by JAMES GUTHRIE
What is the purpose of a university? It’s a question I keep asking as I work on my research into Australian public sector universities’ finances and disclosures. This research reveals how universities perceive themselves through the way they disclose their financial situation. The VCs have been using compliance and cost-centric accounting to inform responses to the Covid-19 pandemic. And their presentation of finances is used to justify job cuts and course reductions.
Examining Deakin University’s annual reports raises precisely this question of university purpose.
Over the last five years, Deakin has pursued a business model based on large scale international student enrolment and used the excess funds for buildings and other non-financial assets such as commercial ventures, financial instruments, and share investments.
In 2019, Deakin University enrolled 62 213 students, 14 863 (23.9 [per cent) of whom were internationals. Published research by Guthrie et al. (2022) highlights this risky exposure to international students of $412m.
Deakin U’s 2020 annual report is the third in which the university used integrated reporting principles. It states that “the integrative report recognises that organisations rely on more than just financial capital to create value. They interact with a range of resources or ‘capitals’.” Dumay et al. (2019) outline “the six capitals as financial, manufactured, intellectual, human, social and relationship, and natural and by taking these into account when reporting on performance, an organisation provides a fuller picture of how it creates value.”
In the annual report, Deakin U’s chancellor, John Stanhope AM, an Australian business leader and leading accountant, stated that “Deakin’s net operating position was a net surplus of $17.2m for 2020. Revenue declined in 2020 by 8 per cent compared to 2019, driven chiefly by declines in international student enrolments and income from investments. The expected result in 2021 is continued operating income decline and a deficit position. The university has sufficient cash, investment reserves and borrowing capacity to cover the expected revenue losses or increased expenditure.”
However, as the analysis that follows will show, as for many other public universities, it was a decline in investment income that drove down Deakin U’s revenues and profits in 2020, not international student fees.
The Deakin University annual report was completed according to the Victorian Financial Management Act 1994 and relevant reporting, standing directions, and applicable Australian accounting standards. The report is nearly 200 pages long and roughly equal divided between non-financial disclosures about operations, governance, and other matters and financial reports
The university’s reported consolidated net result for the year was $17.2m, compared to $108m in 2019 (statutory). On an underlying basis, the underlying net result was $14.3m in 2020, compared to $58.5m in 2019 (not a statutory report but internally generated). I have reproduced this in Table 1, where we can see the importance of the investment portfolio of $50m in 2019 and an impairment loss of $6m in 2020, affecting operating net results. We would expect the vice-chancellor’s performance pay indicators not to include these numbers as many accruals make up the net operating results.
Table One: operating results
20 $m’s 19 $m’s
|Underlying operating net result for the year||14.3||58.5|
|Major one-off items:|
|Future Fund – market movement||1.5||49.5|
|Impairment – Lemond convertible notes||(6.3)||‒|
|Gain on deconsolidation||3.7||‒|
|Operating net result for the year||17.2||108.0|
The overall investment income declined by $70m in 2020 (Investment income 2019 about $95m and in 2020 $26m).
There are two big movers and shakers in the financial statements. The first is property plant and equipment of about $2bn, and an additional $120m was paid for with cash during 2020. Also, we note that there was over $100m in construction work in progress at the end of 2020. Concerning land and buildings (including construction in progress), Deakin now values its land and buildings at about $1.7bn. This is shown at the cost of about $270m. In the past decade, land and buildings have been valued upwards by over $1bn.
This creates two issues. First, the associated accrual for depreciation reduces operating results. Second, gifted land and capital grants from governments for buildings that may have caveats are being recognised as saleable property valued at the so-called “fair market.” This makes Deakin U look like a property developer, not a university.
Second of the movers and shakers are other financial assets. Deakin University has other financial assets of $825m in 2020, increasing by $60m since 2019. It also has about $250m in shares at cost and loans to subsidiaries. These subsidiaries include student accommodation and commercial subsidiaries. No value is given to the ownership interest. However, the difference between university and consolidated results, with the consolidated, is about $518m in financial assets, which could be this.
The $200m other financial assets as of 2010 have turned into $950m of total current and non-current financial assets as of 2020. Most of the cash to invest in these financial assets would have come from excess student fee revenues and government grants to pay for student education, which Deakin U used to buy a range of instruments, including marketable and shares in their commercial subsidiaries.
Short term cash and cash equivalents include cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value. Deakin University has very few loans that would be liabilities in the financial statements. Deakin University, at the end of 2020, had $136 million in cash. This makes Deakin look like an investment house, not a university.
The 2020 annual report states that “Deakin has 4 259 staff (FTE), including casuals (1 854.9 FTE academic and 2 404.2 FTE professional), a 276 FTE or 6.5 per cent reduction from 2019.” However, this is in terms of FTE, not headcount. Deakin also has changed its accounting for employees as, “the change in staffing numbers between 2019 and 2020 reflects the reduced need for casual staff due to a significant reduction in on-campus events, activities and service as well as the need to realign our workforce requirements to provide for financial sustainability and change in work priorities”. Therefore 700 FT, PT and casuals staff lost their jobs in 2020, based on headcount in the reconstructed Table 2 from the 2020 annual report (below). Nevertheless, as will be demonstrated below, many more lost their jobs during 2020.
In CMM’s Counting the uncounted I indicate that three universities (Deakin, Monash and Melbourne) all adopted this mode of reporting, stating the Victorian Government’s Department of Education and Training workforce data reporting guidelines clarified reporting requirements for the 2020 reporting year.
In correspondence to the author Deakin’s Chief Financial Officer stated “that in addition to our annual reports, Deakin reports workforce data to several third parties every year. We provide those agencies and institutions with tailored data that meets their specific criteria and requirements.
For example, some reports are point-in-time snapshots at different times of the year, while other publications request data over the calendar or financial year. In addition, some of the reporting highlights full-time equivalent staff, while others are a headcount of the entire workforce, over a year or at a specific point-in-time.”
Table 2: Deakin University
|Fixed-term and Casual employees||2148||2579||1001||1123|
* recounted 2019 data and adjusted.
As the table shows, in the 2019 annual report, Deakin included all staff employed during the year. However, it now only shows staff employed in the last pay period of the reporting year. It states that this change follows mandatory reporting requirements.
The actual numbers reported in the 2019 annual report were for all employees in 2019 10 720 headcounts and in the 2020 annual report 2019 was 6 226 restated. That is, 4494 employees disappeared. Also, for all employees in 2019, 5396 total FTE and in 2020 annual report 2019 4535 restated. That is 861 FTE employees.
The Deakin University 2020, Australia charities commission document discloses FT 3592, PT 1005, casuals 2974 and FTE 4929.00. This seems to be a mix of headcount and FTE. From the public documents, it is impossible to know how many Deakin staff lost their job or were employed in 2020.
The annual report also discloses the vice chancellor’s annual remuneration and any performance incentive payments, which are benchmarked against CEO positions in organisations of comparable size and turnover and operate in a complex and competitive environment. The premier of Victoria receives about $450 000. The current VC started on July 1 2019; therefore, 2020 is his first year in the job, and his salary is $950,000, just under $1m. One senior executive receives over $500,00.
This month, the university announced its Deakin Reimagined initiative, with 180-220 positions expected to go. Last month, Professor Martin met with staff to discuss the programme which will see a significant change to the university’s structure and staffing. He stated that the proposed changes were necessary to secure the University’s financial future while aligning with its core purposes.
Which takes us back to our initial question. What is a university’s core purpose? The 2020 annual report states that “Deakin is committed to maintaining strong financial sustainability. The university prepared to manage risks associated with commercialisation initiatives and investments in the context of ongoing sound financial management”. These commercial activities and investments have come about because of funds from student fees or the government grants to educate students – which are the university’s core purpose.
Distinguished Professor James Guthrie AM, Macquarie U Business School
Deakin University annual report 2019, 2020, 2010
Dumay, J., Guthrie, J., & Rooney, J. (2020). Being critical about intellectual capital accounting in 2020: An overview. Critical Perspectives on Accounting, 70, . https://doi.org/10.1016/j.cpa.2020.102185
FRD 22H Standard disclosures in the Report of Operations (May 2017)
Guthrie, J. et al. (2021), On the resilience of Australian public universities: why our institutions may fail unless vice‐chancellors rethink broken commercial business models – Accounting & Finance – Wiley Online Library