First-rate governance is crucial as student numbers fall and costs rise, warns Auditor-General John Ryan.
Tertiary institutions face increasing challenges but polytechnics are under particular pressure and their governing councils need to be exemplary, says the Auditor-General.
In his report on audits of tertiary education institutions' 2017 results, Mr Ryan said there were 7000 fewer domestic students last year, and among public tertiary education institutions (TEIs), only the University of Canterbury and Te Wānanga O Raukawa enrolled more domestic students in 2017 than in 2016.
He said the fall hit the 16 institutes of technology and polytechnics (ITPs) particularly hard, with domestic enrolments falling 8 percent and 10 of the institutions also had fewer international students.
"In our view, financial sustainability is the most significant challenge for many of the TEIs, but in particular the ITPs. These financial challenges are contributing to a climate of pressure that can increase risks to the delivery of high-quality education and training for students," the report said.
It said some polytechnics were optimistic when forecasting likely enrolments and had been slow to react to foreseeable changes in demand.
"Councils need to be aware of this optimism bias and the risks it carries," the report said.
It also encouraged polytechnics to work together on capital investments.
The report said few tertiary institutions had robust measures for their wider strategic goals and a few failed to properly highlight significant performance results in their annual reports.
"For example, my auditors found discrepancies between the sentiments expressed in the foreword of an annual report and the actual results in the statement of service performance.
"We expect more transparency when results do not meet targets."
The report said if some public tertiary institutions did not improve the content of their statements of service performance, they risked receiving a qualified audit opinion.
The report said three institutions - Unitec, Tai Poutini Polytechnic and Southern Institute of Technology - did not publish their annual reports by the deadline of 30 April 2018.
It said auditors issued non-standard reports for Unitec and Tai Poutini.