Universities: Results of the 2013 Audits

This report covers the results of the 2013 financial audits of 64 entities, comprising eight universities and the 56 entities they control.

Clear audit opinions were issued on the financial reports of 59 entities. Two qualified opinions were issued, relating to the financial reports of Deakin University and The University of Melbourne, as a result of their accounting treatments of grants received in 2013. Three entities are yet to finalise their financial reports.

The eight universities generated a net surplus of $381.7 million in 2013, a decrease of $73 million from 2012. With continued operating surpluses and low levels of debt, the university sector remains in a relatively healthy financial position. However, active management is required given that operating surpluses have continued their decline since 2009.

While student revenue and the number of students enrolled in higher education continue to increase, they mask a significant decline in domestic and international vocational education and training student numbers during 2013.

Three universities were assessed as having a high risk to self-financing in 2013. The remaining five were assessed as having a medium risk. This indicates that some universities may be unable to fund asset replacement in future periods from cash generated from their operations.

In 2013 Monash University signed agreements with a private sector entity to assume control of its South African operations. From 2001 to 2013 Monash University provided $101.8 million in loan funding to its subsidiary entities associated with the South Africa campus. Monash University has incurred a net loss of $60.5 million in relation to the operation and disposal of this subsidiary, including debt write‑offs of $44.7 million.

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Ordered to be printed

VICTORIAN GOVERNMENT PRINTER May 2014

PP No 327, Session 2010–14

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John Doyle Auditor-General

Audit team Tim Loughnan—Sector Director Michael Almond—Team Leader Matthew Graver—Audit Senior Ryan Ackland—Auditor Ellen Holland—Engagement Quality Control Reviewer

Auditor-General's comments

Victoria’s universities deliver post-secondary educational services to both domestic and international students. Operating in an environment where they must compete for student enrolments, universities are tasked with delivering high-quality education but also managing their resources in a financially prudent manner.

The university sector has consistently delivered healthy financial results, and 2013 was no exception. Despite declining government funding to the sector, each of the eight universities generated an operating surplus in 2013. The total sector surplus of $381.7 million continued a strong trend for the past few years.

With low debt levels and significant asset bases, universities are well positioned to cope with changes in the tertiary education sector. They also generate significant amounts from student fees and other educational activities, which now represent a larger proportion of their income than government funding.

There are a number of challenges facing the sector, however. Expenditure growth outstripped revenue growth in 2013, and a number of financial indictors deteriorated. For example, the self-financing indicator, which is a measure of an entity’s ability to generate cash from its operations to fund asset renewal, declined sharply in 2013.

Capital expenditure also declined, due to a wind-down in activity after significant capital works across the sector in recent years. These recently completed projects see universities well placed to cope with student demand, and illustrate a commitment to improved services and growth in the sector. It is important that capital restitution is prioritised, and that buildings and major assets continue to be periodically renewed. I noted that Monash University relinquished control of its operations in South Africa during 2013, after $101.8 million was contributed to this overseas campus over the past decade. An overall loss of $60.5 million was incurred in relation to the operation and disposal of this campus, highlighting one of the risks facing universities with global aspirations.

As with any government-owned entity, Victoria’s universities are required to implement processes to ensure value for money and appropriateness of expenditure. My office examined procurement practices across each of the universities, as well as reviewing the policies and procedures in place to regulate key financial activities. These practices and policies were generally considered to be sound, although improvement can be made in some areas.

Sound financial reporting frameworks are essential to ensuring quality of the final product. My audits identified gaps in the financial reporting processes at a number of universities. I am concerned that a number of Recommendations regarding the quality of financial reporting have been made over the past few years, with little improvement in the outcomes achieved. Accordingly, in our future reports to Parliament, we intend to name the universities that do not take appropriate steps to improve their practices.

John Doyle

Auditor-General

May 2014

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This report covers the results of the 2013 financial audits of 64 entities, comprising eight universities and the 56 entities they control.

Historically the results of audits of universities and technical and further education (TAFE) institutes are found in one report, the Tertiary Education and Other Entities: Results of Audits report. This year, however, for the first time the results will be presented in separate reports: Universities: Results of the 2013 Audits and Technical and Further Education Institutes: Results of the 2013 Audits.

This approach recognises the significant changes over recent years in the higher education and vocational training sectors. There have been changes to the market settings in both sectors, changes to legislation for both TAFEs and universities, and increased competition between public and private sector providers and between higher education and vocational training providers—with further changes signalled in the higher education sector. This means that TAFEs and universities are operating in increasingly disparate environments. The entities in each sector are subject to different pressures on their operations. By reporting separately, we aim to provide the reader with greater clarity about the performance of entities in the two sectors.

Clear audit opinions were issued on the financial reports of 59 university entities. The two qualified opinions relate to the financial reports of Deakin University and The University of Melbourne, as a result of their accounting treatment of grants received in 2013. The financial reports of three entities are yet to be finalised.

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Figure 1B outlines the structure of this report.

Figure 1B

Report structure

Source: Victorian Auditor-General's Office.

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The quality of an entity's financial reporting can be measured in part by the timeliness and accuracy of the preparation and finalisation of its financial report, as well as against better practice criteria.

Appendix B details the legislative and reporting framework for the 64 entities.

2.3.1 Accuracy

The frequency and size of errors in the draft financial reports submitted to audit are direct measures of the accuracy of those reports. Ideally, there should be no errors or adjustments required as a result of an audit.

Our expectation is that all entities will adjust any errors identified during an audit, other than those errors that are clearly trivial or clearly inconsequential to the financial report, as defined under the auditing standards.

The public is entitled to expect that any financial reports that bear the Auditor‑General's opinion are accurate and of the highest possible quality. Therefore, all errors identified during an audit should be adjusted, other than those that are clearly trivial.

Material adjustments

When our staff detect errors in the draft financial reports they are raised with management. Material quantitative and/or qualitative errors need to be corrected before an unqualified audit opinion can be issued.

The entity itself may also change its draft financial reports after submitting them to audit if their quality assurance procedures identify that the draft information is incorrect or incomplete.

In relation to the 2013 audits, 12 material financial balance adjustments were made compared to seven in the prior year. The adjustments related mainly to errors associated with the preparation of accrual financial statements at year end. The adjustments resulted in changes to the net result and/or the net asset position of entities.

In addition to the financial balance adjustments, there were two qualitative disclosure errors that required adjustment in 2013 (six in 2012). These related to the current/non‑current nature of annual leave entitlements and debit amounts included in trade creditor balances.

All material errors were adjusted prior to the completion of the financial reports.

2.3.2 Timeliness

Timely financial reporting is key to providing accountability to stakeholders and enables informed decision-making. The later reports are produced and published after year end, the less useful they are.

The Financial Management Act 1994 requires an entity to submit its audited annual report to its Minister within 12 weeks of the end of financial year. Its annual report should be tabled in Parliament within four months of the end of financial year.

In 2013, 47 entities completed their financial reports within the legislated time frames. The remaining 17 entities failed to finalise their financial reports within 12 weeks of their applicable balance date.

Appendix B sets out the dates the 2013 financial reports were finalised.

The average time taken to finalise the university sector's 2013 financial reports was 10.5 weeks.

2.3.3 Better practice

An assessment of the quality of financial reporting processes of the universities was conducted against better practice criteria, detailed in Appendix C, using the following scale:

• no existence—process 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 efficient and effective processes.

The results are summarised in Figure 2A.

Figure 2A

Results of assessment of report preparation processes against better practice elements

Source: Victorian Auditor-General's Office.

Security around sensitive information, financial report preparation plans and financial compliance reviews were found to be strong, with all universities' results assessed as either developed or better practice. There is, however, opportunity for further improvement in relation to most better practice elements, particularly:

• analytical reviews
• quality assurance
• materiality assessments.

The results for shell financial statements, competence of staff, monthly financial reporting, supporting documentation, quality assurance and materiality assessments deteriorated in 2013. The deterioration was most evident for two universities.

Assessments against better practice elements have been reported over a number of years. Nevertheless, some entities have not acted to take-up the range of elements which are designed to improve the efficiency and effectiveness of their financial report preparation. In our future reports to Parliament, we intend to name the universities that do not take appropriate steps to improve their practices.

Recommendations

1. That universities that do not demonstrate better practice in report preparation act immediately to improve their financial reporting processes in 2014.
2. That universities and their controlled entities act to ensure their financial reports meet legislated reporting time lines.

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3.2.1 Financial performance

The eight universities collectively generated net surpluses of $381.7 million in 2013, a decrease of $73 million or 16 per cent over the prior year. All universities recorded surpluses in 2013 (seven in 2012).

Despite the reduction in the overall surplus, most universities are still well placed to fund service delivery improvements and meet their operating expenditure commitments.

Figure 3A compares the net results for 2013 and 2012 for each university.

Figure 3A

Net surplus/(deficit) by university, 2012 and 2013

(a) Formerly University of Ballarat

Source: Victorian Auditor-General's Office.

Victoria University reported a surplus of $5.6 million, compared with a $6.5 million deficit in 2012, after a $55.8 million (16.7 per cent) decrease in employee costs following strategic downsizing in 2012.

Five of the eight universities improved their result in 2013, with Swinburne and Victoria Universities achieving overall operating cost savings compared to 2012.

Revenue

Total revenue is represented by government funding, student fee revenue, investment revenue and various other fees and charges. It excludes the impact of the deferred government superannuation contribution, which was offset by an equivalent expense.

In 2013, the eight universities generated revenue of $7.1 billion, an increase of $176.3 million from 2012. The increase was driven by a $294 million increase in student fee revenue and a $59 million increase in other revenue. The increases were offset by a $225 million decrease in government funding (7.1 per cent).

The composition of operating revenue for 2013 is presented in Figure 3B.

Figure 3B

Revenue composition, 2013

Source: Victorian Auditor-General's Office.

During 2013 the composition of revenue changed with a reduction in the proportion from government grants (45 per cent in 2012) and an increase in the proportion generated from student fees (42 per cent in 2012).

Trends in student fee revenue

Student fee revenue includes amounts provided by the Commonwealth Government to meet debts for students participating in the HECS-HELP and FEE-HELP schemes. Student fees comprised 42 per cent of total revenue in 2013.

Overall student fee revenue grew by $294 million or 10.9 per cent to $3.0 billion in 2013. Significant increases were reported at:

• La Trobe University—increase of $28.6 million (12.2 per cent)
• Royal Melbourne Institute of Technology (RMIT) University—increase of $62 million (14.0 per cent)
• The University of Melbourne—increase of $88.7 million (15.5 per cent)
• Deakin University—increase of $36.5 million (10.9percent).

Student fee revenue grew less than 10 per cent in 2013 at the remaining four universities.

The overall growth was mainly due to increases in course fees and a net 3.2 per cent increase in the number of students enrolled in higher education, including a 7.2 per cent increase in new students.

Despite the growth in student revenue and the number of higher education students, total student numbers—including vocational education and training (VET), higher education, domestic and international students—declined to around 361 500 in 2013 (from 370 200 in 2012).

Most notably, around 17 per cent of students in 2013 were VET students, compared to 23 per cent in 2012—a decline of 18 000 students or 22.2 per cent in 2013, including a 14.7 per cent decrease in new students. Changes to the funding model, where government subsidies vary depending on the course, have seen universities increase the cost to students for some VET courses.

International students

International student fees represented 46.7 per cent of total student fee revenue in 2013, compared to 50 per cent in 2012.

In 2013 international student numbers showed:

• a 3.1 percent decrease in higher education students, with 63 700 in total
• an 8.9 percent decrease in VET student numbers at dual-sector universities to 3 241 in 2013
• new student commencements were largely consistent with 2012 numbers.

Nevertheless, over the past five years, international student fee revenue has increased by $365 million (36 per cent) to $1.4 billion, contributing to the sector's generally strong surpluses. The number of international students studying higher education courses has remained relatively stable over the past five years. The number of international students studying VET courses at dual-sector universities has declined, however, by 46.7 per cent since 2009.

Figure 3C presents the number of onshore international student commencements at universities in 2013 and 2012.

Figure 3C

Onshore international new student commencements, 2012 and 2013

Source: Victorian Auditor-General's Office.

International students come from more than 100 countries. The six most represented countries are China, Malaysia, India, Indonesia, Vietnam and Singapore. Of the 'other' the most significant source country is the United States, representing less than 5 per cent of new student commencements.

Domestic students

Domestic student fees grew by $245.5 million or 18.3 per cent in 2013 and represented 53.3 per cent of total student fee revenue. Trends in domestic student numbers in 2013 included:

• an increase in higher education students, with total student numbers up 5.1 percent to 234 400
• a 9 300 (10 per cent) increase in higher education student commencements
• a 22.8 per cent decrease in VET course students at dual-sector universities, with total student numbers down to 60 200.

Expenses

In 2013, universities incurred expenditure of $6.7 billion, $247.1 million (3.8 per cent) more than in the prior year. This was driven by a $31.2 million (18.8 per cent) increase in repairs and maintenance and a $22.7 million (5.3 per cent) increase in depreciation and amortisation. Other operating costs also increased by $200.7 million in 2013.

The composition of expenditure is presented in Figure 3D.

Figure 3D

Expenditure composition, 2013

Source: Victorian Auditor-General's Office.

Other operating costs included:

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

3.3 Financial position

Universities carried land and buildings representing 69.6 per cent of their total assets on their balance sheets at 31 December 2013. Their revenue base is not tied to the value of their assets, however, and most of their assets cannot be readily sold to obtain funds.

The objective for a university should be to maintain and improve its asset base and related service provision, while managing its level of debt. Across the sector, there is evidence that this has been achieved. The significant capital works which were in progress over the last three years came to fruition in 2013, and the assets delivered are now in use.

At the same time, the level of debt decreased by 9.9 per cent in 2013 due to two universities repaying borrowings previously used to fund construction of fixed assets now in service.

3.3.1 Assets

During 2013, the total assets increased by $100.4 million (0.6 per cent) to $16.3 billion. This was mainly due to increases of $273 million in property, plant and equipment and $224 million in financial assets, offset by a $468.7 million decrease in deferred government superannuation contributions.

The increase was mainly driven by construction of new buildings ($661 million), offset by the depreciation expense and independent revaluations at some universities. Revaluation movements included:

• Monash University—$116.6 million decrease mainly relates to land and buildings at the Gippsland campus (further analysis is presented later in this Part)
• Deakin University—$71.5 million increase in land and buildings
• The University of Melbourne—$25.4 million increase in artworks.

The increase in financial assets was due to universities investing their operating surpluses, as well as achieving some holding gains from increases in market values. The composition of university assets was consistent with that of the prior year, with property, plant and equipment continuing to represent the majority of total assets.

3.3.2 Liabilities

At 31 December 2013 the total value of liabilities was $3.9 billion, $412.9 million (9.5 per cent) less than in 2012.

The deferred superannuation liability decreased by 27.8 per cent or $468.7 million during 2013 and at year end represented 30.9 per cent of total liabilities (39 per cent in 2012). 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. The decrease was driven by actuarial assumptions, including adjustments to the applicable discount rate and reducing the rate of contributions tax from 15 per cent to nil.

The decrease was matched by a decrease in the deferred superannuation receivable from government, resulting in no impact on net assets or net result.

Interest-bearing liabilities decreased by $77.8 million (9.9 per cent) during 2013. This was mainly due to a reduction in borrowings for RMIT ($39.6 million) and Monash ($19.0 million) universities. In prior years, borrowings were used to fund the construction of new and expanded building facilities. These projects are now coming to completion and the borrowings are being repaid progressively.

3.4 Monash University's South African campus

3.4.1 Background

Monash University established an overseas campus in South Africa in 2001. It created three subsidiary companies, as the legal vehicles:

• Monash Property South Africa (MPSA)—holding the campus infrastructure and assets of the South Africa campus and operating a rental/landlord arrangement with Monash South Africa (MSA)
• MSA—a private higher education institution and the operator of the campus, incorporated in 2004
• Monash Educational Enterprises (MEE)—the original higher education institution and operator of the campus.

Between 2001 and 2012, Monash University provided around $101.8 million in loans to the subsidiaries. The subsidiaries repaid $2.6 million during the same period.

Figure 3E presents the net results of each of the three entities from their inception until 2012.

Figure 3E

Net results for Monash University's South African subsidiaries, 2001–12

Note: Information presented is up to 2012, due to significant developments in 2013, which are discussed below.

Source: Victorian Auditor-General's Office.

Figure 3E shows that MPSA made small losses until 2010, after which it generated profits. MSA consistently generated losses since its establishment in 2004. MEE made significant losses until its operations were scaled down in 2005 and was dormant from 2006.

The loans provided by Monash University during the period, enabled the subsidiaries to continue to operate despite their poor operating results.

3.4.2 Current year developments

Monash South Africa

On 23 August 2013, Monash University signed a partnership agreement with a private sector entity aimed at accelerating the development of the South African campus and the development of education in Sub-Saharan Africa. To effect the partnership, Monash created a new company GNUCO Pty Ltd (GNUCO) which became the owner of MSA. Under the agreement Monash University sold 25 per cent of its ownership in GNUCO and subsequently on 14 February 2014 a further 50 per cent was transferred for a total initial consideration of $10 million.

Notwithstanding the transfer of majority ownership, the partnership arrangement still requires joint decision-making by the respective parties on major matters affecting campus operations.

The terms of the agreement provide that a deferred performance consideration payment of up to $12.5 million may be payable to Monash University by the private sector entity, depending on MSA's 2017 performance. The deferred consideration will be calculated based on the company's 2017 earnings before interest, tax and depreciation. Figure 3F sets out the relevant ownership details.

Figure 3F

GNUCO Pty Ltd shareholding and directorship

	Number of shares		Number of directors
	23 Aug 2013	14 Feb 2014	23 Aug 2013	14 Feb 2014
Monash University	75	25	3	3
Private sector entity	25	75	2	5
Total	100	100	5	8

Source: Victorian Auditor-General's Office.

Monash Property South Africa

Of the three subsidiaries associated with the South Africa campus, only MPSA holds contributed equity from Monash University. This amounts to $11.6 million and comprises:

• $2 million in shares issued in 2001
• $4 million of debt converted to equity in 2006
• $5.6 million of debt converted to equity in 2012.

At 31 December 2012, MPSA's land and buildings were valued at $33.1 million, and it owed $17.8 million in loans to Monash University. On 23 August 2013, the private sector entity purchased MPSA's land and buildings for $30 million.

The land and buildings were revalued to the fair value of the receivable, and MPSA recognised a $1.5 million decrement in its asset revaluation reserve. A foreign exchange movement of $1.6 million was also recognised at the date of sale.

The sale proceeds of $30 million are intended to be used by MPSA to repay Monash University's loan of $17.1 million and contributed capital of $11.6 million. The directors then intend to wind down MPSA's operations and leave the company dormant.

The sale proceeds, together with compound interest on the outstanding amount calculated at 6.75 per cent, are to be paid to MPSA by the private sector entity over four years. The payments were to commence with $5 million in January 2014, followed by $1 million every year thereafter. The balance is payable on 1 January 2019. As at 31 December 2013, none of this amount had been paid to MPSA by the private sector entity.

Monash Educational Enterprises

MEE, the original higher education institution and operator of the campus, has been dormant since 2006, when MSA took over its provision of student educational services. In 2005, MEE owed Monash University $37.6 million in loans. From 2005 to 2013, the loans decreased due to the strengthening of the Australian dollar against the South African Rand, and in 2013 Monash University forgave the outstanding loan of $19.6 million.

3.4.3 Conclusion

From 2001 to 2013 Monash University provided $101.8 million in loans to the three companies associated with its South African campus. During that period $2.6 million was repaid. The companies reported consistent operating deficits, and Monash University wrote off debt balances of $44.7 million.

Arrangements entered into with the private sector entity during 2013 should enable Monash University to recoup $17.1 million of loans advanced to MPSA and receive $10 million as consideration for MSA's operations.

The overall net loss incurred by Monash University in relation to its South African venture from 2001 to 2013 is $60.5 million, inclusive of foreign exchange differences, sale of land and buildings of $30 million and cash consideration of $10 million.

3.5 Subsequent event—transfer of Monash University's Gippsland campus

On 1 January 2014, Monash University transferred its operations at its Gippsland campus for nil consideration to Federation University and implemented arrangements with Federation University for teaching its continuing students.

The sale resulted in a $6.1 million impairment of the associated assets in Monash University's financial report, and a write-back of $108.9 million in its asset revaluation reserve. Employee provisions for the campus staff were converted to a restructuring provision, representing the staged future payout to Federation University in respect of these entitlements.

A further restructuring provision of $19.8 million was recognised for ongoing financial support of the campus, over a two-year transition period.

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

In this Part insight is provided into the financial sustainability of universities through analysis of five financial sustainability indicators over a five-year period. 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.

4.2 Financial sustainability risk assessment

4.2.1 Overall assessment

Overall, the financial sustainability risk assessment for the university sector showed some deterioration in 2013.

Figure 4A shows that the number of universities with a low financial sustainability risk reduced from six in 2012 to five in 2013. The number of universities with a medium-risk rating increased to two in 2013 from one in 2012.

Figure 4A
Two-year financial sustainability risk assessment

Entity	2013	2012
Deakin University	Low	Low
Federation University	Medium	Low
La Trobe University	Low	Low
Monash University	High	High
Royal Melbourne Institute of Technology University	Low	Low
Swinburne University	Low	Low
The University of Melbourne	Low	Low
Victoria University	Medium	Medium
Total	8	8

Source: Victorian Auditor-General's Office.

Federation University and Victoria University were assessed as medium risk due to poor self-financing ratios. Monash University was again assessed as high risk due to low liquidity. Monash University, however, had financial assets of $281.8 million that were 'available for sale' which could be converted to cash if required.

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

When the risk assessments for each indicator are analysed they show the following trends over the five years to 2013:

• underlying result—all universities remain in the low-risk category
• liquidity—the position is unchanged, with one university in the high-risk category and one in the medium-risk category
• debt-to-equity—all universities remain in the low-risk category
• self-financing—the position has deteriorated, with three universities in the high‑risk category and none in the low-risk category
• capital replacement—the position has deteriorated, with two universities in the medium-risk category.

Universities have generally recorded poor self-financing indicators, but this position has deteriorated and performance against some of the other indicators has also declined. The trend shows, however, that with generally strong operating surpluses coupled with low levels of debt, overall the university sector remains in a healthy financial position.

4.2.3 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, and the basis for calculating the indicators, are reproduced in Appendix D.

All universities have recorded positive underlying result indicators over the past five years, with one exception—Victoria University in 2012, due to high redundancy costs. The magnitude of the surpluses has declined at seven universities over the past five years, with an average surplus of 5.2 per cent in 2013, down from an average of 9.6 per cent in 2009. Only The University of Melbourne reported an improved result in 2013 compared to 2009.

Monash University and the Royal Melbourne Institute of Technology (RMIT) University have consistently recorded lower liquidity indicator results than the sector average. Monash University, however, had financial assets of $281.8 million available for sale at 31 December 2013. While these assets are not included in the calculation of liquidity, they would be available for conversion to cash if required, thereby mitigating the risk of having insufficient funds should debts fall due.

For the remaining six universities, current assets exceeded their short‑term liabilities, meaning sufficient cash was available to fund their day-to-day activities.

Debt-to-equity indicator results are not currently a concern for the sector, with the risk for each university consistently rated as low for this indicator over the past five years.

Universities have generally been in a high- or medium-risk self‑financing position since 2009. Five have failed to record a single risk assessment of low during the five-year period. Some may not be able to fund asset replacement with the cash they generate from operating activities and in the future may need to borrow to replace assets, or reduce asset renewal.

Capital replacement results have declined over the past year. Two universities were assessed as medium risk in 2013, indicating that assets were being consumed at a faster rate, or similar rate, than they were being renewed.

This result needs to be considered in light of the substantial capital works undertaken by Monash University, RMIT and Deakin University and across the sector in recent years. As a result, fewer assets were renewed in 2013, while depreciation increased due to the greater asset base.

4.3 Five-year trend analysis

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

4.3.1 Underlying result

Figure 4B shows the deterioration in the average underlying result for the university sector over the past three years.

Figure 4B
Average underlying result

Source: Victorian Auditor-General's Office.

Eight universities generated an operating surplus in 2013 (seven in 2012), with all universities assessed as low risk, notwithstanding a decline in average underlying results. All universities generated an operating surplus in each of the past five years, with the exception of Victoria University in 2012. The rate of decline in underlying results accelerated between 2012 and 2013.

4.3.2 Liquidity

Figure 4C shows that the results of risk assessments of liquidity were stable in 2013.

Figure 4C
Liquidity risk assessment

Source: Victorian Auditor-General's Office.

Six universities have had a low liquidity risk for each of the five years. Monash University has been assessed as high risk and RMIT was assessed as medium risk in each of the past four years. Both of these ratings are consistent with their performance over the past four years. Monash University has financial assets which are accessible for conversion to cash to meet any unexpected short-term commitments, if required.

4.3.3 Debt-to-equity

All universities were assessed as low risk for the five-year period, indicating that they can comfortably meet their debt repayment obligations. Average debt for the sector remained at less than 6 per cent for the period.

4.3.4 Self-financing

Figure 4D shows that the self-financing risk of the majority of universities has been assessed as medium over the past five years but was relatively stable until 2013, when it declined significantly.

It is particularly concerning that while the proportion of universities in the medium-risk category has remained stable over the five years, there was a significant shift from low risk to high risk during 2013.

Figure 4D
Self-financing risk assessment

Source: Victorian Auditor-General's Office.

No university reported an improved result for this indicator in 2013 compared to 2012, while the results of three deteriorated. Figure 4E presents the self-financing risk assessments for each of the universities for the past two years.

Figure 4E
Two-year self-financing risk assessment

Entity	2013	2012
Deakin University	Medium	Low
Federation University	High	Low
La Trobe University	Medium	Medium
Monash University	High	Medium
RMIT University	Medium	Medium
Swinburne University	Medium	Medium
The University of Melbourne	Medium	Medium
Victoria University	High	High
Total	8	8

Source: Victorian Auditor-General's Office.

Each of the eight universities had a self-financing risk of high or medium in 2013, indicating that they may be unable to fund asset replacement from cash generated from their operations. If these trends continue, some universities may place greater reliance on government funding for asset renewal and replacement.

4.3.5 Capital replacement

Figure 4F shows that 75 per cent or six universities were assessed as having a low capital replacement risk in 2013.

Figure 4F
Capital replacement risk assessment

Source: Victorian Auditor-General's Office.

Capital spending has generally exceeded the aggregate depreciation expense over the five-year period. This suggests that asset-related expenditure is generally outstripping asset consumption throughout the sector. This is mainly the result of substantial building and redevelopment works that have been undertaken across the sector over the past three years.

Total expenditure on university capital programs in 2013 decreased by $251.8 million (23.8 per cent), while depreciation increased by $22.7 million (5.3 per cent). This resulted in a decline in the 2013 capital replacement indicator. The higher level of depreciation was in line with the commencement of depreciation on new building assets completed in late 2012 or early 2013.

Victoria University and RMIT were assessed as medium risk in 2013, mainly flowing from the capitalisation of substantial new building works in recent years and the resulting increase in depreciation charges.

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Figure A1
VAGO reports on the results of the 2012–13 financial audits

Source: Victorian Auditor-General's Office.

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Universities and associated entities

(a) Formerly University of Ballarat.

Note: 'FMA' refers to Financial Management Act 1994.

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The financial audit framework applied in the conduct of the 2013 audits covered by this report is set out in Figure C1.

Figure C1
Financial audit framework

Source: Victorian Auditor-General's Office.

Internal control framework

Figure C2 identifies the main components of an effective internal control framework.

Figure C2 Components of an internal control framework

Source: Victorian Auditor-General's Office.

In the diagram:

• the control environment provides the fundamental discipline and structure for the controls and includes governance and management functions and the attitudes, awareness, and actions of those charged with governance and management of an entity
• risk management involves identifying, analysing and mitigating risks
• monitoring of controls involves observing the internal controls in practice and assessing their effectiveness
• control activities are policies, procedures and practices prescribed by management to help meet an entity's objectives
• information and communication involves communicating control responsibilities throughout the entity and providing information in a form and time frame that allows officers to discharge their responsibilities.

Financial report preparation

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

Figure C3
Financial report preparation better practice

Source: Victorian Auditor-General's Office, and Australian National Audit Office Better Practice Guide Preparation of Financial Statements by Public Sector Entities, June 2009.

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Source: Victorian Auditor General's Office.

These indicators should be considered collectively, and are more useful when assessed over time as part of a trend analysis. These indicators have been applied to the published financial information of universities for the period from 2009 to 2013.

The analysis of financial sustainability in this report reflects on the position of each individual entity and on the university sector. The financial sustainability indicators used in this report are consistent with those used in previous reports to Parliament, and are indicative of the financial sustainability of universities.

Financial sustainability risk assessment criteria

The financial sustainability of each university has been assessed using the risk criteria outlined in Figure D2.

Figure D2
Financial sustainability indicators – risk assessment criteria

Source: Victorian Auditor-General's Office.

The overall financial sustainability risk assessment has been calculated using the ratings determined for each indicator as outlined in Figure D3.

Figure D3
Overall financial sustainability risk assessment

Source: Victorian Auditor-General's Office.

Financial sustainability trend key:

▲= Improving trend

▼= Deteriorating trend.

Universities

Five-year mean

Source: Victorian Auditor-General's Office.

Underlying result

Source: Victorian Auditor-General's Office.

Liquidity

Source: Victorian Auditor-General's Office.

Debt-to-equity

Source: Victorian Auditor-General's Office.

Self-financing

Source: Victorian Auditor-General's Office.

Capital replacement

Source: Victorian Auditor-General's Office.

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Accountability

Responsibility of public sector entities to achieve their objectives, with regard to reliability of financial reporting, effectiveness and efficiency of operations, compliance with applicable laws, and reporting to interested parties.

Amortisation

The systematic allocation of the depreciable amount of an intangible asset over its expected useful life.

Asset

A resource controlled by an entity as a result of past events, and from which future economic benefits are expected to flow to the entity.

Asset useful life

An asset's useful life is the period over which it is expected to provide the entity with economic benefits. Depending on the nature of the asset, the useful life can be expressed in terms of time or output.

Audit Act 1994

The Audit Act 1994 establishes the operating powers and responsibilities of the Auditor-General. This includes the operations of his office—the Victorian Auditor‑General's Office (VAGO)—as well as the nature and scope of audits conducted by VAGO.

Auditor's opinion

Written expression within a specified framework indicating the auditor's overall conclusion on the financial (and performance) reports based on audit evidence obtained.

Capital expenditure

Amount capitalised to the balance sheet for contributions by a public sector entity to major assets owned by the entity, including expenditure on:

• capital renewal of existing assets that returns the service potential or the life of these assets
• expenditure on new assets, including buildings, infrastructure, plant and equipment.

Clear audit opinion – financial report

A positive written expression provided when the financial report has been prepared and presents fairly the transactions and balances for the reporting period in accordance with the requirements of the relevant legislation and Australian Accounting Standards.

Also referred to as an unqualified audit opinion.

Competitive neutrality

Competitive neutrality is about ensuring that the significant business activities of publicly owned entities compete fairly in the market when it is in the public interest for them to do so.

Corporations Act 2001

The Corporations Act 2001 is an act of the Commonwealth of Australia that sets out the laws dealing with business entities in Australia at federal and state levels. It focuses primarily on companies, although it also covers some laws relating to other entities such as partnerships and managed investment schemes.

Depreciation

The systematic allocation of the value of an asset over its expected useful life.

Employee benefits provision

The liability recognised for employees' accrued service entitlements, including all accrued costs related to employment, comprising of wages and salaries, leave entitlements, redundancy payments and superannuation contributions.

Emphasis of matter

An auditor's report can include an emphasis of matter paragraph that draws attention to a disclosure or item in the financial report that is relevant to the users of the auditor's report but is not of such nature that it affects the auditor's opinion—i.e. the auditor's opinion remains unmodified.

Entity

Is a body, whether corporated or unincorporated, that has a public function to exercise on behalf of the state or is wholly owned by the state, including departments, statutory authorities, statutory corporations and government business enterprises.

Equity or net assets

Residual interest in the assets of an entity after deduction of its liabilities.

Expense

Outflows or other depletions of economic benefits in the form of incurred liabilities or depletion of assets of the entity.

Fair value

The amount for which a financial or non-financial asset could be exchanged between knowledgeable and willing parties in an arm's-length transaction.

Financial delegation

A schedule that specifies the level or approval required for each transaction category to facilitate the execution of functions necessary for the efficient operation of the entity.

Financial reporting direction

Financial reports are prepared in accordance with Australian Accounting Standards and Interpretations as issued by the Australian Accounting Standards Board (AASB). When an AASB standard provides accounting treatment options, the Minister for Finance issues financial reporting directions to ensure consistent application of accounting treatment across the Victorian public sector in compliance with that particular standard.

Financial sustainability

An entity's ability to manage financial resources so it can meet spending commitments, both at present and into the future.

Financial year

A period of 12 months for which a financial report (and performance report) is prepared.

Going concern

An entity which is expected to be able to pay its debts as and when they fall due, and continue in operation without any intention or necessity to liquidate or otherwise wind up its operations.

Internal audit

A function of an entity's governance framework that examines and reports to management on the effectiveness of risk management, control and governance processes.

Internal control

Internal control is a means by which an entity's resources are directed, monitored and measured. It plays an important role in preventing and detecting error and fraud and protecting the entity's resources.

Liability

A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

Masterfile

A database of records pertaining to one of the main subjects of an information system, such as customers, employees and vendors. Masterfiles contain descriptive data that does not often change, such as name, address and bank account details.

Materiality

Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial report. Materiality depends on the size or nature of the item or error judged in the particular circumstances of its omission or misstatement.

Net result

The net result is calculated by subtracting an entity's total expenses from the total revenue, to show what the entity has earned or lost in a given period of time.

Non-reciprocal

Transfers in which an entity receives assets without directly giving equal value in exchange to the other party to the transfer.

Qualified audit opinion – financial report

A qualification is issued when the auditor concludes that an unqualified opinion cannot be expressed due to one of the following reasons:

• existence of a quantifiable or qualitative material error
• disagreement with those charged with governance
• conflict between applicable financial reporting frameworks
• limitation of scope.

A qualified opinion shall be expressed as being unqualified except for the effects of the matter to which the qualification relates.

Relevant

Measures or indicators used by an entity are relevant if they have a logical and consistent relationship to an entity's objectives and are linked to the outcomes to be achieved.

Revaluation

Recognising a reassessment of values for non-current assets—in particular land and buildings—at a point in time. 

Revenue

Inflows of funds or other enhancements or savings in outflows of service potential, or future economic benefits in the form of increases in assets or reductions in liabilities of the entity, other than those relating to contributions by owners which result in an increase in equity during the reporting period.

Risk

The chance of a negative impact on the objectives, outputs or outcomes of the entity.

University sector

University sector refers to the eight universities and the 56 subsidiary entities they control.

VET

VET relates to the provision of vocational education and training services, in the context of technical and further education components of the dual-sector universities.

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Introduction

In accordance with section 16(3) of the Audit Act 1994, relevant extracts from the report were provided to all universities, the Department of Treasury and Finance and the Department of Education and Early Childhood Development with a request for submissions or comments.

The submission and comments provided are not subject to audit nor the evidentiary standards required to reach an audit conclusion. Responsibility for the accuracy, fairness and balance of those comments rests solely with the agency head.

RESPONSE provided by the Secretary, Department of Education and Early Childhood Development

RESPONSE provided by the Secretary, Department of Education and Early Childhood Development – continued

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