49.075 million. Public equity increased to $20.775 million at balance date. 8 The TEC s 2008/09 financial performance is discussed in more detail in Part B of our briefing. The TEC underwent significant structural changes in both 2006/07 and 2008/09. The newest structure came into effect on 1 July 2009. The new structure resulted in just over 50 redundancies and the closure of its 3 regional centres (Auckland, Rotorua and Christchurch). As at balance date, the TEC had 240 full-time equivalent staff located in its national office and a service centre in Manukau. The TEC s staff turnover rate for 2008/09 was 20.4% (2007/08: 24.4%) 9. There are currently nine commissioners on the board of the TEC. Mr David Shand has recently resigned as the Chair of the TEC. Ms Kaye Turner (Deputy Chair) has taken on the role of Acting Chair until a new Chair is appointed. There have been further changes at the commissioner level with three new appointments since the TEC last appeared before the Committee. 10 Dr Roy Sharp (former Vice-Chancellor of the University of Canterbury) replaced Ms Janice Shiner as the TEC s Chief Executive in August 2008. 2 3 4 5 6 7 8 9 10 With the exception of a non-voting learner participant who is appointed by the Board, not the Minister. TEO is a general term used to describe all tertiary education organisations. It includes the 31 public tertiary education institutions (TEIs) TEC (2009), Statement of Intent 2009-2012, page 4. TEC (2009), Statement of Intent 2009-2012, page 7. TEC (2009), Annual Report for the year ended 30 June 2009, page 21. This figure relates to resignations from employment. Profile details for each of the commissioners can be found at www.tec.govt.nz.

Part A: Results of the 2008/09 audit 5 1 Audit opinion 1.1 We issued an unqualified audit opinion on the TEC s 2008/09 financial statements. 2 Environment, systems and controls for measuring financial and service performance 2.1 Our conclusions on the TEC s management control environment, systems, and controls for measuring financial and service performance, for the year ended 30 June 2009, are set out in the table below. 2.2 We made our conclusions in the context of our work in forming an opinion on the financial and service performance statements. The purpose of commenting on the underlying environment, systems, and controls is to highlight areas for improvement identified during the audit. The grades assigned for 2008/09 reflect our recommendations for improvement as at 30 June 2009. This is not an assessment of overall management performance or of the TEC s effectiveness in achieving its financial and service performance objectives. (See the Appendix for an explanation of the grading scale and underlying assumptions.) 2.3 We have provided a grade for the service performance information and associated systems and controls for the first time in 2008/09. We did not grade this aspect in our 2006/07 and 2007/08 audits, as we have been updating the standards and methodology our auditors apply in auditing this area in response to the Crown Entities Act 2004, and carrying out reviews of public entities current performance information frameworks and reporting. We wanted to give public entities time to respond to the recommendations for improvement we have made resulting from our reviews and updated expectations of auditors. Management control environment 2008/09 Good 2007/08 Good Comment Improvements would be beneficial and we recommend that the TEC address these. Deficiencies we identified in 2007/08 have been largely resolved. Overall, the management control environment within the TEC continues to operate effectively, including during the last two months of the financial year following the organisational restructure. Impact of assessment on service performance and associated systems and controls on the overall management control environment We found that the control environment has remained stable during the organisational restructure process, and that management has maintained effective procedures and policies. TEC continued to maintain all key governance controls, such as the Audit and

6 Risk Committee. We acknowledge that the Board of Commissioners and management have committed a significant amount of time and effort to prepare the TEC s Statement of Intent (SOI) for 2009/10 2011/12. This included discussion with both the Ministry of Education and central agencies. We note below that the TEC s service performance information and associated systems and controls are poor. Although service performance reporting and the associated systems form one aspect of our overall assessment of the management control environment, we advise that a poor rating, if left unchecked, is likely to adversely affect our assessment of the TEC s management control environment in future. The Auditor-General s revised auditing standard on service performance reporting (AG-4) takes effect for Crown entities in future reporting periods. In future, the quality of service performance information and associated systems and controls will have a greater impact on our overall management control environment assessment. We have recommended some improvements that the TEC should address, including the need to: complete work on its business continuity plan, as we had recommended in our 2007/08 audit; embed better quality assurance and monitoring controls over the drafting of its funding agreements with tertiary education institutions; and develop specific tendering processes for creating a pool of preferred providers for supplying Crown intervention services. We acknowledge that, since balance date, management has considered and started implementing our recommendations. We encourage management to set aside sufficient resources to complete implementing our recommendations before 30 June 2010. Financial information systems and controls 2008/09 Good Improvements would be beneficial and we recommend that the TEC address these. 2007/08 Very good No improvements were necessary. Comment The TEC should continue to follow up on the findings and recommendations arising from our data analysis of its payments and account payable records and ledgers. Although management s follow-up work completed since balance date does not suggest that the deficiencies we found were a significant risk to the TEC, there is the need to consolidate and rationalise those records. Service performance information and associated systems and controls 2008/09 Poor 2007/08 Not graded Comment Major improvements are required and we recommend that TEC should urgently address these. Deficiencies we identified in 2007/08 have been partially resolved. The following comments are based on our review of the forecast 2009/10 non-financial performance report and its supporting systems and controls, and our audit of the 2008/09 Statement of Service Performance (SSP) and its supporting systems and controls. The SOI is not a sufficient basis for assessing the effectiveness of the TEC s operations

and standard of service delivery. We identified a number of major improvements for the TEC to consider in developing its next SOI. These include: the SOI needs to provide clear intervention logic between the outcomes, strategic objectives, medium-term priorities, and output classes of the TEC; the TEC s output classes need to be presented within the context of its overall performance framework there should be discussion or illustration of the links between the output classes and the impacts they are intended to have; and all of the outputs in the forecast SSP need to have performance measures specified and criteria by which service performance can be objectively verified and on which success can be judged. 7 2.4 The Committee may wish to ask: We note the Auditor-General has recommended improvements to the TEC s management control environment and financial information systems and controls. What action has been taken to address recommendations in these areas? 2.5 We comment further, and suggest the Committee ask questions about the TEC s service performance information systems and controls in Part B of our briefing. 3 Significant matters of audit interest 3.1 We noted the following significant matters of interest from our audit of the TEC. Governance structure and organisational restructure process 3.2 The TEC underwent a significant internal restructure of its service delivery model and internal reporting lines during 2008/09. This has resulted in a substantially different business model and staff complement. As part of our audit, we reviewed both the restructuring process that the TEC followed and its management of the risks associated with the change. 3.3 As noted above, we found that the control environment remained stable during the organisational restructure process, and management maintained effective procedures and policies. Monitoring control and quality assurance over Quality Reinvestment Fund (QRF) programme agreements 3.4 During the year, we became aware that, in their 2008 financial statements, a number of tertiary education institutions (TEIs) had accounted for the Quality Reinvestment Fund (QRF) money that they had received from the Crown in a manner that was inconsistent with our expectation. We consider that they should have accounted for this funding as a capital

8 contribution from the Crown in the respective TEIs Statement of Movements in Equity. Although the total amount involved was not material, the fact that the TEIs did not account for the money received in accordance with the Crown s intention concerned the Auditor- General. 3.5 After reviewing a few of the QRF funding agreements, we concluded that there is a need for the TEC to embed better quality assurance and monitoring controls over the drafting of its funding agreements. This is to ensure that the agreements clearly state the intention of the Crown in making such funds available to TEIs. 4 Legislative compliance 4.1 We reviewed the systems and procedures that the TEC uses to identify and comply with legislative requirements. No issues arose that need to be drawn to the Committee s attention.

Part B: Advice to the Committee 9 5 Financial performance 11 5.1 The TEC has two principal revenue streams TEC operating revenue (used to run the TEC) and TEC grants revenue (used to fund TEOs). In 2008/09, the TEC received total revenue of $3.125 billion. 12 This comprised $74.511 million operating revenue (2007/08: $57.731 million) and $3.043 billion in grants revenue (2007/08: $2.893 billion). 13 Both revenue streams come from three main sources: the Ministries of Education and Social Development and Immigration New Zealand. 5.2 Despite the increase in the TEC s 2008/09 operating and grants revenue on the previous year, both amounts were less than the TEC s 2008/09 forecast budget. The TEC s operating revenue is determined as a percentage of its grants revenue from each of the three source agencies. The TEC s 2008/09 grant revenue was lower than budget due to lower participation rates for a number of programmes. It is not clear what impact these variances had on the TEC s operations. 5.3 The Committee may wish to ask: We note the increases in the TEC s 2008/09 operating and grants revenue between years. However, we also note that both amounts were less than the TEC s 2008/09 forecast budget. What led to the increase in the TEC s operating and grants revenue between years? What impact did these budget variances have on the TEC s 2008/09 service performance levels, and to what extent is this reflected in its 2008/09 Statement of Service Performance? Please outline the reasons for the lower than anticipated grants revenue in 2008/09. To what extent is the TEC s operating and grant revenue tracking against budget in 2009/10? We understand that the TEC s operating revenue is determined as a percentage of its grants revenue from the Ministries of Education and Social Development and Immigration New Zealand. To what extent does this method for calculating the TEC s annual operating revenue impact on the TEC s corporate planning function and organisational management? 11 12 13 Note 15 to the financial statements is a succinct statement of material variances for 2008/09.

10 The TEC s 2008/09 financial performance 5.4 The TEC s total operating surplus for the year was $49.075 million. 14 This includes unallocated grants revenue. Its operating surplus (funds used to run the TEC) for the year was $2.876 million. 15 For the previous three financial periods, the TEC had incurred net operating deficits (2007/08: $8.416 million, 2006/07: $2.818 million and $671,000 in 2005/06 all net operating deficits). This is a substantial turn-around in financial performance in 2008/09. The TEC had forecast a break-even position for 2008/09. 16 5.5 We note that the TEC s 2009 SOI forecasts a net operating deficit of $540,000 in 2009/10. 17 5.6 The Committee may wish to ask: We note that the TEC achieved a net operating surplus of $2.876 million against a forecast breakeven position for 2008/09. We understand that up to and including 2007/08, the TEC had incurred three consecutive net operating deficits. What are the reasons for this turn-around in financial performance for 2008/09? To what extent does the 2008/09 net operating surplus signal a change in the recent trend of net operating deficits for the TEC? Despite achieving a net operating surplus in 2008/09, we note that the TEC s 2009 SOI forecasts a net operating deficit of $540,000 in 2009/10. What are the reasons for this forecast of a deficit in 2009/10? Is the TEC s 2009/10 financial performance year-to-date on track against its forecast net deficit? - If not, why not? Operating revenue and expenditure 5.7 The TEC s 2008/09 revenue of $74.511 million was approximately $5 million less than forecast, and $17 million more than 2007/08. 18 As discussed above, the calculation method for the TEC s operating revenue means that the increase in grants revenue from the Ministry of Education has led to the increase in the TEC s operating revenue between years. Operating revenue from the other two sources remained either static or reduced between years. 5.8 The TEC s operating expenditure has also changed between years reflecting the change in revenue. While operating expenditure ($72.862 million) was less than forecast ($80.616 million), it was more than was spent in 2007/08 ($67.799 million). 19 The most significant contributor to the increase in operating expenses is managing third party 14 15 16 17 18 19 TEC (2009), Statement of Intent 2009-2012, page 31.

contracts. The TEC spent $13.171 million for this purpose in 2008/09 compared to $6.024 million in 2007/08. 20 11 5.9 The Committee may wish to ask: We note that the TEC spent $13.171 million on managing third party contracts in 2008/09, compared to $6.024 million in 2007/08. What does this work entail? Please outline the reasons for this 100% increase in this expenditure item between years. Is the level of 2008/09 expenditure on this activity expected to continue? - If so, why? - If not, why not? How is 2009/10 expenditure on managing third party contracts tracking against budget? 5.10 The TEC s personnel expenditure remains relatively static between years: $34.584 million in 2008/09, compared to $34.937 million in 2007/08. 21 The TEC restructured during 2008/09, with the new structure taking effect on 1 July 2009. The TEC disclosed restructuring costs of $3.348 million in 2008/09 (2007/08: $4.490 million) 22, as well as cessation compensation payments for 53 staff totalling $1.333 million for 2008/09 (2007/08: $230,584). 23 The Committee may wish to enquire about the impact of the restructuring on its static personnel expenditure. We discuss the restructuring in more detail in section 7 of this briefing. 5.11 The Committee may wish to ask: We note that the TEC s personnel expenditure remained relatively static between years despite the increase in grants revenue and operating revenue. Please outline the reasons for this. To what extent does this reflect the 2008/09 restructuring? We note that the TEC has disclosed restructuring costs of $3.348 million on page 31 of its 2008/09 Annual Report, as well as cessation compensation payments for 53 staff totalling $1.333 million on page 42 of its 2008/09 Annual Report. What was the total cost of the 2008/09 restructuring exercise? How does the total cost of the 2008/09 restructuring exercise compare with the costs incurred with the 2007 restructuring? 20 21 22 23 TEC (2009), Annual Report for the year ended 30 June 2009, page 31. TEC (2009), Annual Report for the year ended 30 June 2009, page 31. TEC (2009), Annual Report for the year ended 30 June 2009, page 31. TEC (2009), Annual Report for the year ended 30 June 2009, page 42.

12 Grant revenue and expenditure 5.12 The TEC achieved a significant grants surplus in 2008/09: $46.199 million (2007/08: $9.827 million). 24 The 2008/09 Annual Report states that movements in the Student Achievement Component (SAC) and Tertiary Education Organisation Component (TEOC) appropriations impacted on this variance, as well as the net effects of transfers of funding from 2007/08 and transfers from 2008/09 into out-years. 25 The forecast grants surplus for 2008/09 was $2 million. 26 In its previous annual report, the TEC reported expenditure against budget for each of its grant funding pools. This is absent in its 2008/09 Annual Report. 5.13 The Committee may wish to ask: The TEC achieved a significant grants surplus in 2008/09: $46.199 million. What happened to this surplus (e.g. was it retained or returned to the Crown)? Please provide details of the TEC s expenditure against budget for each of its grant funding pools, and an explanation of any significant variances (+/- 5%). What was the impact on TEOs and/or students of the grants surplus? We note that the forecast grants surplus for 2008/09 was $2 million. On what basis did the TEC set its 2008/09 forecast grants surplus, and why? Please explain to what extent a significant variance in the TEC s grants surplus is an indicator of the TEC s management performance for a financial period. 6 Measuring and reporting non-financial performance Measuring and reporting on the TEC s performance 6.1 We considered the TEC s service performance information systems and controls as part of our 2008/09 audit. We have reported our results in Part A of our briefing. Overall, the TEC has a poor set of systems and controls for measuring and reporting on its service performance. We have made a number of recommendations for major improvements to the TEC s framework for measuring and reporting on its own performance. 6.2 The Treasury and our office are working collaboratively to advance the quality of public sector service performance reporting. As part of this work, the Treasury has selected the TEC as one of the priority agencies it will work with in 2009/10 to help improve the way in which the TEC measures and reports on its performance. 6.3 The Committee may wish to ask: 24 25 26 TEC (2009), Annual Report for the year ended 30 June 2009, page 39.

We note that the Auditor-General has made a number of recommendations for major improvements to the TEC s framework for measuring and reporting on its own performance. 13 What progress has the TEC made in addressing each of the Auditor-General s recommendations? We understand that the Treasury has selected the TEC as one of the priority agencies it will work with in 2009/10 to help improve the way in which the TEC measures and reports on its performance. Please describe how Treasury is working with the TEC to help it improve how it measures and reports on its performance. What level of change is the TEC expecting to make in 2009/10 to its framework for measuring and reporting on its performance, and what changes will be made in future years? 6.4 The former Chair has reported that the development of good performance measures, while difficult in the tertiary education sector, is a shared responsibility of the TEC and individual tertiary education organisations (TEOs). 27 This comment is likely to reflect that in addition to measuring and reporting on its own non-financial performance, TEC has a role in guiding the measurement and reporting of the non-financial performance of the TEOs it funds. That is, the TEC uses the Investment Plan process to specify the performance measures that TEOs must report their performance against. 6.5 For its three strategic objectives, the TEC achieved 12 of the 14 2008/09 performance measures. 28 The TEC s 2008/09 Statement of Service Performance (SSP) shows that it met over 75% of its service performance objectives in 2008/09. 6.6 The Committee may wish to ask: The former Chair has reported that the development of good performance measures, while difficult in the tertiary education sector, is a shared responsibility of the TEC and individual tertiary education organisations. To what extent is the TEC working with the tertiary education sector on the refinement of the outcome level measures it reports against. - If not, why not? Guiding the measurement and reporting of TEOs performance 6.7 During 2009, we reviewed a sample of TEIs 2007 service performance reporting. Our concluding view is that significant improvements could be made to the quality of service performance reporting in TEIs. It is likely that this conclusion could also be levelled at private providers of tertiary education. However, the Auditor-General is not the auditor of these organisations. In the context of comments on performance measurement, the former 27 28 TEC (2009), Annual Report for the year ended 30 June 2009, page 5. TEC (2009), Annual Report for the year ended 30 June 2009, pages 14-15.

14 Chair notes that further work is required to build a performance focus in the tertiary education sector, and that this would be a feature of the 2009/10 TEC work programme. 29 6.8 The Committee may wish to ask: We note that building a performance focus in the tertiary education sector is a feature of the 2009/10 TEC work programme. Please provide details of this work programme, and what progress has been made in the year to date. To what extent will this project require enduring effort beyond 2009/10 from the TEC, given the very large number of TEOs it funds. 6.9 The TEC has reported that it is taking a more hands off approach with those TEOs that are managing themselves well. 30 Related to this, the TEC reports that all TEOs that had agreed an Investment Plan with the TEC in 2008 received a full-year report on their 2008 performance. 31 6.10 The Committee may wish to ask: The TEC has reported that it is taking a more hands off approach with those TEOs that are managing themselves well. What criteria has the TEC used to assess that a TEO is managing itself well? What does a more hands off approach entail? Which TEOs are considered to be managing themselves well and are subject to this hands off approach? We note that all TEOs that had agreed an Investment Plan with the TEC in 2008 received a full-year report on their 2008 performance. What has TEC learnt from these reports about the Investment Plan process? What has TEC learnt from these reports about tertiary education sector performance in 2008, including value-for-money considerations? What, if any, impact has this stream of work had on the TEC s 2009/10 work programme? TEC s monitoring of TEIs performance 6.11 The TEC is responsible for monitoring the Crown s ownership interest in the 31 public TEIs. Our 2008/09 Annual Plan signalled our intent to carry out a performance audit of this TEC function. The TEC has developed a new monitoring framework for TEIs. It includes both 29 30 31 TEC (2009), Annual Report for the year ended 30 June 2009, page 5. TEC (2009), Annual Report for the year ended 30 June 2009, page 5. TEC (2009), Annual Report for the year ended 30 June 2009, page 10. The TEC did not require some TEOs to agree an Investment Plan to access the TEC s funding. This was usually due to their small size.

financial and educational performance dimensions. 32 As a consequence of the five new monitoring processes that form part of this new monitoring framework, we have decided to defer our performance audit until 2011/2012. 15 6.12 The Committee may wish to ask: We note that the TEC has developed a new monitoring framework for TEIs which includes both financial and educational performance dimensions. Please provide details of the monitoring framework. How does the framework improve the quality of ownership advice that the TEC provides to the Minister for Tertiary Education about TEIs? 6.13 The 2008/09 Annual Report states that all institutes of technology and polytechnics have been involved in a benchmarking exercise to better understand how well they are performing, and where they can improve the way that they operate and deliver better education and training. 33 All Investment Plans are being re-negotiated in 2010, to take effect for up to a three-year period, beginning in 2011. 6.14 The Committee may wish to ask: We understand that institutes of technology and polytechnics have been involved in a benchmarking exercise to better understand how well they are performing, and where they can improve the way that they operate and deliver better education and training. How well are institutes of technology and polytechnics performing, as a group of education providers compared to whom? How can institutes of technology and polytechnics improve the way that they operate? In what ways can institutes of technology and polytechnics better deliver education and training? How does the TEC intend to use this benchmarking information for its 2011 Investment Plan decisions? 7 Organisational capability 2008/09 restructuring 7.1 In 2008, the Board of Commissioners requested a review of the TEC s structure and operations to ensure that the organisation continued to be fit for purpose. 34 This closely followed a 2007 restructuring which resulted in the closure of 11 area offices and the establishment of a number of stakeholder engagement managers. 32 33 34 TEC (2009), Annual Report for the year ended 30 June 2009, page 10. TEC (2009), Annual Report for the year ended 30 June 2009, page 11. TEC (2009), Annual Report for the year ended 30 June 2009, page 12.

16 7.2 A new organisational structure came into effect on 1 July 2009. The new structure resulted in just over 50 redundancies and the closure of its 3 regional centres (Auckland, Rotorua and Christchurch). The TEC now comprises a national office in Wellington and a service centre in Manukau. 7.3 The Committee may wish to ask: We note that a new organisational structure came into effect on 1 July 2009. What were the objectives of the 2008/09 restructuring exercise? Has the restructuring exercise fulfilled its objectives? - If not, why not? - If so, how has this been assessed? What were the capability risks of the 2008/09 restructuring exercise? - How were these managed? Please outline any unintended consequences of the 2008/09 restructuring exercise. What has been the impact of the two recent restructurings on staff engagement and morale? 7.4 The Chief Executive reports that while the TEC is a funding agency, its role is also to understand the system, optimise the system and provide stewardship of the system. 35 7.5 The Committee may wish to ask: To what extent has the new organisational structure better enabled the TEC to fulfil its role of understanding the system, optimising the system and providing stewardship of the system? Risk management 7.6 The TEC reports that it promotes a risk management culture. 36 The TEC has adopted a systematic approach to identifying, communicating, analysing, evaluating, treating and monitoring key risks to the TEC. It also reports that it is working with other education sector agencies to manage sector strategic and operational risks. 37 7.7 The Committee may wish to ask: 35 36 37 TEC (2009), Annual Report for the year ended 30 June 2009, page 6. TEC (2009), Annual Report for the year ended 30 June 2009, page 13. TEC (2009), Annual Report for the year ended 30 June 2009, page 13.

The TEC reports that it promotes a risk management culture. What is the TEC s definition of a risk management culture? 17 How does the TEC promote its risk management culture? How does the TEC assess whether it is being effective in identifying and mitigating risk? The TEC reports that it has adopted a systematic approach to identifying, communicating, analysing, evaluating, treating and monitoring key risks to the TEC. What are the key risks to the TEC? - How are these key risks being managed? To what extent is the TEC working with the Ministry of Education, as its monitoring department, on the mitigation of these key risks? We note that the TEC is working with other education sector agencies to manage sector strategic and operational risks. Which education agencies are involved, and which agency is leading this work? What are the tertiary education sector strategic and operational risks? - How are these risks being managed, and by whom?

18 APPENDIX Explanation of scope and grades Management Control Environment Financial Information Systems and Controls Service Performance Information and Associated Systems and Controls Indicative Areas This is the foundation of the control environment and may include consideration of the following: clarity of strategic planning/the way the entity manages and reports performance; communication and enforcement of integrity and ethical values; commitment to competence; participation by those charged with governance for example, the involvement and influence of Audit Committee and Board (or equivalent); management philosophy and operating style; organisational structure; assignment of authority and responsibility; human resources policies and practices; risk assessment and risk management; key entity-level control policies and procedures; information systems and communication (including information technology planning and decision-making); monitoring; and legislative compliance arrangements. These are the systems and controls (including application-level computer controls) over financial performance and financial reporting and include the following: appropriateness of information provided; presentation of financial information; reliability of systems; control activity (including process-level policies and procedures); and monitoring. This concerns the quality of the service performance measures selected for reporting against, as well as the systems and controls (including application-level computer controls) over service performance reporting, and includes the following: appropriateness of information provided and reported; presentation of SSP information; reliability of systems; control activity (including process-level policies and procedures); and monitoring. Comments and grades are based on conclusions drawn on the 2009/10 2011/12 SOI and the 2008/09 SSP.

Grade Very good Good Needs improvement Poor Explanation of grade No improvements are necessary. Improvements would be beneficial and we recommend that the entity addresses these. Improvements are necessary and we recommend that the entity should address these at the earliest reasonable opportunity. Major improvements are required, and we recommend the entity should urgently address these. 19 1. The reporting under Part A of this briefing, Environment, Systems, and Controls for Measuring Financial and Service Performance, is a by-product of the underlying audit work carried out to form an opinion on the financial and service performance statements. Its scope is limited to those areas of the management control environment, information systems, and controls the auditor has given attention to during the course of the audit. 2. Recommendations for improvement are generally limited to those findings that the auditor considers are the more notable weaknesses in the design or operation of the management control environment, information systems, or controls. The recommended improvements determine the grade assigned. A single, serious deficiency drawing a recommendation for improvement may, of itself, determine the grade. Similarly, the most serious deficiency among several will draw a stronger recommendation and affect the grade accordingly. 3. Deficiencies in the management control environment, information systems, or controls are the gaps between what auditors observe and what auditors consider, in their professional judgement, constitutes best practice (see below). Auditors professional judgement is informed by many factors, including national and international standards, knowledge of best practice, and standards and expectations for the public sector in New Zealand. 4. To help ensure the relevance to all entities of the auditor s recommendations and grading, the auditor s recommendations are made with reference to what is considered best practice given the size, nature, and complexity of the entity. Thus, notions of best practice will vary among entities because what is considered necessary, sufficient, or beneficial for some entities may not be so for others. There is therefore not a one size fits all standard across the public sector. Rather, recommendations for improvement are based on the auditor s assessment of how far short the entity is from a standard that is appropriate for the entity s size, nature, and complexity of its business. 5. Further, notions of best practice may vary over time in response to change for example, changes in the operating environment, changes to standards, and changes in general expectations. Grades assigned to entities may therefore fluctuate from year to year according to how entities respond to changes in the environment and in best-practice expectations. Grades may also be affected from year to year because of changes in emphases, in accordance with the auditor s risk-based approach to testing systems and controls. 6. Improvements are recommended only when it is considered, in the auditor s judgement, that the benefits of the improvements would justify the costs. 7. Recommendations for improvement are based on the auditor s conclusions about the state of the entity s management control environment, information systems, and controls as at the end of the financial year.