Tertiary Education and Other Entities: Results of the 2012 Audits

Conclusion

Notwithstanding some areas for improvement, Parliament can have confidence in the adequacy of financial and performance reporting and the internal controls of the entities audited.

Performance reporting

The usefulness of current performance information is limited, as there is little consistency in indicators and targets. We intend to provide advice to TAFEs on the relevance and appropriateness of performance indicators in management letters in years ending 31 December 2013 and 2014. In the year ending 31 December 2015 we will express an audit opinion on the relevance and appropriateness of performance indicators.

Financial results and sustainability

TAFEs collectively generated a surplus of $58.5 million in 2012, down 39.1 per cent on 2011 as a result of increased employee costs due to structured redundancy programs. Changes to funding mean that TAFEs are now more reliant on student tuition fees for generating a major portion of their operating revenue. Overall student fee revenue was consistent with 2011, with a $7.1 million decrease in international student fees offset by a $7.7 million increase in domestic student fees.

The sector's financial sustainability risk is deteriorating, with 10 of the 14 TAFEs assessed as medium risk in 2012, compared with seven in 2011. TAFEs generally recorded poor self‑financing indicators, which suggests that they are unable to fund asset replacement or renewal with cash generated from their operating activities. Capital replacement indicator results declined at nine of the 14 TAFEs, and there is an increasing dependence on government funding for capital programs.

Seven of the eight universities reported a surplus in 2012, with the sector generating a total surplus of $454.6 million, compared to a $478.5 million surplus in 2011. Student fee revenue grew by $107.4 million, mainly due to higher domestic student fees.

Victoria University was assessed as having medium financial sustainability risk due to its poor self-financing indicator. Monash University's financial sustainability risk was assessed as high due to low liquidity, however it had financial assets classified as 'available for sale' which can be converted to cash if required. The remaining six universities had a low financial sustainability risk in 2012.

Universities that have established overseas campuses have experienced mixed financial success. Monash University's campus in South Africa is reliant on its parent to meet its ongoing expenditure commitments, requiring $34.0 million in loan funding over the past five years. Conversely, RMIT International University Vietnam has generated surpluses over the past five years totalling $30.5 million, and has no outstanding loans.

Alpine resorts collectively reported an operating deficit of $1.7 million in 2011–12 ($5.2 million surplus in 2010–11) notwithstanding support payments contributed by the Department of Environment and Primary Industries. Without this support funding, the sector's operating deficit would have been $4.9 million—similar to its 2011 result.

The three larger alpine resorts at Mt Buller and Mt Stirling, Mt Hotham and Falls Creek generated surpluses in 2012. These three resorts were assessed as having low financial sustainability risk on average for the past five years.

Financial sustainability continues to be of concern for Mt Baw Baw and Lake Mountain, with poor operating results and low liquidity levels placing them at high risk in 2011–12. Work has commenced on investigating sustainable operating solutions for Lake Mountain, with it appointing an external contractor to deliver services and products at the resort during 2013.

Internal controls

Overall, internal controls in TAFEs and universities were adequate for producing reliable, accurate and timely financial reports.

Internal audit functions were well developed, although four universities and five TAFEs did not have arrangements for internal auditors to report their conflicts of interests. Improvements could be made in relation to internal audit coverage, with a number of key business areas not subject to recent internal audit scrutiny.

Controls over credit card purchasing were generally sound, however improvements can be made in relation to risk identification. Sample-based testing produced positive results, with identified internal controls operating in a majority of instances.

Ten of the 22 tertiary education entities (three universities and seven TAFEs) had not assessed themselves as being compliant with the requirements of the Payment Card Industry-Data Security Standard. This shows a lack of understanding of the importance of this high risk activitiy, and potentially exposes students to risks of identity theft or fraud if their credit card information is accessed by unauthorised persons.

1. That universities and TAFEs address the better practice report preparation elements by preparing shell financial statements, performing materiality assessments and implementing rigorous analytical reviews, in order to improve the quality of reporting.
2. That performance reporting for the tertiary education sector be elevated to legislative status, and a clear framework developed, with standard benchmarks and disclosure requirements.

That TAFEs:

3. review key strategies and service objectives set out in their strategic plans so that they are clearly expressed, aligned and measurable
4. review their financial and non-financial key performance indicators to determine, and if necessary improve, their relevance and appropriateness to their key strategies and service objectives
5. improve the quality of data relating to their international student cohort in order to better inform decision-making to improve their financial sustainability and to identify and promote a competitive advantage
6. revise internal audit charters to address reporting conflicts of interest of internal auditors, and to outline the selection process for internal audit providers
7. obtain regular internal audit assurance over key business areas, in particular cash management and operational efficiency and effectiveness
8. obtain annual certification of compliance with agreements from cardholders
9. identify risks associated with using credit cards for purchasing, and mitigation strategies
10. develop policies for revenue paid by credit or debit cards and achieve compliance with the Payment Card Industry‑Data Security Standard, and actively manage the associated risks in order to protect the security of payers' personal information.

That universities:

11. obtain regular internal audit assurance over key business areas
12. obtain annual certification of compliance with agreements from cardholders
13. identify risks associated with using credit cards for purchasing, and mitigation strategies
14. develop policies for revenue paid by credit or debit cards and achieve compliance with the Payment Card Industry-Data Security Standard, and actively manage the associated risks in order to protect the security of payers' personal information.
15. That Lake Mountain and Mt Baw Baw Alpine Resort Management Boards should continue to develop strategies to attract greater visitor numbers.
16. That Mt Baw Baw Alpine Resort Management Board should identify the reasons leading to shorter length of stay by visitors and develop strategies to address this.
17. The Alpine Resorts Co-ordinating Council together with Lake Mountain and Mt Baw Baw Alpine Resort Management Boards should implement revised operating arrangements to improve their financial viability.

Submissions and comments received

In addition to progressive engagement during the course of the audit, in accordance with section 16(3) of the Audit Act 1994 a copy of this report, or relevant extracts from the report, was provided to all universities, TAFEs, ARMBs, the Department of Treasury and Finance, the Department of Education and Early Childhood Development and the Department of Environment and Primary Industries with a request for submissions or comments.

Agency views have been considered in reaching our audit conclusions and are represented to the extent relevant and warranted in preparing this report. Their full section 16(3) submissions and comments however, are included in Appendix F.

1.1 Introduction

This report covers 106 entities with a financial year end other than 30 June 2012. Principally it deals with the results of the audits of 98 tertiary education sector entities, comprising universities, technical and further education (TAFE) institutes, training entities and the entities that they control. The profile of these entities is set out in Figure 1A.

Figure 1A

Entities with a financial year end other than 30 June 2012

Note: Controlled entities generally include associated companies, trusts and joint ventures.

Source: Victorian Auditor-General’s Office.

The report informs Parliament about significant issues arising from the financial audits and augments the assurance provided through audit opinions on financial reports and performance reports included in the respective entities’ annual reports.

The report comments on the quality and timeliness of financial reporting and the financial sustainability of tertiary education bodies and alpine resort management boards. It also comments on the effectiveness of internal audit and credit card management controls in the tertiary education sector.

Other reports of the Victorian Auditor-General's Office on the results of financial audits for 2012 are outlined in Appendix B.

1.1.2 Audit of financial reports

An annual financial audit has two aims:

• to give an opinion consistent with section 9 of the Audit Act 1994, on whether the financial statements are fairly stated
• to consider whether there has been wastage of public resources or a lack of probity or financial prudence in the management or application of public resources, consistent with section 3A (2) of the Audit Act 1994.

The financial audit framework applied in the conduct of the 2012 audits is set out in Appendix C.

1.1.3 Audit of performance reports

Section 8(3) of the Audit Act 1994 authorises the Auditor-General to audit performance indicators included in the annual reports of a public sector entity to determine whether they fairly represent the entity's actual performance.

The Auditor-General uses this authority to audit the performance reports prepared by the TAFE sector.

1.1.4 Audit of internal controls

An entity's governing body is responsible for developing and maintaining its internal control framework. Internal controls are systems, policies and procedures that help an entity to reliably and cost-effectively meet its objectives. Sound internal controls enable delivery of reliable, accurate and timely external and internal reporting. The main components of an effective internal control framework and an explanation of the framework are set out in Appendix C.

1.2 Audit conduct

The audits of 98 tertiary education entities, five alpine resort management boards and three other entities were undertaken in accordance with the Australian Auditing Standards.

Pursuant to section 20(3) of the Audit Act 1994, unless otherwise indicated any persons named in this report are not the subject of adverse comment or opinion.

The total cost of preparing and printing this report was $225 000.

1.3 Structure of this report

Details of the entities covered within each Part of this report are set out in Figure 1B.

Figure 1B

Report structure

Source: Victorian Auditor-General’s Office.

2.1 Introduction

This chapter covers the results from the audits of the 106 entities with a financial year end other than 30 June 2012.

Each entity must prepare its financial report in accordance with Australian Accounting Standards, including the Australian Accounting Interpretations.

The principal legislation governing financial reporting by these entities in 2012 was the Financial Management Act 1994 (FMA) and the Corporations Act 2001.

Appendix A details the legislative and reporting framework for the 106 entities.

2.2 Audit opinions issued

Clear audit opinions were issued on the financial reports of 103 entities for the year.

Independent audit opinions add credibility to financial reports by providing reasonable assurance that the information reported is reliable and accurate. A clear audit opinion confirms that the financial statements present fairly the transactions and balances for the reporting period, in accordance with the requirements of relevant accounting standards and legislation.

A qualified audit opinion means that the financial report is materially different to the requirements of the relevant reporting framework or accounting standards, and is less reliable and useful as an accountability document.

Qualifications

Three qualified audit opinions were issued for the 2012 financial year (three for 2011).

The University of Melbourne and Deakin University again received qualified audit opinions because their accounting treatment of non-reciprocal research and capital grant income as a liability was not in accordance with Australian Accounting Standards. Accounting standards require grants which are non-reciprocal to be recognised as revenue in the year they are received—when the entity gains control of the funds.

Deakin University regards the receipt of these monies as a reciprocal transfer where the grants have outstanding performance or return conditions and accounts for them in accordance with Australian Accounting Standard AASB 118 – Revenue. VAGO is of the opinion that these monies are non-reciprocal grants and should be accounted for in accordance with Australian Accounting Standard 1004 – Contributions, whereby such payments are treated as income in the year of receipt.

The Australian Accounting Standards Board is currently reviewing grant accounting in not-for-profit organisations. However, until that review is complete, the accounting standards in their current form apply.

The ongoing qualified opinion issued to the Anti-Cancer Council of Victoria is generally attached to the financial reports of entities with significant voluntary fundraising activities. The qualification draws attention to the risk inherent in management assuring the complete recording of cash collected through donations. The risk is unavoidable and cannot be cost-effectively mitigated by further internal controls.

Emphasis of matters

In certain circumstances an audit opinion may draw attention to, or emphasise, a matter relevant to the users of an entity’s financial report but does not warrant a qualification. Unmodified opinions can include an emphasis of matter (EOM) paragraph.

The audit opinion on the financial report of the International Fibre Centre Limited contained an EOM, which drew attention to the material uncertainty surrounding the continued existence of the company beyond 2013.

In previous years, the audit opinions of several entities included an EOM. The EOMs drew attention to each entity's reliance on continuing financial support from its parent entity to sustain its operations. An EOM was not included in audit opinions in 2012 where the entity had received a letter of financial support from its parent entity. In these instances, the entity was able to demonstrate that the going concern assumption was satisfied.

2.3 Quality of reporting

The timeliness and accuracy of the preparation of an entity's financial report is integral to the quality of reporting. Entities need to have a well-planned and managed preparation process to achieve cost-effective and efficient financial reporting.

In 2012, 103 entities completed their financial reports within their mandated time frames. The audited financial statements for three entities had not been finalised at the time of writing this report.

Overall, the financial report preparation processes of universities and technical and further education (TAFE) institutes produced accurate, complete and reliable information. There was an overall improvement in all key areas that form a better practice reporting framework. The framework applied in assessing the quality of reporting is detailed in Appendix C.

Figure 2A shows that the overall quality of financial reporting improved in 2012.

Figure 2A

Quality of financial reporting in 2012

Source: Victorian Auditor-General’s Office.

The assessment of performance was against better practice criteria using the following scale:

• no existence—function not conducted by the entity
• developing—partially encompassed in the entity's financial reporting process
• developed—entity has implemented the process, however it is not fully effective or efficient
• better practice—entity has implemented processes which are effective and efficient.

Figure 2B summarises the results of our analysis.

Figure 2B

Results of assessment of report preparation processes against better practice elements

Source: Victorian Auditor-General’s Office.

Further improvement is needed in relation to:

• preparation of shell financial accounts
• materiality assessments
• rigorous analytical reviews
• quality assurance procedures
• financial compliance reviews.

There was no noticeable improvement in these areas in 2012. Improving these areas will assist the quality of reporting by enabling the timely preparation of financial reports and early detection and correction of errors.

The Victorian Skills Commission (VSC) previously prepared model financial statements for TAFEs, although this was not the case in 2012. VSC's activities have been assumed by the Department of Education and Early Childhood Development, with the entity ceasing to exist from 31 December 2012.

Recommendation

1. That universities and TAFEs address the better practice report preparation elements by preparing shell financial statements, performing materiality assessments and implementing rigorous analytical reviews, in order to improve the quality of reporting.

3.1 Introduction

The Audit Act 1994 empowers the Auditor-General to audit any performance indicators in the report of operations of an audited entity to determine whether they:

• are relevant to any stated objectives of the entity
• are appropriate for the assessment of the entity’s actual performance
• fairly represent the entity’s actual performance.

The annual attest audit of performance statements currently expresses an opinion on whether the reported results are presented fairly and whether they have been prepared in accordance with the Financial Management Act 1994. It does not express an opinion on the relevance or appropriateness of the performance information reported.

This chapter outlines the performance reporting framework and comments on the results of our audits of the associated statements in 2012. It also signals our intention to further develop our audit of the performance statements in the future.

3.2 Elements of effective performance reporting

Effective performance measurement and monitoring enables managers and the governing boards of entities to evaluate performance against a set of key indicators. It also facilitates appropriate and timely action to achieve organisational objectives and outcomes. Reporting on performance to senior management and the community is an important part of a performance management framework and public sector accountability.

Central to effective performance measurement, management and reporting is a comprehensive suite of relevant and appropriate performance measures or indicators, and targets.

Relevant indicators have a logical and consistent relationship to an entity's objectives and are linked to the outcomes to be achieved. Ideally they should take into account immediate deliverables and long-term sustainability.

Appropriate indicators give sufficient information to assess the extent to which the entity has achieved a predetermined target, goal or outcome. They can include the trends in performance over time, performance relative to that of similar agencies and performance relative to benchmarks.

Fair presentation of performance results requires that the information provided is able to be measured, consistently represents what it purports to indicate without bias, and is accurate and auditable.

3.3 Performance reporting by education entities

The preparation of performance statements by technical and further education (TAFE) and other tertiary education entities is not mandated under legislation. In November 2008 the Department of Innovation, Industry and Regional Development (DIIRD)—now the Department of State Development, Business and Innovation—issued an executive memorandum requesting 20 entities report on certain key performance indicators (KPI). This included the 14 TAFEs, four universities with TAFE divisions and two training entities. DIIRD required the performance indicators to be disclosed in a performance statement, subject to audit by the Auditor-General, and included in the entity's annual report.

The current indicators reported on by the 20 entities are:

• participation of 15–24 year olds
• participation of 25–64 year olds
• module load completion rate
• student satisfaction
• total cost per student contact hour
• working capital ratio
• net operating margin
• fee for service revenue
• revenue per equivalent full-time staff
• student contact hours
• energy consumption.

Minimal guidance was provided by the DIIRD on the calculation method for these indicators, and no further guidance has been issued since the original memorandum.

3.4 Audit opinions issued

This year we reviewed the performance indicators of 20 entities. They comprised the 14 TAFEs and:

• Ballarat University
• RMIT University
• Swinburne University of Technology
• Victoria University
• Centre for Adult Education
• Driver Education Centre of Australia.

Clear audit opinions were issued on the 20 performance reports.

3.5 The quality of reporting

3.5.1 Indicators reported

KPIs need to be reliable, relevant and measurable. They are most effective where there is consistent application of underlying data and calculation method across entities. This allows for the comparison of results over time and against other bodies.

The current arrangements for tertiary sector performance reporting do not prescribe how each indicator should be measured. As a result, entities are using different calculation methods and many of the indicators, and therefore performance, is incomparable across entities.

The indicators that commonly result in difficulty in comparison are:

• participation of 15–24 year olds
• participation of 25–64 year olds
• student contact hours
• energy consumption.

These indicators in particular are quantitative measures which ignore the relative size of an entity. Larger entities may report better results against participation indicators because of their expanded capacity, rather than as a result of sound management. Conversely, smaller entities may have better energy consumption rates because of reduced campus sizes.

In contrast, the indicators that best enable cross-entity comparisons are:

• module load completion rate
• cost per student contact hour
• fee for service revenue
• revenue per equivalent full-time staff.

These indicate how well an entity is performing in a particular area, and are not distorted by the size of the entity's operations.

The number of indicators reported by the 20 entities varies, as presented in Figure 3A.

Figure 3A

Indicators reported in performance statements

Source: Victorian Auditor-General’s Office.

The range of indicators was mainly due to some entities reporting energy consumption in greater detail. Eight reported an aggregate result for energy consumption, while 11 provided a breakdown based on various energy sources. The remaining entity did not include energy consumption results in its performance statement, however, it provided a separate report on environmental performance.

The usefulness of performance reporting by TAFEs would be improved with a review of the indicators used, and consistency in their calculation.

3.5.2 Achievement of targets

Effective performance reporting includes a comparison of results against indicators that are consistent across the sector. Benchmarks provide users of information with a clearer understanding of how an entity has performed against like industry operators.

The current performance reporting framework does not prescribe a set of standard indicators, targets or benchmarks. As a result, entities are able to set their own indicators and targets, or report only actual results.

Figure 3B shows the number of targets set by the 20 entities.

Figure 3B

Target setting

Source: Victorian Auditor-General’s Office.

Target setting was generally poor, with 45 per cent of performance statements including them for less than half the indicators reported.

To be useful, KPIs should be consistent across a number of entities and reflect a predetermined level of required performance. Targets should reflect a standard for each particular KPI that is relevant and appropriate to the entity.

3.5.3 Quality of analysis

Comparative information is important, as it highlights how an entity has performed over a period of time. We noted that nine of the 20 entities that prepared performance reports did not include results achieved in the prior year.

Sound performance reporting is accompanied by commentary explaining why a target was not achieved, or analysing variances from year to year. This provides greater clarity around the information reported and offers users a clearer picture of why performance varied.

Explanations for significant variances in the actual result to the target or prior year result were provided by 75 per cent of entities (15 of 20) in 2012. However, where provided, the analysis was generally poor, with commentary stating that a variance had occurred, without giving an explanation why.

3.6 Future audit approach

Performance reporting for tertiary education entities was established in 2008. Since that time, we have focused the audit of performance information on whether the reports fairly present performance and comply with the legislative requirements.

However, given that performance reporting has been in place within the sector for more than five years, we intend to expand our audit of performance indicators in future periods, to promote improvement in the sector and exercise audit's complete mandate. On 26 April 2013 it was gazetted that TAFEs were required to have a current strategic plan that included financial and non-financial KPIs. The KPIs were to have clear links with each TAFE's key strategies.

Recognising the relative immaturity of existing performance information across the sector, and the scale of improvements required to achieve relevant and appropriate performance indicators, we intend to gradually move to express an opinion on the relevance and appropriateness of the indicators reported in TAFE performance statements.

We intend to implement this approach over a three-year period. In the years ending 31 December 2013 and 2014 we propose to convey our opinion on the relevance and appropriateness of performance indicators through management letters to encourage their further development, while continuing to express a public opinion on their fair representation. We will also provide an update each year on the sector's progress in our annual report on the results of audits.

In the third year, TAFEs will be expected to provide a suite of measures that are relevant and appropriate for assessing the TAFE's performance, and that fairly represent that performance. From that year the public audit opinion will address the relevance and appropriateness of the indicators and whether they fairly present performance. Where this standard is not met, a qualified audit opinion may be issued on the performance statement.

This transitional approach will require the support of the Department of Education and Early Childhood Development and the TAFEs to achieve the desired outcome—more transparent and meaningful reporting on TAFE performance to the community.

Recommendations

1. That performance reporting for the tertiary education sector be elevated to legislative status, and a clear framework developed, with standard benchmarks and disclosure requirements.

That TAFEs:

2. review key strategies and service objectives set out in their strategic plans so that they are clearly expressed, aligned and measurable
3. review their financial and non-financial key performance indicators to determine, and if necessary improve, their relevance and appropriateness to their key strategies and service objectives.

4.1 Introduction

Accrual-based financial statements enable an assessment of whether technical and further education (TAFE) institutes are generating sufficient surpluses from operations to maintain services, fund asset maintenance and retire debt. Their ability to generate surpluses is subject to the regulatory environment in which they operate, and their ability to minimise costs and maximise revenue.

An entity's financial performance is measured by its net operating result—the difference between its revenues and expenses. An entity's financial position is generally measured by reference to its net assets—the difference between its total assets and total liabilities.

4.2 Financial results

4.2.1 Financial performance

The TAFE sector generated a surplus of $58.5 million in 2012, a decrease of $37.5 million or 39.1 per cent over the prior year. This was mainly due to an increase in employee related costs, and a decrease in government grants received by the sector.

Figure 4A provides a comparison of the total operating result for the TAFE sector for 2012 and 2011.

Figure 4A

Surplus/(deficit) by TAFE, 2011 and 2012

Source: Victorian Auditor-General’s Office.

Figure 4A shows that 10 TAFEs reported a lower result in 2012 than in 2011.

Revenue

In 2012 TAFEs collectively generated revenue of $1.2 billion, a decrease of $13.1 million from 2011. The decrease was mainly due to a reduction of 40.1 per cent in government capital grants.

Nevertheless government funding remained the largest revenue component for TAFEs, comprising 66 per cent of total revenue in 2012. The majority comprised $539.0 million in operating grants from the State Government ($525.5 million in 2011) and $168.1 million from the Commonwealth Government ($157.9 million in 2011). These figures included capital grants from the state and Commonwealth governments which decreased to $59.1 million in 2012 ($98.6 million in 2011).

The composition of operating revenue for 2012 is presented in Figure 4B.

Figure 4B

TAFE revenue composition, 2012

Source: Victorian Auditor-General’s Office.

Figure 4B highlights the sector's financial dependence on government. Student fees generated 15 per cent of total revenue in 2012, highlighting the sector's relatively low level of self-generated income.

Trends in student fee revenue

Student fee revenue did not change materially in 2012, with the sector reporting a total of $178.9 million ($178.2 million in 2011). However, the following TAFEs experienced significant variances in 2012:

• Goulburn Ovens Institute of TAFE—an increase of $1.03 million or 30.9 per cent
• Wodonga Institute of TAFE—an increase of $0.464 million or 20.9 per cent
• Northern Melbourne Institute of TAFE—a decrease of $2.02 million or 7.5 per cent.

Total student fee revenue increased by 18.2 per cent from 2008–12, despite a volatile international student market during the period.

Recent policy changes in the TAFE sector increasing competition between private and public sector tertiary education providers mean it is increasingly important that TAFEs proactively target students and modify their marketing activities and course design to attract enrolments and to enhance their competitive advantage. This is especially important in the international student market, as international students generate higher revenue per student than domestic enrolments, and their fees are an important factor in the ongoing viability of individual TAFEs and the sector.

International students

International student fee revenue declined by $7.1 million or 6.3 per cent to $105.5 million in 2012—their lowest level over the past five years.

Fees received from international students represented 59.0 per cent of total student fees in 2012 (62.1 per cent in 2011). International student fee revenue has decreased in the past two years, contributing to the decline in surpluses.

Therefore, it is of concern that only six of the 11 TAFEs with international students were able to provide us with comprehensive data on student enrolments.

Common data issues included:

• inability to provide a breakdown of student countries of residence
• inconsistent reporting of figures from year to year
• deficiencies in comparative figures
• unable to provide commencement details.

TAFEs are heavily reliant on revenue from international students, and a lack of quality information may impact on their ongoing ability to attract and retain these students. With the international market in decline it is important that TAFEs improve the quality of this data to maximise their return on effort and investment, and to improve their financial sustainability.

Domestic students

Domestic student fee revenue increased by $7.7 million or 11.8 per cent in 2012, and represented 41.0 per cent of total student fees (36.9 per cent in 2011).

Domestic student fee revenue increased at the following TAFEs in 2012:

• Goulburn Ovens Institute of TAFE—an increase of $1.0 million or 29.3 per cent
• Chisholm Institute of TAFE—an increase of $1.3 million or 11.9 per cent
• Holmesglen Institute of TAFE—an increase of $3.0 million or 39.0 per cent.

Fee revenue from domestic students has increased in four of the past five years and, over the period from 2008–12, increased by 68.9 per cent.

Expenses

In 2012 the 14 TAFEs collectively incurred $1.1 billion in operating expenses, an increase of $24.4 million or 2.2 per cent from the prior year. The increase was predominantly due to:

• employee benefits up $25.7 million or 3.5 per cent
• depreciation up $4.0 million or 6.4 per cent.

Figure 4C shows the composition of TAFE expenditure for 2012.

Figure 4C

TAFE expenditure composition, 2012

Source: Victorian Auditor-General’s Office.

Employee-related costs remained the most significant expenditure item, representing 67 per cent of total expenses in 2012 (66 per cent in 2011). Expenditure composition for the TAFE sector was consistent with 2011.

4.3 Financial position

An entity’s financial position is generally measured by reference to its net assets—the difference between its total assets and total liabilities. However, this measure is less appropriate for TAFEs, as they are not-for-profit entities, and generally do not hold assets that generate revenue. While they carry land and buildings of significant value on their balance sheets, representing 73 per cent of their total assets, the revenue base of TAFEs is not tied to the value of their assets and most of their assets cannot be readily sold to obtain funds.

The objective for a TAFE should, therefore, be to maintain and improve its asset base and related service provision, while managing levels of debt.

4.3.1 Assets

During 2012 the total value of TAFE assets increased by $176.5 million or 8.0 per cent to $2.4 billion. This was mainly due to an increase in the values of land and building assets as well as a $35.0 million increase in cash assets (15.6 per cent).

Land and buildings were revalued at all TAFEs in 2012, based on independent assessments by the Valuer-General.

Significant increases in the value of land included:

• Northern Melbourne Institute of TAFE—an increase of $25.5 million or 39.4 per cent
• Chisholm Institute of TAFE—an increase of $11.2 million or 32.7 per cent
• Holmesglen Institute of TAFE—an increase of $10.1 million or 18.9 per cent.

Building values increased by $92.5 million or 7.8 per cent. This was due to new asset construction and some valuation increments, including at:

• Box Hill Institute of TAFE—an increase of $24.8 million or 29.3per cent
• Central Gippsland Institute of TAFE—an increase of $14.9 million or 37.8 per cent
• Holmesglen Institute of TAFE—an increase of $17.4 million or 8.0 per cent.

The composition of TAFE assets in 2012 is presented in Figure 4D.

Figure 4D

TAFE asset composition, 2012

Source: Victorian Auditor-General’s Office.

4.3.2 Liabilities

At 31 December 2012 the total value of liabilities for the TAFE sector was $235.0 million. This was substantially the same as in 2011, although there were movements noted in each class of liability. A $6.8 million increase in payables was offset by a $9.7 million decrease in provisions. There was a decrease in employee benefit provisions at 11 of the 14 TAFEs, mainly due to fewer staff as a result of structured redundancy programs.

Provisions (47 per cent) and payables (38 per cent) continued to represent the majority of total TAFE liabilities.

Recommendation

5. That TAFEs improve the quality of data relating to their international student cohort in order to better inform decision-making to improve their financial sustainability and to identify and promote a competitive advantage.

5.1 Introduction

To be financially sustainable, entities need to be able to meet their current and future expenditure as it falls due. They also need the ability to absorb foreseeable changes and financial risks as they materialise.

In this chapter we provide insight into the financial sustainability of the 14 technical and further education (TAFE) institutes through analysing the trends in each of five financial sustainability indicators over a five-year period. The five indicators are:

• underlying result
• liquidity
• debt-to-equity
• self-financing
• capital replacement.

Appendix D describes the sustainability indicators and risk assessment criteria used in this report.

The financial sustainability indicators and assessments flag departures from the norm that warrant attention. However, to form a definitive view of an entity’s financial sustainability, a holistic analysis that moves beyond financial indicators is required, including an assessment of the entity’s operations and the regulatory environment. These additional considerations are not examined in this report.

5.2 Financial sustainability

5.2.1 Overall assessment

The risk to financial sustainability for four TAFEs was assessed as low for 2012. The risk for the remaining 10 was assessed as medium, due to poor self-financing and capital replacement indicators.

Figure 5A provides a summary of our overall financial sustainability risk assessment results for the past two years.

Figure 5A

Two-year financial sustainability risk assessment

Source: Victorian Auditor-General’s Office.

This shows that the risk to financial sustainability for the sector as a whole deteriorated between 2011 and 2012, with the number of TAFEs with medium risk to their financial sustainability increasing from seven to 10 over the two years.

5.2.2 Summary of trends in risk assessments over the five‑year period

When the risk assessments for each indicator are analysed for the sector they show the following trends over the five years to 2012:

• underlying result—the number of TAFEs in the medium-risk category has increased from three to four, with the remainder in the low-risk category
• liquidity—the number of TAFEs in the low-risk category has remained stable at14
• debt-to-equity—the number of TAFEs in the low-risk category has remained stable at 14
• self-financing—the number of TAFEs in the high-risk category has increased from three to nine
• capital replacement—the number of TAFEs in the high-risk category has increased from two to six

In summary, the sector's financial sustainability has deteriorated over the past five years.

5.2.3 Analysis of trends in sustainability indicators across the five-year period

To further understand the results, we analysed the five-year data for the five indicators. The relevant data are reproduced in Appendix B.

Figure 5B shows the mean sustainability risk assessments for the 14 TAFEs, over the five years from 2008 to 2012. High-risk results are shown in red, medium risk in orange, and low risk in green.

Figure 5B

Five-year mean financial sustainability risk assessment

Source: Victorian Auditor-General’s Office.

The underlying result, liquidity and debt-to-equity results are positive, with all TAFEs recording risk assessments of low during the past five years.

However, deeper analysis revealed that the average underlying result for TAFEs has decreased since 2010. Nine of the 14 TAFEs recorded a lower result for this indicator in 2012 than in 2008. The decline highlights the challenge for the sector to achieve positive financial operating results following changes in the funding model.

TAFEs have generally recorded poor self-financing results over the five-year period and the result has deteriorated since 2008. Cash generated from operating activities decreased 41.9 per cent from 2010 to 2012 and now represents less than 10 per cent of underlying revenue balances.

The capital replacement indicator also declined over the five-year period. This indicator compares the level of asset renewal against the depreciation expense, or the consumption of existing assets. Changes in the funding model have resulted in TAFEs cutting expenditure viewed as 'non-essential', including construction of capital assets. Payments for property, plant and equipment decreased by $53.5 million (35.6 per cent) to $96.7 million in 2012.

Impact of changes in legislation and funding model on sustainability

Changes to the legislative framework and funding model introduced in 2012 mean that TAFEs are more reliant on tuition fees for generating a major portion of their operating revenue. These tuition fees include domestic and international student fees, as well as fees for service. Consequently, there is less reliance on government grants. As a result of this changed environment, TAFEs need to proactively review their courses to focus on those that attract students in order to generate funds and be sustainable.

The changes in the operating model and cuts in funding have had a significant impact on TAFEs. As well as reducing or changing course offerings, the sector has responded by making staff redundant, closing campuses to drive down costs and attempting to sell land and buildings.

The financial impact in 2012 included:

• increased employment costs due to redundancies paid
• lower employee benefit provisions, due to fewer ongoing staff
• constraints over operating costs to reduce overheads
• downward revaluations of assets in some entities to reflect infrastructure assets no longer required or in use.

The full effect of the changes to the funding model was realised from 1 January 2013, when the cost to students undertaking vocational education and training increased. This may reduce participation.

There is a risk that if individual TAFEs do not change their operations to cut costs and increase student revenue, they may become unsustainable.

The funding model for TAFEs has not progressively funded them for the depreciation of their assets, instead allocating capital grants strategically across the sector. This means that funds for replacing assets were not provided until the government considered replacement was appropriate, given its strategic review of the sector's needs and other spending priorities.

As a result of the TAFE Reform Panel's 2013 report, A strong and sustainable Victorian TAFE sector, a number of changes have been announced. The government has reiterated its commitment to competitive neutrality in the vocational training sector and is considering more flexible financing options for TAFEs. The government stated that TAFE institutes will be required to demonstrate the capacity to operate commercially. They will also need to cover their depreciation costs through their operations.

The government will provide contestable funding of $200 million over four years to support the ongoing financial sustainability of TAFE institutes, including $100 million in infrastructure funding.

5.3 Five-year trend analysis

This section analyses and comments on the trends in the five sustainability indicators for the sector over the past five years. The indicators reflect each entity's funding and expenditure policies, and identify whether these policies are sustainable.

Financial sustainability should be viewed from both the short and long-term perspective. The shorter-term indicators—underlying result and liquidity—focus on an entity's ability to maintain positive operating cash flows and adequate cash holdings, and to generate an operating surplus over time.

The longer-term indicators—debt-to-equity, self-financing and capital replacement—identify whether adequate funding is available to repay debt, replace assets to maintain the quality of service delivery, and to meet community expectations and the demand for services.

5.3.1 Underlying result

Figure 5C shows that the average underlying result has deteriorated over the past three years.

Figure 5C

Average underlying result

Source: Victorian Auditor-General’s Office.

Ten of the 14 TAFEs generated an operating surplus in 2012 (10 in 2011). However, only four of the 10 reported an improved underlying result in 2012. The worsening position indicates that expenses are growing faster than revenue and places the long‑term financial sustainability of TAFEs at risk.

During the past five years, nine of the 14 TAFEs recorded a deficit at least once.

Figure 5D shows the number of TAFEs in the medium-risk category was consistent with 2011.

Figure 5D

Underlying result risk assessment

Source: Victorian Auditor-General’s Office.

5.3.2 Liquidity

Figure 5E shows that current assets have exceeded current liabilities in each of the past five years.

Figure 5E

Average liquidity indicator

Source: Victorian Auditor-General’s Office.

All 14 TAFEs were in the low-risk category for the liquidity indicator for each of the five years. Current assets are at least three times the value of current liabilities. TAFEs have few liabilities, largely limited to payables and employee-related provisions.

5.3.3 Debt-to-equity

Figure 5F shows that all TAFEs were in the low-risk category for the debt-to-equity ratio for the past five years.

Figure 5F

Average debt-to-equity indicator

Source: Victorian Auditor-General’s Office.

5.3.4 Self-financing

Figure 5G shows the significant decline in the TAFE sector's self-financing indicator since 2010.

Figure 5G

Average self-financing indicator

Source: Victorian Auditor-General’s Office.

Figure 5H shows that the majority of TAFEs (eight of 14) now have a self-financing risk of high and that 86 per cent are now in the high- or medium-risk categories (72 per cent in 2011).

Figure 5H

Self-financing risk assessment

Source: Victorian Auditor-General’s Office.

Most TAFEs are not able to generate sufficient cash from their operating activities to fund asset replacement. The government's review of financing arrangements may enable TAFEs to borrow funds for asset replacement. In addition, on 7 May 2013 the government confirmed that $100 million in contestable capital funding would be provided to help meet this shortfall over the next four years.

5.3.5 Capital replacement

Figure 5I shows a significant increase in the number of entities in the high-risk category over the five-year period.

Figure 5I

Capital replacement risk assessment

Source: Victorian Auditor-General’s Office.

Ten of the 14 TAFEs (71 per cent) are now in either the medium or high-risk category. If greater capital investment does not occur, assets will deteriorate at a greater rate than they are replaced or renewed. This presents a risk to the long-term financial sustainability of TAFEs, as buildings and other infrastructure assets will become unusable.

Capital spending has decreased over the past three years, while depreciation expenses have increased.

Government capital grants to the TAFE sector decreased by 40 per cent to $59.1 million in 2012. The decline, in conjunction with poor capital replacement indicator results, highlights the dependence of TAFEs on government funding to undertake capital programs.

6.1 Introduction

Comprehensive internal controls help entities reliably and cost-effectively meet their objectives. Reliable internal controls are a prerequisite for the delivery of reliable, accurate and timely external and internal financial reports.

In our annual audits we focus on the internal controls relating to financial reporting and assess whether entities have managed the risk that the financial statements may not be complete and accurate. Poor internal controls diminish management's ability to achieve their entity's objectives and comply with relevant legislation. They also increase the risk of fraud and error.

The governing body of each technical and further education (TAFE) institute is responsible for developing and maintaining internal controls that enable:

• preparation of accurate financial reports and other supporting information
• timely and reliable external and internal reporting
• appropriate safeguarding of assets
• prevention and detection of errors and irregularities.

The Education and Training Reform Act 2006 and the Financial Management Act 1994 require management of TAFE institutes to implement effective internal control structures.

In this chapter we report on aspects of internal controls in the state's 14 TAFEs including:

• general internal controls
• internal audit
• credit card management.

6.2 General internal controls

Internal controls at the 14 TAFEs were adequate for maintaining the reliability of external financial reporting. Nevertheless, a number of control weaknesses were reported to governing bodies and management during the course of the 2012 audits.

The commonly identified areas that require improvement were:

• account reconciliations
• documentation of policies
• segregation of duties.

Weaknesses found during audits were brought to the attention of an entity's chairperson, management and audit committee by way of management letters.

6.2.1 Account reconciliations

A financial report is prepared based on information captured in an entity's general ledger. Key balances within the general ledger are often supported by information recorded in subsidiary ledgers such as accounts payable, billing, fixed assets and payroll systems. Periodic reconciliation of the general ledger with subsidiary ledger balances is vital to confirm the completeness and accuracy of data.

While TAFEs were generally preparing key account reconciliations, we identified a number of instances where improvements could be made. In some instances reconciliations had not been prepared or reviewed.

6.2.2 Documentation of policies

Documented policies provide a frame of reference for staff, and communicate management's expectations in relation to particular activities. In the absence of documented policies the opportunity for fraud increases.

TAFEs generally had policies addressing their key financial processes. However, there were several instances where policies were either deficient or non-existent. This included policies for cash collection, the use of purchasing cards and managing IT user accounts.

6.2.3 Segregation of duties

Sound financial management involves the segregation of key accounting responsibilities to maintain integrity, minimise errors and mitigate the risk of fraud. Functions such as payment of suppliers and employees, or approval of reconciliations should be performed independently by different staff.

Several TAFEs cited staff resourcing shortfalls as the reason behind a lack of segregation of duties. Management must ensure that the risk of poor segregation of duties is mitigated.

6.2.4 Status of prior year issues

Internal control weaknesses reported to management, the governing body and/or audit committee should be actioned and resolved in a timely manner. Sixteen of the 30 internal control weaknesses identified and reported to management at six TAFEs in 2011 or earlier were not resolved by management at the time of the 2012 audits.

While action to address outstanding issues was proceeding on some matters, failure to address previously identified and reported internal control weaknesses reflects poorly on the governing body and management of each of the six TAFEs.

6.3 Internal audit

Internal audit is a key mechanism available to TAFE governing boards to support the discharge of their governance and oversight responsibilities. Internal auditors can review core internal controls and identify areas of risk within an entity, providing assurance to management on the operational effectiveness of key controls. They may also identify and report on deficiencies or control weaknesses that need to be addressed.

An effective internal audit function strengthens internal controls, adding credibility to both the financial and non-financial information produced, as well as improving the efficiency of key controls and processes.

6.3.1 Internal audit framework

The key elements of an effective internal audit function are detailed in Figure 6A. The table draws on the Australian National Audit Office better practice guide Public Sector Internal Audit – an investment in assurance and business improvement, September 2012.

Figure 6A

Key elements of an effective internal audit function

Source: Victorian Auditor-General’s Office.

These elements were considered in our assessment of the internal audit function in each of the 14 TAFEs.

Conclusion

Internal audit frameworks across the TAFE sector were generally sound. All had policies in place, and internal audit reported regularly to the audit committee. All TAFEs had internal audit functions that were 'developed' or better, reflecting many of the better practice elements in the framework. Nevertheless, there are opportunities for improvement across the sector in policy content and internal audit coverage of some key business areas.

6.3.2 Policies

Each of the 14 TAFEs had an internal audit policy or charter. The charters contained the majority of better practice elements outlined in Figure 6A.

Across the sector, policies commonly incorporated the following better practice elements:

• details of roles and responsibilities
• clear reporting lines to management and audit committee
• need for operational independence.

However the following better practice elements were not addressed by a number of tertiary education bodies:

• outline of the process for selecting the internal audit service provider
• arrangements for reporting conflicts of interest of internal auditors
• requirements for periodic review.

Reporting internal audit conflict of interest

Policies at five TAFEs had no arrangements for reporting conflicts of interest of internal auditors. Independence is a central characteristic of an effective internal audit function, to maintain integrity and to avoid the appearance of bias.

All TAFE institutes use external service providers. However, it was concerning that six internal audit charters did not address the process for selecting the internal auditors. There is a risk that the internal auditors appointed may not have appropriate qualifications, experience or understanding of the entity required for a quality internal audit function.

Review of policy and charter

Thirty-six per cent of TAFE charters did not include requirements for periodic review of the policy.

6.3.3 Management practices

Management at each of the TAFEs had developed an internal audit program outlining the audit coverage to be achieved, and regularly reported to the audit committee on the status of recommendation implementation.

Internal audit program

Internal audit programs were generally for three years, and included sufficient detail of the work to be completed, costs, resources and links with relevant entity risks.

Programs had clear time lines, identifying key milestones and the reporting date for each audit.

Approval by audit committee

Audit committees at all 14 TAFEs had signed off their respective internal audit program.

6.3.4 Governance and oversight

Reporting to the audit committee

Each of the 14 TAFEs had an audit committee that regularly reviewed internal audit reports. Eleven (79 per cent) also maintained an issues register, populated by internal audit's findings and recommendations.

Follow up of implementation of recommendations

All audit committees followed up internal audit recommendations to monitor their implementation, and to hold management accountable for addressing issues raised.

Periodic review of internal audit arrangements

Only 11 of the 14 TAFEs had reviewed their internal audit arrangements within the past three years. The remaining three should conduct a review of their arrangements in a timely manner in order to identify improvements and maintain alignment with organisational objectives and risks.

6.3.5 Comprehensiveness of internal audit program

We identified seven key business activities common to the 14 TAFEs, and assessed whether they had been subjected to internal audit scrutiny over the past three years.

Twelve TAFEs achieved coverage over at least six of these activities. The remaining two TAFEs had only reviewed four of the seven activities, indicating that further attention by internal audit is required.

Figure 6B highlights the common key business activities, and the percentage of TAFEs that had addressed them through internal audits.

Figure 6B

Review of internal audit coverage in TAFEs

Source: Victorian Auditor-General’s Office.

Our analysis revealed opportunity for greater coverage of controls over cash management and operational efficiency and effectiveness. These functions had not been reviewed at 21 per cent of TAFEs (three of 14).

The comparatively lower coverage of cash management is concerning, as cash is an item highly susceptible to theft or misuse and is highly portable and difficult to trace. Internal audit scrutiny can help improve the controls in this area and reduce the potential for fraud.

Ineffective or inefficient processes can raise probity issues, expose an entity to reputational risk or lead to waste of public resources. In the tight economic times, internal audit reviews of efficiency and effectiveness can improve business processes and identify savings.

6.4 Purchasing by credit card

Credit cards enable entities to purchase goods and services with reduced administrative costs, greater convenience and flexibility for staff compared to using cash or cheques. However, they can expose entities to the risk of inappropriate or unauthorised expenditure, and are a high fraud risk.

Credit card expenditure for the sector was projected to be $6.2 million in 2012. Figure 6C compares the number of cards on issue across the 14 TAFEs and the expenditure incurred for the past two years.

Figure 6C

Number of credit cards and expenditure incurred, 2011 and 2012

Note: 2012 projected figures were obtained during the course of the 2012 audits.

Source: Victorian Auditor-General’s Office.

The overall spend was projected to increase slightly to $6.2 million in 2012 ($5.9 million in 2011). This is consistent with entities' increasing preference for making purchases with credit cards.

However the number of credit cards at TAFEs decreased by 6 per cent in 2012. The scaling back of operations in the TAFE sector due to the changed funding model has resulted in campus closures and staff redundancies, leading to fewer cards.

6.4.1 Credit card framework

Figure 6D outlines the key components of an effective credit card management framework. It draws on the:

• Standing Directions of the Minister for Finance, ‘Purchasing Card Rules for the Use and Administration’
• New South Wales Treasury 2005 policy and guidelines paper ‘Credit Card Use Best Practice Guide’
• Victorian Auditor-General's Office 2012 performance audit report Personal Expense Reimbursement, Travel Expenses and Corporate Credit Cards.

Figure 6D

Key elements of an effective credit card framework

Source: Victorian Auditor-General’s Office.

These elements were considered in our assessment of credit card management in each of the 14 TAFEs.

Conclusion

None of the TAFEs recorded a 'better practice' rating for their credit card management, indicating that they had not addressed all elements in the framework. Attention should be given to risk identification, oversight and obtaining annual certification from cardholders on their compliance with entity policies and cardholder agreements.

6.4.2 Policies

Existence of credit card policies

Thirteen of the 14 TAFEs (93 per cent) had a policy addressing the use of credit cards. The remaining TAFE had not expressly considered the use of credit cards in its procurement policy, however, was in the process of drafting a related policy. Where established, credit card policies were generally based on the Standing Directions of the Minister for Finance, ‘Purchasing Card Rules for the Use and Administration’.

The following better practice elements were addressed at each of the 13 TAFEs that had a credit card policy:

• eligibility criteria for having a credit card
• scope and conditions for use
• approval process
• financial delegations
• documentation required to substantiate purchases
• security measures in the event of loss or theft of card.

There was room for improvement as 38 per cent of TAFEs (five of 13) had not addressed training requirements for new cardholders in their policy. Training is an important component of a control framework as it familiarises staff with the conditions of use and management's expectations.

Reporting requirements

Where established, policies required card misuse to be followed up by management, with 69 per cent of policies requiring this information to be reported the board or audit committee (nine of 13).

No instances of credit card fraud or misuse were reported during 2012.

6.4.3 Management practices

Certification by cardholders of cardholder agreement

All cardholders were required to sign agreements, acknowledging their responsibilities and the conditions of use, in advance of the cards being issued.

Annual certification of compliance

Better practice involves entities obtaining annual certification from all cardholders, confirming their compliance with the relevant conditions of use. This provides a level of assurance to management that cardholders have complied with the policy. Nine of the 14 TAFEs (64 per cent) did not obtain annual certification from cardholders.

Risk management

Where cardholders are also involved in an entity's accounts payable function—such as invoice processing or acquitting transactions—the opportunity for them to commit fraud increases.

Cardholders had access to the payments system or accounts payable module at five TAFEs (36 per cent).

However, management at all 14 had implemented appropriate controls and restrictions to largely mitigate the risk. This included restricting cardholders to read-only access, limiting their data input functionality or their ability to amend personal card details.

6.4.4 Governance and oversight

Reporting

Credit card activity reports were not generally reported to TAFE boards—the information was reviewed by the Chief Executive or Chief Financial Officer.

High level reports detailing the number of credit cards issued and the frequency of use was reviewed at the board level at five TAFEs. While not essential, such information enables a board to better determine the nature and impact of related risks to the TAFE. A nil-return report, for example, would provide the board with regular assurance that no instances of card misuse had been detected.

Review of arrangements and risks

All TAFEs had engaged internal audit to review their credit card arrangements during the past three years.

Boards or audit committees at 11 of the 14 TAFEs had reviewed the risks associated with credit cards within the past two years. Only nine had included risks associated with credit card use in their strategic risk register.

6.4.5 Testing of controls over credit card use

As part of our assessment of management and use of credit cards we sampled credit card transactions at each of the 14 TAFEs and tested a selection of key internal controls. The results are summarised in Figure 6E.

Figure 6E

Results of credit card controls testing

Source: Victorian Auditor-General’s Office.

The timeliness of approving transactions could be improved to enable management to identify problems early, so that appropriate corrective action can be undertaken. All other results were satisfactory.

6.5 Fee payment by credit card

Students have a range of options for paying their tuition fees, including payment by cash, cheque, Bpay, credit card and debit card.

Students can make payments using their credit/debit cards at all TAFEs.

Figure 6F shows the payment options currently used by students to pay their fees. However, as six TAFEs were unable to provide breakdowns of their receipting methods, the data relates to the eight TAFEs from which data was available.

Figure 6F

Payment options used by students to pay fees, 2012

Source: Victorian Auditor-General’s Office.

Figure 6F shows that payment by credit or debit card was the preferred payment method for students in 2012. Payments through Bpay or other facilities can also involve credit or debit cards.

6.5.1 Compliance with the Payment Card Industry-Data Security Standard

Entities that receive debit and credit card payments need policies and procedures for handling customer personal information, or sufficient assurance from facilitating agencies that personal information of payers is protected and that the revenue data is accurate and complete.

The Payment Card Industry-Data Security Standard (2010) (PCI-DSS) addresses the storage and handling of customer credit and debit card information and data. It was developed by MasterCard, Visa, American Express, Discover Financial Services and JCB to establish consistent data security requirements across the globe.

PCI–DSS deals with systems, policies and procedures for:

• establishing and maintaining a secure network
• protecting cardholder data
• maintaining a vulnerability management program
• strong access controls
• regular monitoring and testing of networks
• maintaining an information security policy.

Any entity that processes, stores and transmits credit or debit card information and data should comply with the standard.

Management at seven of the 14 TAFEs had self-assessed that they were compliant with the requirements of the PCI-DSS. Of the remaining seven, five had not developed a policy in relation to handling student credit card information.

Management at 71 per cent of TAFEs (10 of 14) had not assessed the risks associated with the handling of customer credit and debit card information and data.

The results are concerning as they show a lack of understanding of the importance of this high-risk activity.

Poor security controls and noncompliance with PCI-DSS increase the risk of identity theft and fraud and expose an entity to a loss of reputational risk and financial penalties.

Early action is needed by the noncompliant TAFEs to develop policies for credit card revenue, achieve compliance with the PCI-DSS and actively manage the associated risks.

Recommendations

That TAFEs:

1. revise internal audit charters to address reporting conflicts of interest of internal auditors, and to outline the selection process for internal audit providers
2. obtain regular internal audit assurance over key business areas, in particular cash management and operational efficiency and effectiveness
3. obtain annual certification of compliance with agreements from cardholders
4. identify risks associated with using credit cards for purchasing, and mitigation strategies
5. develop policies for revenue paid by credit or debit cards and achieve compliance with the Payment Card Industry-Data Security Standard, and actively manage the associated risks in order to protect the security of payers' personal information.

7.1 Introduction

Accrual-based financial statements enable an assessment of whether entities are generating sufficient surpluses from operations to maintain services, fund asset maintenance and retire debt. This chapter analyses the financial results of the eight universities for the year ended 31 December 2012.

Four of the eight universities are dual-sector entities, that is, they offer vocational education and training (VET) courses similar to the technical and further education institutes as well as university courses. The financial results for the dual-sector entities are included in this chapter.

7.2 Financial results

7.2.1 Financial performance

Victoria's universities generated a net profit of $454.6 million in 2012, a decrease of $23.9 million or 5.0 per cent over the prior year. This was mainly due to:

• an increase of $308.6 million or 8.1 per cent in employee benefits
• an increase of $45.1 million or 10.6 per cent in depreciation and amortisation
• a decrease of $31.3 million or 15.9 per cent in investment revenue.

These were partially offset by an increase of $388.1 million or 9.4 per cent in government grants.

Seven of the eight universities recorded surpluses in 2012, continuing a trend from 2011. However, Victoria University reported a deficit of $6.5 million, compared with an $8.7 million surplus in 2011, mainly due to an increase in employee wage and redundancy costs.

Figure 7A provides a comparison of the total operating result for universities for 2012 and 2011.

Figure 7A

Net surplus/(deficit) by university, 2011 and 2012

Source: Victorian Auditor-General’s Office.

Revenue

In 2012, the eight universities generated revenue of $7.3 billion, an increase of $741.0 million from 2011. The increase was driven by higher Commonwealth Government grants and a deferred government superannuation contribution of $322.6 million. This contribution represents the future expected receivable associated with the defined benefits superannuation program, and was offset by a corresponding deferred employment liability.

The composition of operating revenue for 2012 is presented in Figure 7B.

Figure 7B

Revenue composition, 2012

Source: Victorian Auditor-General’s Office.

Government funding remained the largest revenue component, comprising 45 per cent of total revenue in 2012. Revenue composition was consistent with the prior year.

Trends in student fee revenue

Student fees are a significant portion of self-generated revenue for universities and comprised 37.9 per cent of total revenue in 2012. This revenue includes amounts received from the Commonwealth Government in respect of the HECS-HELP and FEE-HELP programs.

Overall student fee revenue grew by $107.4 million or 4.3 per cent to $2.6 billion in 2012. Significant increases were reported at:

• The University of Melbourne—an increase of $42.6 million or 8.2 per cent
• University of Ballarat—an increase of $10.7 million or 13.1 per cent.

The remaining six universities reported growth in total student fee revenue of less than 5 per cent in 2012.

Increased student fee revenue contributed toward the operating surpluses of seven universities. However, despite a $7.7 million increase in student fee revenue, Victoria University reported a $15.2 million decrease in its operating result in 2012.

International students

International students attending Victorian universities come from more than 106 countries. The six most represented countries are China, Malaysia, India, Indonesia, Vietnam and Singapore.

There was an overall decline in international student numbers for the sector in 2012, with total enrolments down 2.3 per cent to approximately 53 900 in 2012. Despite this, new enrolments reached the highest level in five years, increasing by 11.1 per cent on 2011. The number of Indian students commencements increased by 54.1 per cent during 2012 (33.7 per cent decrease in 2011).

Figure 7C indicates the number of onshore international students commencing at universities in 2012 compared to 2011. The six most common countries of origin are shown individually while 'other' includes students from over 100 countries.

Figure 7C

Onshore international students commencing, 2011 and 2012

Source: Victorian Auditor-General’s Office.

The data show there was an increase in onshore Indian and Chinese and 'other' student commencements in 2012. Commencing students from the other four countries identified fell during 2012, albeit slightly in some cases.

International student fees represented 51.1 per cent of total student fee revenue for universities in 2012.

International student fee revenue has increased by $316.3 million over the past five years to $1.35 billion in 2012. This revenue growth has allowed the universities to maintain strong surpluses since 2009.

Figure 7D shows the relationship between international student fee revenue and operating surpluses of universities over the past five years. The figures include fees from both onshore and offshore international students.

Figure 7D

International student fee revenue and operating surpluses

Source: Victorian Auditor-General’s Office.

Domestic students

All eight universities reported growth in revenue from domestic student fees in 2012. The increase in domestic student fees was $106.0 million or 9.0 per cent for the year.

Domestic student fees in 2012 represented 48.9 per cent of total university student fee revenue.

Expenses

In 2012 the eight universities incurred $6.8 billion in expenses, an increase of $761.0 million or 12.6 per cent from the prior year. The increase was driven by higher employee wage costs and the deferred employee benefits superannuation expense of $322.8 million ($5.4 million in 2011). This expense is offset by the deferred government superannuation contribution.

The composition of expenditure is presented in Figure 7E.

Figure 7E

Expenditure composition, 2012

Source: Victorian Auditor-General’s Office.

Other expenses typically included:

• scholarships and prizes
• grant payments
• learning materials
• contractors and professional services.

The composition of expenditure was consistent between 2011 and 2012.

7.3 Financial position

Universities carry land and buildings of significant value on their balance sheets, representing 68 per cent of their total assets. However, their revenue base is not tied to the value of their assets and most of their assets cannot be readily sold to obtain funds.

The objective for a university should, therefore, be to maintain and improve its asset base and related service provision, while managing levels of debt.

7.3.1 Assets

During 2012 the total value of assets increased by $1.8 billion or 12.3 per cent to $16.2 billion. This was mainly due to increases of $1.3 billion or 13.3 per cent in property, plant and equipment and financial assets of $243.9 million or 15.2 per cent.

The movements were driven by the construction of new buildings, and actuarial revaluations of land and buildings. Land assets of The University of Melbourne were revalued by the Valuer-General and increased by $188.9 million or 26.5 per cent, adding to the revaluation conducted in 2011.

The composition of assets was consistent with the prior year, with property, plant and equipment continuing to represent the majority of total assets.

7.3.2 Liabilities

At 31 December 2012 the total value of liabilities was $4.4 billion—an increase of $672.1 million or 18.2 per cent from the 2011 figure.

The deferred superannuation liability grew by 27.2 per cent to $1.7 billion during 2012 and now represents 39 per cent of total liabilities (36 per cent in 2011). The liability is based on an actuarial assessment, and represents amounts expected to be paid to university employees who qualify for the defined benefits superannuation program.

Interest bearing liabilities increased by $120.0 million or 18.0 per cent during 2012, mainly due to borrowings by the RMIT and La Trobe universities. The borrowings were used to fund the construction of new and expanded building facilities.

7.4 Overseas campuses

Some Victorian universities have a vision to be global universities, to be known and respected internationally and, as a result, have established overseas campuses. The overseas campuses are either fully-fledged universities or smaller ventures or schools.

7.4.1 Overview

Overseas campuses operated by Victorian-based universities have experienced mixed financial success. Some require significant ongoing investment in the form of loans or equity contributions. In 2012 two required letters of support in order to meet the going concern test, demonstrating their financial dependence on their parent entity. One overseas campus has thrived, and generated surpluses in each of the past five years.

Monash University and RMIT University have established overseas campuses in South Africa and Vietnam. Monash University's South Africa campus is structured through two companies, with one holding the infrastructure assets and the other responsible for campus operations.

For the purposes of this report, we have limited our analysis of overseas operations to the three entities associated with these two campuses.

We have not analysed the operations of Monash University's 45 per cent partnership in Malaysia at the Monash University Sunway Campus. Monash University received $44.5 million in royalties, licence fees and course development revenue from this operation over the past five years.

7.4.2 Levels of investment and operating results

Over the past five years, Monash University and RMIT University have invested more than $41 million in equity contributions and loans to the overseas campuses. Loan repayments and interest charges paid to Monash University by its subsidiaries since 2008 have totalled $7.1 million.

Figure 7F presents the value of Monash University and RMIT University's investment in their overseas campuses and the operating results for the past two years.

Figure 7F

Operating results and investment value, 2011 and 2012

Source: Victorian Auditor-General’s Office.

Neither of the overseas campuses has paid a dividend to its parent entity during the past four years, as:

• the constitution of Monash Property South Africa (MPSA) specifically provides that no dividends can be paid
• Monash South Africa (MSA) has consistently reported operating losses
• RMIT International University Vietnam (RIUV) has reinvested the majority of its operating surpluses into its capital program.

7.4.3 Cash flows

Figure 7G shows the net cash flows from these overseas universities for the past five years.

Figure 7G

Net cash flows from overseas universities

Source: Victorian Auditor-General’s Office.

The data show that Monash University has provided loan advances totalling $26.2 million to MSA during the past five years. While still heavily dependent on loans, it is positive that the advances have reduced year on year over the past three years and the operating deficit decreased between 2011 and 2012.

MPSA made a repayment of loan principal to Monash University in 2012, but required additional loan funding in 2009 and 2011 for the construction of two education buildings associated with the growth in student numbers.

Amounts paid by RIUV to RMIT University are from transactions negotiated on commercial terms. These do not amount to a return on investment for the parent university, and are instead payments for services.

7.4.4 Analysis

Monash South Africa

MSA is an Australian company and a wholly owned subsidiary of Monash University. It is registered as a private higher education institution, and operates Monash University's campus in South Africa.

The data in Figure 7F show that MSA is completely funded by debt. At 31 December, $30.4 million in unsecured, interest-free loans was outstanding to Monash University ($28.5 million in 2011). During the past five years, loans of $26.2 million have been advanced to MSA. MSA has not made any loan repayments to its parent over that period. Student numbers have increased by 48.0 per cent since 2008, to 3 065 equivalent full-time students in 2012.

MSA does not currently provide a return on investment to its parent entity. It has recorded operating deficits totalling $22.6 million since 2008. Figure 7F shows that it delivered deficits in both 2011 and 2012, which have declined from a $5.8 million deficit in 2010.

During 2012 a letter of comfort was provided by Monash University, confirming its intention to support MSA financially, and meet its debts when they fall due. Monash University has also indicated that it does not currently intend to require repayment of loans advanced to MSA.

The letter of comfort from Monash University enabled MSA to meet the going concern test. Without it the financial statements of MSA would have been qualified.

Monash Property South Africa

MPSA is a wholly owned subsidiary of Monash University, incorporated in Australia, and holds the campus infrastructure and assets of the South Africa campus on its balance sheet. The developed property is leased to MSA and generates significant rental income.

MPSA is primarily funded by loans provided by Monash University, with a total outstanding loan balance of $17.8 million at 31 December 2012 ($25.3 million in 2011). The $5.5 million decrease was mainly due to conversion of debt to equity during 2012.

During the past five years Monash University has provided $7.8 million in new loans to MPSA. MPSA has repaid a total of $1.3 million in principal during that time. Monash University also received $5.8 million in interest relating to these loans.

In 2012 MPSA reported an operating surplus after tax of $1.8 million, although 55.2 per cent of this result was due to deferred tax benefits, partly resulting from the carry forward of losses.

MPSA received a letter of support in 2012, with Monash University confirming that it would support the subsidiary company financially. This extends to meeting expenditure commitments as and when they fall due.

The letter of comfort from Monash University enabled MPSA to meet the going concern test. Without it the financial statements of MPSA would have been qualified.

RMIT International University Vietnam

RIUV did not report any movements in its issued share capital in 2012. It delivered surpluses in each of the past two years.

RMIT University has expanded its university operations to Vietnam, which it controls through RIUV. The value of RMIT University's investment in its subsidiary was $31.2 million at 31 December 2012.

RIUV reported a strong after tax operating surplus of $6.2 million in 2012, an increase of $3.7 million from 2011. The company has cash reserves of $17.6 million, although 42.1 per cent of this balance relates to course fees received in advance from students.

The only funding provided by RMIT University to its overseas subsidiary during the past five years was a one-off capital contribution of $6.95 million in 2010. RIUV does not have any outstanding borrowings.

RIUV has invested $19.2 million in capital projects over the past two years from cash generated from its operating activities.

RIUV has not paid a dividend in the past four years, with the most recent return to owners a $0.7 million dividend in 2008. RMIT University has received a total of $26.1 million from its subsidiary during the past five years. These payments are the result of projects conducted on commercial terms, and do not constitute a direct return on investment for the parent entity.

The level of capital expansion and liquid assets, when considered in the context of the limited funding provided by the parent entity, indicates that RIUV is a profitable and sustainable overseas operation.

8.1 Introduction

To be financially sustainable entities need the capacity to meet their current and future expenditure as it falls due. They must also be able to absorb foreseeable changes and financial risks as they materialise.

In this chapter we provide insight into the financial sustainability of Victoria's universities through analysing the trends in each of five financial sustainability indicators over a five-year period. The five indicators are:

• underlying result
• liquidity
• debt-to-equity
• self-financing
• capital replacement.

Appendix D describes the sustainability indicators and risk assessment criteria used in this report.

To form a definitive view of any entity’s financial sustainability, a holistic analysis that moves beyond financial indicators would be required, including an assessment of the entity’s operations and the regulatory environment in which the entity operates. These additional considerations are not examined in this report.

8.2 Financial sustainability

8.2.1 Overall assessment

Six universities were rated as having low financial sustainability risk. Victoria University was assessed as medium risk due to its poor self-financing indicator, while Monash University was assessed as high risk due to its low liquidity level.

Figure 8A provides a summary of our overall financial sustainability risk assessment results for the past two years.

Figure 8A

Two-year financial sustainability risk assessment

Source: Victorian Auditor-General’s Office.

Despite its financial sustainability risk being assessed as high, Monash University had financial assets that were 'available for sale', which would be accessible for conversion to cash if required.

8.2.2 Summary of trends in risk assessments over the five‑year period

When the sector's risk assessments for each indicator are analysed they show the following trends over the five years to 2012:

• underlying result—there are no longer any universities in the high-risk category
• liquidity—the number of universities in all categories has remained stable
• debt-to-equity—all universities remain in the low-risk category
• self-financing—the number of universities in the high‑risk category has not changed, however, the majority of universities are assessed as medium risk over the period
• capital replacement—the position has improved, with the number of universities in the medium-risk category halving over the five-year period.

In summary, the trend shows no significant change in the sector's overall financial sustainability. Universities have generally recorded poor self-financing indicators, but performance against the other indicators has improved.

8.2.3 Analysis of trends in financial sustainability indicators across the five-year period

To further understand the results we analysed the five-year data for the five indicators. The relevant data are reproduced in Appendix B.

Figure 8B shows the mean sustainability risk assessments for the eight universities, over the five years from 2008 to 2012. High risk results are shown in red, medium risk in orange, and low risk in green.

Figure 8B

Five-year mean financial sustainability risk assessments

Source: Victorian Auditor-General’s Office.

All universities recorded operating surpluses and positive underlying result indicators over the past five years, with two exceptions—The University of Melbourne in 2008 and Victoria University in 2012. The magnitude of these surpluses has declined at five universities, however, the sector's position remains strong. Revenue growth has matched expenditure growth during the period, with all universities assessed as low risk on average.

Monash University and RMIT University recorded poorer liquidity indicator results than the sector average, however, the position has not changed significantly over the past five years. The other six universities have consistently maintained current assets well in excess of their short‑term liabilities.

Monash University had available for sale financial assets of $231.0 million at 31 December 2012. These assets have not been considered in the calculation of the liquidity indicator as they are classified as non-current, however, they are available for conversion to cash if required.

Debt-to-equity indicator results are not a concern for the sector. Debt levels are generally low, and as a result the risk for each university has consistently been rated as low for this indicator over the past five years.

With the exception of Deakin University, each university has recorded a poor self‑financing ratio over the past five years. Net cash inflows from operating activities have generally been less than 20 per cent of underlying revenue balances. While they generally have positive results for their capital replacement indicator, the poor self‑financing results for universities suggests they will not be able to fund asset replacement from cash generated from operating activities. This position has not changed significantly in the past five years.

8.3 Five-year trend analysis

This section provides analysis and commentary on each indicator's trend for the past five years.

8.3.1 Underlying result

Figure 8C shows that the average underlying result has deteriorated slightly in the past two years.

Figure 8C

Average underlying result

Source: Victorian Auditor-General's Office.

Seven universities generated an operating surplus in 2012 (eight in 2011), with Victoria University assessed as medium risk for the first time in the past five years. Its 2012 operating deficit was modest, although it has generated surpluses previously. The remaining universities were assessed as low risk, having generated surpluses in each of the past four years.

8.3.2 Liquidity

Figure 8D shows that the results of risk assessments of liquidity have been consistent over the past three years.

Figure 8D

Liquidity risk assessment

Source: Victorian Auditor-General’s Office.

Six universities were assessed as having a low liquidity risk for the five years. Monash University and RMIT University recorded slightly improved results in 2012, however, remain high and medium risk, respectively. Monash University had available for sale financial assets, which are accessible if required.

8.3.3 Debt-to-equity

Figure 8E shows that universities have maintained low levels of debt over the five years.

Figure 8E

Average debt-to-equity indicator

Source: Victorian Auditor-General’s Office.

All universities were assessed as low risk, indicating that they can comfortably meet their debt repayment obligations.

8.3.4 Self-financing

Figure 8F shows that the self-financing risk of the majority of universities has been assessed as medium over the past five years.

Figure 8F

Self-financing risk assessment

Source: Victorian Auditor-General’s Office.

University self-financing risk assessments have not changed significantly during the past five years, and have been stable over the past three. Six of the eight universities (75 per cent) were assessed as having a self-financing risk of high or medium in 2012, meaning that they are unable to fund asset replacement from cash generated from their operations.

Capital grants received from government increased by $29.6 million or 17.6 per cent in 2012. If these trends continue, universities may place greater reliance on government funding for asset renewal and replacement.

8.3.5 Capital replacement

Figure 8G shows that seven universities were assessed as having a low capital replacement risk in 2012.

Figure 8G

Capital replacement risk assessment – universities

Source: Victorian Auditor-General’s Office.

Capital spending has exceeded the aggregate depreciation expense over the five-year period. This suggests that asset-related expenditure is outstripping asset consumption.

Total expenditure on university capital programs in 2012 increased by $123.5 million or 13.2 per cent, while depreciation increased by $46.3 million or 10.9 per cent. The majority of this expenditure related to new asset construction, however, with the true level of spending on asset renewal substantially less than indicated.

Although Swinburne University of Technology was assessed as medium risk in 2012, capital expenditure still exceeded depreciation. This was the first year since 2007 that the university was not assessed as low risk.

9.1 Introduction

Effective internal controls help entities reliably and cost-effectively meet their objectives. Reliable internal controls are a prerequisite for the delivery of reliable, accurate and timely external and internal financial reports.

The enabling legislation for each of the eight universities requires management to implement effective internal control structures.

In this chapter we report on aspects of internal controls in the state's eight universities including:

• general internal controls
• internal audit
• credit card management.

9.2 General internal controls

Each of Victoria's eight universities had adequate internal controls to produce reliable internal and external financial reports. We identified a number of control weaknesses during the course of our 2012 audits, and reported these to management and governing bodies.

Commonly identified areas that required attention were:

• information technology (IT) and security
• independent review of key accounting functions.

9.2.1 Information technology controls and security

Information technology controls protect computer applications, infrastructure and information assets from a wide range of security and access threats. They help to minimise business risk, reduce the risk of fraud and error, and help meet business objectives. IT security can be physical, including restricting access to buildings and equipment, and at the application level, such as password restrictions and data encryption.

Information held by universities about employees, customers and suppliers, and the financial and operational aspects of the business can be highly sensitive. It needs to be protected from unauthorised access, theft or manipulation.

We identified a number of instances where IT controls and physical security could be improved, including:

• physical access to employee personal information
• unauthorised access to payroll database
• physical access to finance and cash management areas
• maintenance of old system user accounts.

9.2.2 Independent review of key accounting functions

Review of key accounting functions, including data entry and account reconciliations, is an important component of effective internal controls. The independent review can minimise input errors, mitigate the risk of fraud and provide assurance that processes are being completed correctly.

There were a number of instances where review of key accounting functions was either non-existent or poor. In particular, weaknesses identified related to the maintenance of vendor masterfiles, payroll processing and preparation of clearing account reconciliations.

9.2.3 Status of prior year issues

Internal control weaknesses reported to management, the governing body and/or audit committee should be actioned and resolved in a timely manner. Twelve of the 26 internal control weaknesses identified and reported to management at three universities in 2011 or earlier were not resolved by management at the time of the 2012 audits.

Management at the three universities had undertaken corrective action on a number of these matters. However failure to resolve previously identified and reported internal control weaknesses reflects poorly on management and the governing body of these universities. It suggests that they are not effectively managing the risk of error within the financial report.

9.3 Internal audit

An effective internal audit function strengthens internal controls, adding credibility to both the financial and non-financial information produced, as well as improving the efficiency of key controls and processes.

9.3.1 Internal audit framework

The key elements of an effective internal audit function are detailed in Figure 6A of this report. The elements were considered in our assessment of the internal audit function in each of the eight universities.

Conclusion

The internal audit frameworks of all universities were generally sound, with governance arrangements and internal audit plans reflecting a majority of the better practice elements.

9.3.2 Policies

Each of the eight universities had an internal audit policy or charter. They contained the majority of better practice elements outlined in the framework.

Across the sector the following better practice elements were consistently addressed:

• details of roles and responsibilities
• clear reporting lines to management and audit committee
• need for operational independence.

However, the following better practice elements were not addressed by a number of universities:

• arrangements for reporting of conflicts of interest of internal auditors
• requirements for periodic review of the internal audit charter.

Four universities had no arrangements for reporting on conflicts of interest of internal auditors. This can compromise the integrity of the internal audit function.

Review of internal audit charter

Four of the eight universities had not reviewed their internal audit charters within the past three years. Of these four, the policies of three did not require periodic review.

Internal audit policies should be periodically reviewed by the audit committee to maintain alignment with the university's risk register and to reflect the better practice framework.

9.3.3 Management practices

Management at each university had developed an internal audit program outlining its scheduled internal audit coverage, and regularly reported to the audit committee on the status of recommendation implementation.

Audit program

All internal audit programs were aligned with, and addressed, key risks within risk registers.

Programs generally covered three years and included sufficient detail of the intended work. Improvements could be made to expected costs and time frames for completion of activities, which were not addressed in the internal audit programs of two universities.

Approval by audit committee

Audit committees at all eight universities had signed off their respective internal audit program.

9.3.4 Governance and oversight

Audit committee

All audit committees regularly reviewed internal audit reports. They maintained issues registers populated with internal audit findings, and regularly followed up on the status of recommended corrective action. Management responses to internal audit reports were provided to audit committees at most universities.

However the quality of information provided to the audit committees could be improved. Details of a number of key operational aspects of internal audit were not presented regularly, at a significant number of universities:

• variations in planned cost—not provided in 63 per cent of cases
• scope of planned internal audits—not provided in 25 per cent of cases
• changes to the internal audit program—not provided in 25 per cent of cases.

Failure to report on these areas can result in time and budget overruns, reduced transparency to the committee and expectation gaps.

The application of such information by audit committees to the scrutiny of future audits would improve the ability to develop accurate, effective and comprehensive internal audit plans.

9.3.5 Comprehensiveness of internal audit program

We identified seven key business activities common to the eight universities, and assessed whether they had been subjected to internal audit scrutiny over the past three years.

Six universities achieved coverage over at least six of these activities. The remaining two had only reviewed four or five of the seven activities, indicating that further attention by internal audit is required.

Figure 9A highlights the common key business areas, and the percentage of universities that had addressed them through internal audits.

Figure 9A

Review of internal audit coverage in universities

Source: Victorian Auditor-General’s Office.

All universities had reviewed payroll and cash management during the past three years. Areas that were less commonly reviewed included controls over student fee revenue and compliance with regulatory requirements.

Student fee revenue comprises a significant portion of a university's self-generated income, and involves a high number of transactions. The loss of sensitive data and failure to comply with regulatory requirements can expose a university to reputational risk and financial penalties.

9.4 Purchasing by credit card

9.4.1 Use of credit cards

Each university had on average 990 credit cards in use in 2012. This was due to large and often multiple campuses, and independent faculties or schools within each. Credit cards facilitate decentralised processing and procurement arrangements, but also present risks to the sector. The overall spend using credit cards was projected to be $127.3 million, or 6.2 per cent of operating expenditure in 2012.

Figure 9B highlights the increase in both card numbers and spending on them in 2011 and 2012.

Figure 9B

Credit cards and expenditure incurred

Note: Projected figures were obtained during the course of the 2012 audits.

Source: Victorian Auditor-General’s Office.

The number of credit cards at universities increased by 7.0 per cent in 2012, as some universities streamlined their purchasing processes and pushed procurement responsibilities out to individual faculties or schools.

9.4.2 Credit card management framework

The key elements of an effective credit card management framework are set out in Figure 6D of this report.

These elements were considered in our assessment of credit card management in each of the eight universities.

Conclusion

Credit card management frameworks were generally underpinned by comprehensive policies and sound controls. There is room for improvement in training for new cardholders and governance arrangements.

9.4.3 Policies

Existence of credit card policies

Seven of the eight universities had a policy on the use of credit cards. The remaining university had addressed some aspects of the better practice framework in its standard procurement policy and was drafting a credit card-specific policy.

Across the sector we noted that the following better practice elements were generally addressed:

• financial delegations
• scope and conditions for use
• application process
• approval process
• compliance monitoring arrangements.

The following elements were not incorporated into credit card policies at a number of universities:

• training requirements for new cardholders
• eligibility criteria for having a credit card.

Without identified eligibility criteria, credit cards may be issued without appropriate consideration of risk, increasing the opportunity for misuse or fraud. Training is an important component of an effective framework, as it familiarises all cardholders with the associated expectations and responsibilities.

9.4.4 Management practices

Certification and monitoring

All universities required cardholders to sign agreements at the time a card was issued, acknowledging the conditions of use. However, seven did not obtain annual certification from cardholders to confirm their compliance with the conditions of use.

Card use was reviewed monthly by all universities. Transaction approval was monitored at the data input level, with financial purchase limits reviewed annually. There were also strong controls around credit card account settlements.

Instances of misuse or noncompliance with the credit card policy were followed up by management, with the information reported to the audit committee or board at 75 per cent of universities.

Policy breaches were detected at four universities during 2012, and the matters were addressed and dealt with by management.

Control environment

There were strong controls associated with credit card use at each university, with the following areas commonly addressed:

• retention of documentation relating to transactions
• recording, approval and reconciliation of transactions in a timely manner
• regular reporting to executive
• restricting cardholder access to the payments system
• independent review of credit card account settlements.

Segregation of duties is important in credit card processing and acquittal, as it reduces the risk of error or fraud. At three universities some cardholders had access to the accounts payable system. However, in each instance, the risk was mitigated by additional monitoring controls.

9.4.5 Governance and oversight

Chief financial officers generally received reports on credit card usage and policy compliance, with matters of significance reported to the audit committee.

Risk assessment

Three universities had not addressed risks associated with credit card use in the risk register, indicating that they did not assign appropriate importance to this high-risk activity.

Use of internal audit

Six universities had engaged their internal auditors to review their credit card arrangements during the past three years. Of the remaining two, only one planned to review credit card use through their internal audit program. Given the prevalence of card use throughout the sector, all universities should have their arrangements subject to internal audit review periodically.

9.4.6 Testing of controls over credit card use

As part of our assessment of management and use of credit cards we sampled credit cards transactions at each of the eight universities and tested a selection of key internal controls.

The results are summarised in Figure 9C.

Figure 9C

Results of credit card controls testing

Source: Victorian Auditor-General’s Office.

The tested controls were operational and effective across the sector and there was a high level of compliance. A cardholder agreement had been signed and appropriately filed for each credit card we reviewed. Each control test recorded a positive result of at least 95 per cent, but there was opportunity for improvement as no test resulted in a 100 per cent result.

9.5 Fee payment by credit card

Students have a range of options for paying their tuition fees, including payment by cash, cheque, Bpay, credit card and debit card. Students can make payments using their credit/debit cards at all universities.

Figure 9D shows the payment options currently used by students to pay fees. However, as one university was unable to provide a breakdown of its receipting methods, the data relate to the seven universities for which data was available.

Figure 9D

Payment options used to pay fees, 2012

Source: Victorian Auditor-General’s Office.

The analysis shows that credit and debit card payments were the preferred method for payment in 2012. Payments through Bpay or other facilities can also involve credit or debit cards.

9.5.1 Compliance with the Payment Card Industry-Data Security Standard

The Payment Card Industry-Data Security Standard (PCI-DSS) is an industry‑developed standard that addresses the storage and handling of customer credit and debit card information and data. All universities should conduct a self‑assessment of compliance with the standard regularly.

Only five of the eight universities had determined that they were compliant with the requirements of the PCI-DSS. Two of the remaining three had developed strategies to achieve compliance, and were progressing toward a positive assessment.

The remaining university had not assessed whether it was PCI-DSS compliant, however, it had undertaken its own internal information and card security assessments. Nevertheless, it should assess its practices against the PCI-DSS.

Six of the eight universities did not have a policy relating to handling customer credit card/debit card information, and only five of the eight had assessed the associated risks. The results are concerning as they show a lack of understanding of the importance of this high-risk activity.

Poor security controls and noncompliance with PCI-DSS increase the risk of identity theft and fraud, and expose an entity to a loss of reputational risk and financial penalties. Early action is needed by universities to develop policies for credit card revenue, achieve compliance with the PCI-DSS and actively manage the associated risks.

Recommendations

That universities:

1. obtain regular internal audit assurance over key business areas
2. obtain annual certification of compliance with agreements from cardholders
3. identify risks associated with using credit cards for purchasing, and mitigation strategies
4. develop policies for revenue paid by credit or debit cards and achieve compliance with the Payment Card Industry-Data Security Standard, and actively manage the associated risks in order to protect the security of payers' personal information.

10.1 Introduction

Accrual-based financial statements enable an assessment of whether alpine resorts are generating sufficient surpluses from operations to maintain services, fund asset maintenance and retire debt.

An entity's financial performance is measured by its net operating result—the difference between its revenues and expenses. An entity's financial position is generally measured by reference to its net assets—the difference between its total assets and total liabilities.

10.2 Financial results

Victoria's alpine resorts located at Mt Buller, Mt Stirling, Falls Creek, Mt Hotham, Mt Baw Baw and Lake Mountain are almost entirely dependent on the winter season and the level of snowfalls to deliver surpluses and to sustain their operations.

10.2.1 Financial performance

Collectively, the alpine resorts delivered a deficit of $1.7 million for 2011–12, a decrease from a surplus of $5.2 million in 2010–11.

Three of the five alpine resort management boards (ARMB)—Mt Buller and Mt Stirling, Mt Hotham and Falls Creek—recorded modest operating surpluses in 2011–12. All five recorded operating surpluses in 2010–11.

Mt Baw Baw and Lake Mountain recorded deficits of $2.4 million and $0.6 million respectively in 2011–12. The deficits would have been greater if the two entities had not received government support to address their operating cash shortfalls.

Figure 10A shows the total operating results for ARMBs for 2010–11 and 2011–12. It also shows that had government support funding, insurance recoveries and bushfire relief not been received, the results would have been deficits in both years.

Figure 10A

Alpine resort sector operating result, 2010–11 to 2011–12

Source: Victorian Auditor-General’s Office.

Revenue

During 2011–12 ARMBs generated revenue of $43.8 million, a decrease of $3.0 million (6.4 per cent) from the $46.8 million for 2010–11.

Revenue from government grants in 2011–12, including support funding, was 52.7 per cent or $5.7 million less than in 2010–11. However, government grants received in 2010–11 were higher than the norm as they included $3.2 million of 2011‑12 grants received in advance by Lake Mountain and Mt Baw Baw.

Figure 10B shows that the composition of operating revenue has varied over the past five years. However, site and service fees charged to on-site private operators, such as cafes and lodging, remain the highest revenue component.

Figure 10B

Revenue composition

Source: Victorian Auditor-General’s Office.

Visitor fees increased by $2.8 million in 2011–12 due to the longer snow season.

Expenditure

In 2011–12, total operating expenditure of the five ARMBs increased by 9.4 per cent or $3.9 million to $45.5 million, predominantly due to:

• an increase of 7.9 per cent or $1.2 million in employee benefits due in part to the longer snow season
• an increase of 28 per cent or $1.5 million in depreciation following the upward revaluation of assets during 2011.

Figure 10C shows that the composition of operating expenditure has remained relatively consistent over the past five years.

Figure 10C

Expenditure composition

Source: Victorian Auditor-General’s Office.

10.2.2 Further analysis of financial performance

When analysing the financial performance of the ARMBs, it is important to consider their capacity to meet their short-term operating expenditure commitments with revenue from operating activities. As part of our analysis of the challenges facing the sector, we analysed the cost incurred by each ARMB per visitor day, the length of stay of those visitors, and the capacity of the entities to meet their operating expenditure commitments.

Cost per winter day

Figure 10D shows the expense incurred by each ARMB for each visitor day for the winter season, for the five years to 2012.

The analysis compares total expenses incurred by these ARMBs for the full year against winter visitor days. While some ARMBs have some revenue-generating activities during the green season, the associated expenditure is negligible in the context of winter operations. The inclusion of full-year data would not materially distort the analysis.

Figure 10D

Cost per winter visitor day

Source: Alpine Resort Co-ordinating Council visitor data and Victorian Auditor-General's Office.

Mt Buller and Mt Stirling, Mt Hotham and Falls Creek incurred an expense per winter visitor day of around $20 for each winter period between 2008 and 2012. However, Mt Baw Baw and Lake Mountain incurred significantly greater expense per winter visitor day than the larger resorts. Notably:

• Mt Baw Baw incurred around $85 per winter visitor day in 2011–12.The resort operates ski lifts and provides accommodation, food and beverage services— activities that are mainly delivered by private operators at the larger resorts. This contributes to the relatively higher costs incurred by Mt Baw Baw.
• Lake Mountain incurred costs of around $48 per winter visitor day. This is largely due to its limited capacity for additional revenue generating activities, as it has no overnight accommodation facilities.

Visitor numbers and length of stay

Figure 10E highlights the total visitor days recorded, and the average length of stay for the four resorts with accommodation over the five-year period.

Figure 10E

Total visitor days compared to average stay

Source: Victorian Auditor-General’s Office.

It shows that Mt Buller and Mt Stirling has continued to attract the largest number of visitor days throughout the five-year period. However in in 2011–12, Mt Hotham and Falls Creek showed marked increases. Mt Baw Baw recorded less than 35 per cent of the number of visitors of the larger resorts over the five-year period. In addition to a shorter length of stay on average, Mt Baw Baw reported the lowest number of visitor days. This is not surprising given its smaller size, although the number of visitors to Mt Baw Baw has increased by 22 per cent since 2008.

While not displayed in the data in Figure 10E, Lake Mountain also recorded fewer visitor days over the five-year period. Visitor days increased to over 105 000 in 2012, with a five‑year average of 100 000 visitor days. These were impacted by the 2009 bushfires and reflect the lack of accommodation options at Lake Mountain.

In the past three years, visitors to Mt Hotham have stayed longer than visitors to any of the other three resorts, closely followed by Falls Creek, and then Mt Buller and Mt Stirling.

Figure 10E shows that the average length of stay at Mt Baw Baw is significantly shorter than that of the other three resorts. However, it is of concern that despite its lower visitor numbers and their shorter length of stay, Mt Baw Baw's expenditure excluding depreciation in 2011–12 was $6.4 million or 75 per cent of the expenditure incurred by the larger ARMBs ($6.2 million in 2010–11). This is mainly due to the resort incurring additional expenditure associated with the operation of ski lifts and the provision of accommodation, food and beverage services. Notwithstanding these additional costs, the disparity in results warrants further scrutiny by Mt Baw Baw ARMB and the Alpine Resorts Co-ordinating Council.

Capacity to meet short-term operating expenditure commitments from revenue from operating activities

In undertaking an analysis of the ability of the ARMBs to meet short-term operating expenditure commitments from revenue from operating activities we recognised that:

• Mt Baw Baw and Lake Mountain, the two smaller ARMBs, receive significant government support funding which effectively enables them to continue to operate
• depreciation is a 'non-cash' adjustment representing the consumption of assets over a long period of time—it is not indicative of the capacity of an entity to meet its short- to medium-term operating commitments from its operations.

Figure 10F sets out the operating results of each of the five ARMBs for 2011–12 and the operating result excluding government support funding and depreciation. The cash operating surplus shows whether each ARMB has the capacity to meet its short-term operating expenditure commitments from its revenue from operating activities. This consideration is important in assessing the underlying health of an entity's operations.

Figure 10F

Cash operating surplus, 2011–12

Source: Victorian Auditor-General’s Office.

The data show that Falls Creek, Mt Hotham, and Mt Buller and Mt Stirling generated sufficient revenue to meet their short-term operating expenditure commitments in 2011‑12, enabling them to fund asset replacement or upgrades, or repay debt. However, Mt Baw Baw and Lake Mountain did not generate sufficient revenue to meet their short-term expenditure commitments. Their cash shortfalls were $2.6 million and $1.1 million respectively.

Figure 10G shows the capacity of the five ARMBs to meet their short-term operating expenditure commitments over the past five years.

Figure 10G

Five-year trend of cash operating surpluses

Source: Victorian Auditor-General’s Office.

It shows that neither Mt Baw Baw nor Lake Mountain has generated a cash surplus from operating activities during the five-year period. It also shows that Lake Mountain's results have improved since replacing its destroyed building assets after the 2009 bushfires.

The remaining three ARMBs have consistently generated cash operating surpluses over the five years, and generate sufficient cash to fund asset replacement and repay debt.

The 2003 Alpine Resorts Reform package required all ARMBs to establish:

• a snow drought reserve to maintain cash flow during poor snow seasons
• a capital improvement fund to finance asset maintenance and replacement.

All ARMBs subsequently established these funds, with Mt Baw Baw and Lake Mountain being the last to do so in 2007.

Over a number of years the operating shortfalls of Mt Baw Baw and Lake Mountain were partially funded by their cash reserves and by ongoing support from government. As at 31 October 2012 the reserves of these two ARMBs had been depleted.

10.3 Financial position

The financial objective for ARMBs should be to generate sufficient surpluses from operations to meet their financial obligations, and to fund asset replacement and acquire new assets. However, their revenue is generally not tied to the value of their asset base as they cannot obtain funds by selling them. The ability of ARMBs to achieve surpluses and be sustainable therefore depends largely on the funding policies established by the Department of Environment and Primary Industries (formerly Department of Sustainability and Environment) and how well the ARMBs manage their operations.

The objective of an ARMB should therefore be to maintain the condition of its infrastructure, while managing levels of debt.

10.3.1 Assets

During 2011–12 the total assets of ARMBs decreased by $6.1 million to $388.5 million (decrease of $30.6 million in 2010–11).

Figure 10H shows the shift in composition of property, plant and equipment values over the past five years.

Figure 10H

Property, plant and equipment composition

Source: Victorian Auditor-General’s Office.

Independent valuations in 2010–11 caused movements in these asset categories. Valuations were not required to be completed in 2011–12, and asset composition remained similar to the prior year.

Property, plant and equipment continues to make up more than 95 per cent of the total asset base of ARMBs.

10.3.2 Liabilities

Liabilities decreased by $0.2 million or 1.4 per cent, to $11.9 million during 2011–12, notwithstanding a $0.8 million or 17.4 per cent decrease in interest bearing liabilities. Four ARMBs had outstanding loans which were partly repaid during the year. Lake Mountain reported the highest level of repayments at $0.5 million or 40.1 per cent of the total loan balance.

Liabilities primarily consist of payables—employee benefits provisions and interest bearing liabilities making up 38 per cent, 22 per cent and 20 per cent respectively.

Recommendations

1. That Lake Mountain and Mt Baw Baw Alpine Resort Management Boards should continue to develop strategies to attract greater visitor numbers.
2. That Mt Baw Baw Alpine Resort Management Board should identify the reasons leading to shorter length of stay by visitors and develop strategies to address this.

11.1 Introduction

To be financially sustainable, entities need the capacity to meet their current and future expenditure as it falls due. They must also be able to absorb foreseeable changes and financial risks as they materialise.

In this chapter we provide insight into the financial sustainability of the five Alpine Resort Management Boards (ARMB) through analysing the trends in each of five financial sustainability indicators over a five-year period. The five indicators analysed are:

• underlying result
• liquidity
• debt-to-equity
• self-financing
• capital replacement.

Appendix D describes the sustainability indicators and risk-assessment criteria used in this report.

To form a definitive view of any entity’s financial sustainability, a holistic analysis that moves beyond financial indicators would be required, including an assessment of the entity’s operations and the regulatory environment in which the entity operates. These additional considerations are not examined in this report.

11.2 Financial sustainability

11.2.1 Overall assessment

The sector’s overall financial sustainability risk is assessed as low. However, the financial sustainability risk for both Lake Mountain and Mt Baw Baw is high.

Figure 11A summarises our financial sustainability risk assessment results for the past two years.

Figure 11A

Two-year financial sustainability risk assessment

Source: Victorian Auditor-General’s Office.

The data show that the financial sustainability risk for Mt Baw Baw and Mt Hotham increased in 2012, and the risk for Lake Mountain stayed high.

Mt Hotham was assessed as having medium financial sustainability risk in 2011–12 as a result of its poor capital replacement indicator.

Figure 11B shows that the five-year sustainability assessment for ARMBs since 2007–08 has deteriorated. In 2011–12 two ARMBs were assessed as having a high sustainability risk compared to one in 2007–08.

Figure 11B

Five-year financial sustainability risk assessment

Source: Victorian Auditor-General’s Office.

11.2.2 Summary of trends in risk assessments over the five‑year period

When the risk assessments for each indicator are analysed individually over the five years to 2011–12, they show the following trends:

• underlying result—the number of ARMBs in the high-risk category has doubled
• liquidity—the number of ARMBs in the low-risk category has remained stable, however, one entity has moved into the high-risk category (none in 2007–08)
• debt-to-equity—the number of ARMBs in the low-risk category has remained stable
• self-financing—the number of ARMBs in the high-risk category has decreased from three to one, although three are now in the medium-risk category (none in 2007–08)
• capital replacement—the number of ARMBs in the high-risk category has increased from two to three.

In summary, the trend shows that the overall financial sustainability position of the ARMB sector has deteriorated over the past five years. Poor operating results have led to a decrease in capital investment, and self-financing is becoming a problem for more entities in the sector.

11.2.3 Analysis of trends in sustainability indicators across the five-year period

To further understand the results we analysed the five-year data for the five indicators for each of the ARMBs. The relevant data are reproduced in Appendix D.

Figure 11C shows the mean sustainability risk assessments for the five ARMBs, over the five years from 2007–08 to 2011–12. High-risk results are shown in red, medium risk in orange, and low risk in green.

Figure 11C

Five-year mean financial sustainability risk assessment, 2007–08 to 2011–12

Source: Victorian Auditor-General’s Office.

Over the five years Mt Baw Baw and Lake Mountain have both averaged low liquidity levels and operating deficits. The overall financial sustainability risk assessment for both is high.

The results illustrate the limited capacity of Mt Baw Baw and Lake Mountain to continue as a going concern without operational support funding from government.

Mt Baw Baw

The overall sustainability risk assessment for Mt Baw Baw increased from medium to high in 2011–12. This was mainly due to a 74 per cent reduction in government support funding, due to significant financial support in 2010–11. During the five-year period its expenditure increased by 56.1 per cent, while its revenue grew by 12.5 per cent.

Its assets are depreciating at a greater rate than they are being replaced, as shown by the capital replacement indicator.

Lake Mountain

In 2011–12 Lake Mountain's own-source revenue increased by $1.2 million (66 per cent), essentially due to the longer snow season and improved facilities following rebuilding after the 2009 bushfires. The resort also managed to contain its labour costs, despite the additional labour requirements of the extended snow season.

However, over the five years, Lake Mountain averaged a deficit of 25.5 per cent. Its financial sustainability worsened in 2011–12, mainly due to a deteriorating underlying result caused by reduced government support funding.

11.2.4 Revised funding and operating arrangements

Under the Alpine Resorts (Management) Act 1997 the ARMBs are fully accountable for their financial management and performance. However, the Department of Environment and Primary Industries (DEPI)—formerly Department of Sustainability and Environment—has committed to provide further operational funding to Mt Baw Baw and Lake Mountain. Both ARMBs received a letter of support during 2012, which indicated that DEPI would meet the operational expenditure commitments of the two ARMBs for 2013. The provision of funding support by DEPI blurs the accountability of the individual ARMBs for their financial performance.

Notwithstanding this, as part of a strategy to investigate and assess possible alternative operating models, in late 2012 Lake Mountain ARMB resolved to outsource its operations for 12 months. An external contractor has been appointed to deliver services and products at the resort during 2013. We will review and report on the outcome of this arrangement in future reports.

11.3 Five-year trend analysis

This section provides an analysis and commentary on the trends for each indicator for the past five years. The indicators reflect each entity’s funding and expenditure policies, and identify whether these policies are sustainable.

Financial sustainability should be viewed from both a short- and long-term perspective. The shorter-term indicators—the underlying result and liquidity—focus on an entity’s ability to maintain a positive operating cash flow and adequate cash holdings, and to generate an operating surplus over time.

The longer-term indicators—debt-to-equity, self-financing and capital replacement—identify whether adequate funding is available to repay debt, replace assets to maintain the quality of service delivery, and to meet community expectations and the demand for services.

11.3.1 Underlying result

Two of the five ARMBs recorded an operating deficit in 2011–12, after all five recorded surpluses in the prior year.

Figure 11D

Underlying result risk assessment

Source: Victorian Auditor-General’s Office.

Under the funding model, both of the smaller ARMBs will continue to operate with minimal cash as DEPI meets their operational expenditure commitments as needed. Should the deficits continue, however, spending on capital required to generate additional income may be deferred or abandoned, and enhance concerns about the long-term viability of Lake Mountain and Mt Baw Baw.

11.3.2 Liquidity

The overall ability of ARMBs to repay short-term liabilities remained stable from 2008‑09 to 2010–11. However, the liquidity assessment for both Lake Mountain and Mt Baw Baw changed during 2011–12 from high to medium risk, and from low to high risk, respectively.

Lake Mountain's liquidity ratio improved slightly in 2011–12, due to the repayment of finance leases held in respect of vehicles.

Figure 11E

Liquidity risk assessment

Source: Victorian Auditor-General’s Office.

Lake Mountain and Mt Baw Baw, having depleted their cash reserves as at 31 October 2012, have limited current assets to meet their expenditure and liability commitments, and are reliant on DEPI to do so.

11.3.3 Debt-to-equity

Overall debt for ARMBs decreased by $0.8 million (17.4 per cent) during 2011–12 to $3.8 million. The sector generally has a low level of debt, with all ARMBs in the low-risk category for the debt-to-equity indicator for the past five years.

A low debt-to-equity indicator shows that an entity is able to comfortably meet its repayment obligations from own-source revenues.

As Lake Mountain and Mt Baw Baw rely on support funding from government to meet their expenditure commitments, their ability to repay debt is also dependent on this funding.

Figure 11F shows that the average debt-to-equity indicator for all ARMBs reduced between 2007–08 and 2011–12. The risk remains low for the sector as a whole.

Figure 11F

Average debt-to-equity indicator

Source: Victorian Auditor-General’s Office.

11.3.4 Self-financing

Mt Baw Baw recorded a high self-financing risk for 2011–12. Only Mt Hotham was assessed as low risk.

Figure 11G

Self-financing risk assessment

Source: Victorian Auditor-General’s Office.

A low self-financing risk indicates than an entity can replace its assets over the long term using cash generated from its own operations. High risk suggests that an entity's capacity to fund its capital program is limited, and raises long-term financial sustainability issues as assets may not be able to be replaced as required.

The deterioration in this indicator across the sector since 2009–10 suggests action is needed to address the capacity of ARMBs to generate greater revenue.

11.3.5 Capital replacement

Figure 11H shows that the capital replacement risk result for ARMBs deteriorated significantly in 2011­–12, with only one ARMB retaining a low-risk rating.

Alpine resort activities and services are capital intensive and heavily reliant on infrastructure to generate revenue. The capital replacement indicator is a long-term measure of a resort’s ability to replace these assets.

Figure 11H

Capital replacement risk assessment

Source: Victorian Auditor-General’s Office.

The 2011–12 assessment reflects the reduction in capital spending across the sector during the year. However, as the indicator is a long-term indicator of an entity's financial sustainability, a low level of capital investment in any particular year is not concerning.

Nevertheless, when considered in light of the poor self-financing indicators, it raises concerns about the sector's ability to generate sufficient cash from operations over the long term, to replace assets as required. This applies particularly to Mt Baw Baw and Lake Mountain.

Caution is required when interpreting these results, as annual spending on assets includes new and expanded facilities, in addition to existing facilities. As a result, the true level of spending on asset renewal is usually less than indicated.

Recommendation

1. The Alpine Resorts Co-ordinating Council together with Lake Mountain and Mt Baw Baw Alpine Resort Management Boards should implement revised operating arrangements to improve their financial viability.

Financial report preparation

Our assessment of financial reporting performance against better practice was also based on criteria outlined in Figure C3.

Figure C3

Financial report preparation better practice

Source: Victorian Auditor-General’s Office.

Auditor-General's response to Mt Baw Baw Alpine Resort Management Board

Increase in expenditure

Since 2008 Mt Baw Baw's expenditure has increased by $2.7 million or 56.1 per cent. However this increase was only partly due to higher depreciation and electricity costs. These costs increased by $1.0 million over the past five years, contributing 37 per cent of the total increase in expenditure. Increases in other operating costs have been disproportionate to revenue growth.