Speaker: Chad Britton

Kia Ora, kor Chad Britton ahou, Nor kirikiriroa ahou, he Manager School Financial advice. Welcome along everybody to the session on the future of school finance reporting. The aim of the session is to give you a high-level overview of a proposal that we have put together in consultation with various other parties around the Ministry and what government sector around How schools prepare their annual financial accounts.

Without getting too involved in detail, this is an exciting time for the accounts in the room. It's not often that the chance to review and amend and update a reporting framework comes along that often. So as you can probably tell from the tone of my voice, I'm excited at this prospect. But anyway, enough of that, let's RIP into it.

So what are the current issues that we're facing? So this really comes down to a couple of things. School financial reporting really has been found to be too complex for people to prepare and to truly understand and then actually to read at the other end. 

It's proving to become more and more costly. We've seen the last two order contract rounds, there have been significant increases in audit costs associated to doing it, associated doing the audits of the school accounts.

And we're also finding that actually the way the current reporting requirements are moving, it's not really as fit for purposes as it possibly could be. If you think about the users of the accounts thing that your school community and trying to understand how the schools use its resources to provide education to education to the students and it's an account of the accounts can be quite difficult and to be fair, quite overwhelming to actually look at.

I guess. So just to frame it up a little bit, you know, schools are crown entities and they must meet strict compliance requirements and standards, but they generally tend to be quite simple in nature with many being small and generally speaking financially low risk. Schools can't go and invest in imbedded derivatives of the derivative of the derivative, which you know, obviously large multinational companies can do. So you know, that's something that's outside of the realms. So actually generally speaking, most of the time any sort of excess cash is problem term deposit, which is relatively simple and straight forward.

You know, we know, we know that costs are increasing not only just in the preparation of the fund statements, but we know the audit fees. You know, everyone, every school who's received a proposal letter in the last, I guess probably four years, maybe five years now has seen, you know, that the audit fee has been increasing. Largely it's because, you know, audit standards have been evolving. There's been shortage of auditors and some of the fees have been historically constrained.

You know, obviously our school audit, you know, a lot of it comes down to, you know, the, the requirement for audit fee is a, a reasonable fee for the work undertaken and the time taken to complete an audit has been increasing significantly.

You know, back, back in, back in my day of auditing, which was, you know, a few years ago now, you know, we were looking at, you know, maybe 30 hours to get a, a small primary school completed. Now that's, that has now moved at, you know, in many cases up to sort of more towards 50 to 60 hours to complete a similar sized school. So there is a lot more time being spent.

We also know that many schools, well, all schools, pretty much all schools at the moment reported the financial reporting Tier 2 level, which we'll talk more next slide.

However, with some changes that most schools can actually report under Tier 3 at the moment, and the current model is, well, what it works. It's it's good, it's stable. There's not a lot of changes year on year. It's burdensome.

Not only was meaningful to school board, Whanau or communities, it's 
a difficult thing to understand if you don't know what you're looking at. 

So does that mean it's fit for purpose? Perhaps not.

So as I mentioned previously, we just wanted to talk just a little bit of information here around the reporting tier structure, just to give you some context. So the accounting and auditing standards in New Zealand are set by the External Reporting Board, which is an independent organisation of the Ministry of Education, and the Auditor General as well.

The Office of the Auditor General has the ability to apply its own standards or adapt versions of the XRB standards as well. So they can either follow what the XRB releases or they can prepare slightly altered auditing standards to undertake the audits. 

Just so just to make it clear as well, the, the Auditor General is the auditor of all Crown entities and they will then subcontract that work out to other auditing firms who will then undertake your school audit. Which is why, you know, you might see, you know, an accounting/auditing firm come out to do your audit as opposed to the Office of the Auditor General coming out to do your audit. 

So just something to be aware of the. So as I mentioned, I was going to talk about the, just get some context around the reporting tiers. So there are basically 4 reporting tiers in New Zealand and each has a different level of disclosure requirements attached to it or complexity of what the final presentation is.

So currently all schools report on the Tier 2 except for about 5 schools in the country who reported under tier one, which is this category here, which hopefully you can see my mouse just running around on there at the moment.

But what we're saying is with the change in the limits for expenditure, which is what you know, not-for-profit entities or public sector entities are based on for the reporting requirements, about 75% schools actually qualify for Tier 3 reporting right now, which is actually really wonderful news.

And interestingly, there's, there's potentially a higher level that could qualify for that under the proposal we have.

So we'll just keep keep moving along.

You want too board. So why are we looking into it now? Will the Office of the Auditor General first raised concerns about where complexity and cost back in 2021. That really stemmed a bit of conversation around well actually is what is prepared to complex as well. So actually both go ahead and then hands preparing the accounts, comparing, preparing the financial statements is too difficult and auditing them is too difficult. They actually generally speaking, there's something that's not quite right in the whole process. So we need to have a bit of a look back at what's going on and see what we can do.

Current government priorities include reducing regulatory and compliance burdens.

You know, we know that this is not a fun process for anybody. Compliance never is, and it can be quite difficult. So actually, what are the things we can do to make life a little bit easier for everybody?

Um, we know the Ministry for Regulation has also received a commentary or, or communication through the red tape tip line, which they've been in contact with us about and they've been quite interested in this project as well.

Um, you know, ultimately our goal is to simplify reporting while maintaining integrity, transparency and accountability for schools because there's actually a really important thing schools deal with public funds and the use of public funds on a daily basis, you know, and providing education for the students at this school.

So actually we you know what you know, so the reporting then how those funds have been used is actually quite critical.

And I guess the big things we're looking to align this with the next audit contract cycle. We know that if we try and change things mid cycle that can you know have the opposite impact or effect of what we're intending. So we're looking for this to be rolled out or begin reporting under the new new framework for the 31 December 27 year end.

So I proposed idea we're calling this a modified Tier 3 reporting. So Tier 3 reporting is the accrual simple format accrual based reporting. So it's the fairly basic disclosures of your financial statements and fairly are fairly straight forward basic layout and but with the accrual concept of accounting, so you're recognising debtors and creditors and other potential costs, you know it is more than cash accounting.

So our modified version builds on the current Tier 3 standard, but does do a little bit of altering towards it. So obviously mentioned, this is for less complex entities, which schools kind of fall into, um, the proposed modifications with us and we're looking to try and also make this reporting a bit more fit for user, the user experience. So obviously the ministry is a big user of the account, as is the Treasury or the financial information, the accounts, but actually the school community is a big user of that information as well.

You know, and actually having it so that your average parent or average person in the community who may not be an accountant, you know, his inability to actually pick up the school's financial statements and get a sense of how things are going.

So the high level of the proposal is that, so the positives of it are really there. All schools would be eligible to be and, and the modified Tier 3 model. We're not looking to have multiple models, tiers in this case, all levels of reporting removing, We're looking to remove items where there's essential, there's service essentially provided by the Ministry of Education, for example, teacher salaries or land and building or land building notional leases, schools dont control. These are potentially distorts enter distortion to the financial statements. And interesting too, if we actually remove this, we can get nearly 95% of schools qualifying for Tier 3, which kind of gives us a bit of a push to say, well actually they all schools should report a Tier 3. Because actually if we think about the complexity of the school and justice, because a school has a school, a school's expenditure increases because of the number of students of his, not because it is doing anything that is more difficult and more complex. It is just bigger in size, but it's still bound by the same restrictions as any as a 20 student school.

So it doesn't actually make it more complex. So that's kind of one of the other things we think about there about moving everyone to Tier 3.

In theory it would reduce any year adjustments, so should enable some earlier submission for financial statements for audit, which is great because in there it will extend the time that audit can be completed. Because at the moment if we stick hard to legislation that is there's only about two-month window to order 2421 odd schools. So you know, that's quite a very, it's a very short turn around time and you know, it's proven to be quite difficult.

You know, the idea of it is, you know, it's significantly reduces the burden or mean to retain trust and transparency. You know, it's going to be based on accepted national framework reporting framework, but it reduces the final statements and the example that's available, the illustration is available, sorry, it reduces it from 29 pages currently in Kiwi Park down to 11 for that example. So the financial statements are getting much shorter. So hopefully a bit more punch into the point.

The county says it needs to be followed. Reduced from 43 down to 1 or 43 odd down to 1.

And you know the notes go from 30 notes at 30 odd nights at the moment, um, plus or minus a few depending on, you know, what your school actually does down to about 13. So actually the decreases the amount of work that needs to be done and prepared.

We're also looking to, you know, make some of the disclosures a bit more meaningful. You know, for example, teacher salaries. If we're not going to include the actual cost amount, then we're looking to include a narrative around the school received 15 FTTE’s and they used 14 or they used 16.

So what I'm trying to do is, you know, actually that’s how the school receives the resourcing and then they can kind of report back how they've used it, which is a bit easier. Means a bit more than saying there was $5,000,000 salaries. Well, that doesn't really mean as much as it could potentially mean if you're saying, well it's 15 staff and we've used 14 or 16 whatever it happens to be.

This concept is was proposed, I guess is, is generally supported by Treasury, the Office of General External Reporting Board and Ministry Regulation at a high level there. There are some concerns and there are some points we still working through on it, but we did want, we needed to get some further feedback. We need to get some feedback from you good people out there in the sector who are dealing with on a day-to-day basis just to make sure that you know, we're not completely crazy.

So some of those challenges that we're working through to sort of mentioned the existence that, you know, we're not fully compliant with our generally accepted accounting practise under this model. We're very close. We just have we just are deferring slightly. So there is there is ability in the legislation to do what we're doing, but we just need to work through some challenges associated to that. There is a potential of lowering audit materiality thresholds which would then ultimately increase audit testing, which then would have the opposite effect that we're trying to do
or we may not see, you know savings as we are hoping for. We're expecting to see from it, in theory if there is less there to audit, there's less time spent auditing it, so therefore less cost involved in the audit side of it.

There's also alignment with the, as part of this project, there is the office of the Auditor General is looking into the new less complex entity auditing standard, which New Zealand is looking to adopt. And the auditor general is currently working through what this might mean or might look like for schools. And will it help assist the audit, audit process. We're very hopeful it will. It sounds very promising. So, you know, this is something, so there's multiple things going on here at the same time. I guess one of the other things, I guess one of the other challenges, I guess really around particularly first point there are not being fully compliant with gap. Are there other things that should not that we currently have in the financial reporting that are currently in the financial accounts or the Kiwi Park model as you know, as you know it to be, that shouldn't be there. They're not actually adding any value that should we be looking to pull them out. If we're thinking about, we're bending the, the, the, the the road line as much as possible.

Yeah, I have some other things we should be thinking about doing. So just something to think about for, for, for the feedback side of things is, is, are there things that are currently reported as part of the financial statements that you see has limited value and perhaps shouldn't be reported?

Likewise, too, while we haven't expressly commented on it as yet, but there's always some questions around, hey, you know, should we, the regularity of auditing and your other other options for that. But before we go too deep into that, really.  So we have considered other options. So we've considered the status quo, keeping Tier 2 with the full audit.

Now you know why we're sort of say it's not viable or why we're not progressing the further or basically we're saying we need to change is that's too complex, costly, it's not proportionate to school size or their risk.

So it's just it just doesn't work. It was great to start with. It got a lot of consistency involved, which has been fantastic. But over time, as is always the case, things evolve and change and we look at what happens and we looked at the current Tier 2 deliver reporting, so the current reporting with reduced audit scope, so maybe every second year or a risk based approach, someone to what ERO do. The challenge there is that there's a legislative change and more just the Education Training Act, needed for that. The preparation orders still actually overly complex and there are risks associated with reduced assurance. The challenge being too is that audit doesn't really work in a way that you can audit every other year because you ultimately have to get comfort on the prior year numbers. So to do that, you have to then perform audit procedures over those numbers.

And so you're not only ordering the current numbers, but you're trying to then do procedures over the prior numbers to say, Yep, okay, we think the material, we think they're correct. And if you've got multiple years, say A 5 year. For example, your potential got four years. You're trying to get some comfort that all that stuff from the last audit makes sense to then say this year makes sense, then go, Yep, there's no material issues in the accounts. 

And if we don't do that, then we end up with modifications to the audit report saying ohh, well the, you know, we weren't able to get comfort over the opening balances. So therefore there could be a material error in there. We don't know about it. Now that's a modification that reduces the level of comfort over the numbers that are provided. Now that's a level that is not it's seen as really acceptable to have because if we you know, if you think that if you get it doesn't take well, sorry, it doesn't take long for a small error that has material in one school. If it, you know, other schools also doing it doesn't take long for that to become a material error at the financial statements of government level. And if you think about it too, if the same thing as a problem for 2421 schools, that could be quite a significant problem from a financial reporting perspective in the financial statement of government levels, which financial statements are government level, which creates a real risk.

So we also considered full Tier 3 reporting. So this includes things like the teacher salaries and land and buildings like we do at the moment, just reduces the disclosures quite significantly. Interestingly, the more we looked into it, we realised that there's those centrally provided services are actually not only audited the school level one way, but they tend to be audited at the ministry level in a different way and then order the financial statement statements of government level another way. And so we actually wanting the same information three times cut a different way.

Is there value in doing that? And especially when the school doesn't directly control, you know, those values, they can be, they can be become quite misleading or I guess at least the way they're reported can become misleading.

And also, yeah, I just mentioned the last one was also the audit cycle, you know, biannually or risk based. Yeah, it provided less assurance, less accountability. And there was number real expected say potential savings and cost savings. Because you end up, although you save in the short term for one year, you end up spending that money in the next year trying again move towards that unqualified opinion. So I didn't really achieve kind of where we were hoping or looking to achieve.

So with all of this, a time frame is important because, you know, we actually gonna actually get these things done.

So obviously now and through January we're doing the sessions, you know, we're doing some live sessions, yeah. And yeah, we'll do a few more if we need to. And we're also going out directly to, you know, auditors and service providers and service financial providers and a number of other interested parties to get their feedback as well. So that's happening through December and January. Time could be better, I realised, but we do need to keep moving through sort of February and March. We're going to sort of analyse the feedback and you know what the preferred option and sort of thing, Firm up, what the preferred option is, because there is, I guess it's important to say there is change coming, change will be happening. It's just what exactly they change looks like. There's probably the important thing to note.

Yeah, we've created a call the next, bit phase two which is March through December next year is basically this will be developing all the reporting templates, guidance and what the implementation of it is all going to look like.

We want to set to be ready for this where it's not something that we want to push on doing, but in the last minute we want everyone to be ready for what we want to make sure people are comfortable with it and that we'll have a successful 31 December 2027. And then obviously phase three there is really just rolling it out to the sector and with that, nothing in firm place, you know, we're looking at how do we actually support and make sure the sector and service providers and schools to make sure that, you know, they're ready to go, you know, and, and orders are prepped and, and happy as.

So there are some things that we we're currently still exploring. So were are not finished on where it is.

You know, as I mentioned before, there is a challenge where it doesn't quite meet the Tier 3 framework and how far diversion, if we do divert from that, what exactly does that mean?

You know, we're thinking about cyclical maintenance. You know, that is a continual pressure point for audit and schools. To be fair, it's not not the easiest, but how could it could? Could it be ordered centrally in some central insurance provided that would be quite a particularly radical change happen there.

You know, will audit materiality thresholds be affected? You know, I mentioned that one back in roles that we're dealing with, will there be needs to change schools, change accounting systems, We certainly not anticipating that we need to change for that because this is just the kind of final reporting at the end of it. How you do the day-to-day transaction recording shouldn't really be affected by this. It's more just potential output from it.

You know, budgets are a real big question. You know, the Crown entities are, you know, if, if you look at a normal, sorry, if you look at a normal charity, budgeted amounts aren't included. Legislation requires it to be there at the moment. So why? Um, you know, it's, it's a frustrating point because, you know, it doesn't often make sense. And sometimes, you know, the preparing the budget in the form of the final statement doesn't actually mean a lot to anybody either.

Who's exploring, you know, you know, this is really where we're doing this. But as you know what what do users you know boards and whanau and our communities extraordinary communities actually need from the financial reports change is meaningful and are there better ways to inform school communities. Our resources have been the resource have been delivered, used to deliver education.

Essentially, we're trying to get it right the first time, dear. I say that we will know we're going to give it the best chance, best shot we possibly can. So really your inputs are really important on this. Certainly not perfect, but sometimes I'm pretty close to it as much as I can possibly be there.

How we're gathering your feedback. So we're running these sessions, live sessions plus this recording. We're doing a short, we're going to have a short 5 to 10 minute questionnaire using SurveyMonkey for that because that's the easiest way to for us to sort of collect the information. It's open to everybody and schools, auditors, boards, whanau communities, you know, grant funders, anybody who wants to have a say, please, please, please provide some comment.

We, we have limitations. Schools will have to prepare financial statements of some description. They will need to be assurance of some description provided on that.

What will it look like? As mentioned, we're doing some live webinars in December and January. If you get along to them, that's fantastic. If not, hopefully this will work as well and the results of all of this information will help sort of inform the final recommendations to go through.

So you know, your voice does mean like and why I say I don't want 70,000 pieces of, of feedback. I do want feedback. So if it's 70,000 pieces of feedback, then I'll take the 70,000 pieces of feedback. We want to make sure what we end up producing will work. And will everyone be happy with it? Probably not, but hopefully the vast majority will be at least be feeling fairly confident that it makes logical sense to them and that it should save them time with ideally the added bonus of saving saving cost as well. You know, if you think if you're if you're at the school preparing a set of accounts and also very takes you 20 hours to prepare, Instead of 40 hours, that's 20 hours you can put into something else within the school.

I know it's been quite a high level and I really just wanted to, yeah, obviously this is a recording for you, so it's a bit difficult to ask questions, but what I would really encourage you to do here is to actually jump in back into the website page and have a look at the other material available. Have a look at the illustrative potential, you know, sort of finance them as we have there. Um, have a look at and, and and do jump in and do the SurveyMonkey as well. And that's really, really.

So on that note, I'm just wanted to thank you all for your time. Let me dribble on for nearly half an hour and look, really look forward to your feedback. And look, if you have any questions, please do just fire through the feedback. And we've got to prepare a bit of a Q&A document as part of all of this to ask how answer questions. There is a bunch of free text sales in there. So please do it. So on that note, thank you everybody. Ka kete everyone.

Have a great day.