Saturday, November 09, 2013

Lies, damned lies and incomplete statistics: teaching staff numbers in Further Education

These are difficult times for all those working in post-16 education. Across the United Kingdom there have been funding cuts – and there will be more before and after the 2015 election. This week the usually excellent Guardian Datablog added to the anxiety. It ran an article warning “The number of staff in further education dropped by 35% last year”.

Is that really so? I doubt it. Where did the numbers come from? It is not clear. What went wrong? My guess is that the article relied in part on data from the Staff Individualised Record. The SIR is soon to cease. The SIR 2011/12 suffered disinterest with a 22% non-response rate.

So what has happened to staffing? For English FE we have the college finance records which include staffing numbers.

We have seen a contraction in teaching Full Time Equivalent numbers since 2009/10. In English colleges teaching FTEs peaked at 80,674. Numbers fell 6% to 75,999 in 2010/11 and then 4% to 72,755. Painful job losses but not the one year apocalyptic drop shown by the Guardian.

Thursday, November 07, 2013

Paying the college governors - the debate in the Guardian and elsewhere

This week Guardian Further Education carries a debate about whether college governors should be paid or not. The three contributions clearly set out some of the issues at the heart of the issue.

The article reminds me of the debate in the social housing sector a decade ago.

In 2003 the Housing Corporation allowed housing associations to pay board members who had previously been volunteers – like college governors are now. As a board member in the Midlands and opposed to board remuneration. I am now less sceptical.

Across the housing association sector, board remuneration was tied to governance improvement plans which saw good practices being introduced including board member appraisal and term limits on appointments. (Essential good practices not seen on too many college governing bodies.) Moreover, remuneration often ended board recruitment problems and promoted a professionalisation of governance.

So should college governors be paid? Maybe – it depends on the balance of costs and benefits being thoroughly and objectively analysed. Scarce resources spent on governors won’t be available for teaching and learning. On the other hand, if paying governors is used to improve governance we should end up with a better governed and stronger FE sector. The arguments for paying governors are likely to be particularly strong for the larger colleges.

In the Guardian FE piece, all three contributions came from the sixth form college sector rather than the general FE sector. The largest of the three sixth form colleges has an income of £14 million. Could board remuneration be justified for colleges of that size? I doubt it.

In 2011/12 (the latest year for which we have published figures) 17 colleges had income over £50 million. For such large and complex organisations, board remuneration may be appropriate and, perhaps, essential. A debate over board remuneration has a particular relevance for this sub-sector of further education – rather than for sixth form colleges.

Tuesday, October 29, 2013

More than invoices: the investigation report at the King’s Science Academy should raise more questions

The free schools programme was again in the news on Friday with the Newsnight report into the Kings Science Academy in Bradford. Likewise Saturday’s newspapers asked whether there had been a “cover-up” of the findings of an Education Funding Agency audit report (pdf of the report available here).

While most of the media coverage was about allegedly misclaimed funding (so-called “false invoices”) and the repayment of about £70,000 by the project to the Department for Education, the Education Funding Agency audit report was far more wide-ranging in its scrutiny of governance and financial management at the free school.

The report identified that business interests did not appear to be declared when they should have been:
  •  [redacted] (a Director) is the brother of the Principal, [redacted] ;
  •  [redacted] and [redacted], the former FD, have links with the company [redacted] , used by the Academy to engage [redacted];
  • [redacted] has a number of family members working for the Academy and a brother who is a member of the GB;
  • The links with the [redacted] – who leased the land and [redacted]  role as [redacted].

Maybe these connections were not evidence of cronyism. But transparency becomes especially vital when situations are complicated.

There were also significant blurring of roles. A former Chair was acting as a “benefactor/advisor” which had no legal standing and effectively duplicated the Chair’s role of overseeing governance. The Companies House entries for the company were out-of-date with year old changes in directorships not being shown.

In the fields of personnel and procurement, there appeared to be weaknesses.

The report goes beyond matters of compliance and procedure. More generally, it found that the directors were failing to perform key elements of their governance role:

The lack of understanding of responsibilities and the experience of running a school resulted in an acceptance of the way the GB was being run (e.g. no notice of meetings, lack of adequate minutes etc. already raised by the [redacted] review and the FMGE validation). In relation to the finance area in particular there was no challenge where the lack of expected reports such as management accounts and balance sheets was not being presented to the GB, which are important for understanding the Academy’s finances and for monitoring financial health.

These are serious failings. Let us hope that this was a unique failure of governance at an academy. Perhaps it isn’t.

Saturday, October 05, 2013

Fraud in schools - some thoughts on the DfE's risk indicator checklist for academies

Allegations, fraud, corruption and bad behaviour have been in the news. A knighted Headteacher was convicted of false accounting and narrowly missed a custodial sentence for false accounting. A free school was being investigated after allegations of irregularities. Derby University was forced to strongly deny claims that it falsified official statistics on graduate employment.

The very structure and culture of colleges and universities, as well as the current constraints under which many…operate, can create conditions that facilitate fraud.

This makes it timely to look at the recently published guidance from the Department for Education (DfE ) on fraud. Last month the Education Funding Agency at the DfE issued Fraud Indicators: A checklist for academies (download here).

The Fraud Indicators checklist details “generic” indicators including “personal and organisational motives for fraud, possible weakness of internal controls, transactional indicators and possible methods of committing and concealing fraud”. The DfE suggest that the checklist “may be helpful for use as a checklist where concerns exists that fraudulent activity may be taking place”.

It would be easy to mock the section headed Personal Motives – many organisations would show a red flag on fraud indicators such as “personnel believe they receive inadequate compensation and/or rewards”, “disgruntled employee”, “recent failure associated with specific individual” and “personal animosity or professional jealousy”. Nevertheless these soap opera indicators do highlight that in the fraud triangle motivation and rationalisation sit with opportunity.

Under the heading of Organisational Motives, how many of us have known organisations “experiencing financial difficulty”, burdened by “under unusually tight time deadlines to achieve level of outputs” or having “suffered disappointment/reverses/consequences of bad decisions”.  Still the checklist is right to point to the problems which arise from an all-powerful head and governance which lacks clarity and direction. How many schools are dominated by Heads with Maxwell-sized egos.

Flippancy aside, this is all useful stuff. However, as with all self-assessments, they are treated most seriously by those who are least in need of reflection and criticism.

The checklist sets out what poor policies, procedures and practices look like. The document is fairly comprehensive. One area where the checklist says little is audit. It notes that critical audit reports and obfuscating auditees are fraud indicators. But what about where managers do not put in place robust internal audit arrangements and/or where governors let weak internal audit arrangements persist. The Principal’s PA or a governor without the time and skills to be an internal auditor is never enough.

Also it is worth noting that the checklist focuses on fraud risks internal to academies. There are plenty of external risks – and organisations tend to pay more attention to them (even if, not enough).

So what is my conclusion? If you are a manager, governor, internal or external auditor, spend some time working through the Fraud Indicators: A checklist for academies. If enough academies do treat fraud risks more seriously, academy assets and public funds will be better safeguarded as will the reputation of the sector.

Wednesday, September 18, 2013

The National Audit Office on risks in academies

Over the summer the National Audit Office published guidance to the external auditors of academies. The guidance, NAO Communication with academy auditors 2013, has been issued as the academies are consolidated into the “group accounts” of the Department for Education – so academy auditors are auditing parts of the DfE.

The guidance will be fascinating for audit anoraks. It will also be of interest to anyone many others including principals, senior managers, governors and ROs/internal auditors. The short guide highlights what the auditors at the NAO worry about.

We … consider, because of the number and variety of providers, there is an inherent risk that across the academies sector there could be material or systemic irregularity, which may be heightened in newly converted academies. Particular areas of concern include:
  • Approval from the Secretary of State not being sought for certain transactions above delegated authorities, outlined in the academies financial handbook;
  • Fraud or misappropriation of funds, especially at the Trust level in a multi academy trust; and
  • The increasing risk that academies with long standing deficits may become insolvent.

Fraud and insolvency are of wider public interest too.

In terms of regularity (i.e. income and expenditure being applied, in all material respects, for the purposes intended by Parliament), the NAO advise:
  • There are a number of themes which the auditor should consider when identifying the risk of irregularity. These themes include:
  • Misuse of funds by head teachers (i.e. using academy funds for personal gain);
  • Governance at multi academy trusts (i.e. oversight of activities of individual academies, or weak controls at the trust level)
  • Weaknesses in procurement (i.e. non-compliance with EU procurement rules, or employment/contracting with related parties)
Clearly audit and assurance are vital to keeping academies on the right track – and spotting problems if they do start to go off the rails.

Friday, September 13, 2013

Social housing regulation: the risks of the HCA putting a hex on the finances of housing associations

This week social housing has been in the news. The government – or at least Conservative component – charged into battle against the UN rapporteur who dared to come from Brazil (where some people live in favelas) to the UK to question the “bedroom tax” – which the Conservatives describe as an end to a “spare room subsidy”. (As entertaining backstory the Daily Mail reported that the Brazilian academic dabbled in witchcraft – even going so far as to making an animal sacrifice to get Karl Marx to leave her alone.) Against this the House of Commons’ Communities and Local Government select committee had little hope of getting much press coverage for its own report on social housing regulation. (Only the BBC and Guardian seem to have given it any profile outside the housing and public finance media.)

The CLG select committee report (pdf available) may not have much witchcraft or sorcery but it is an interesting survey of economic and consumer regulation of social housing by the Housing and Communities Agency.

The committee report was highly critical of how the HCA rates the financial viability of housing associations.

It has now emerged that the Regulator is unable to use his statutory powers or provide a frank assessment of concerns about a provider’s financial viability fearing that it might trigger a re-pricing of the provider's debt and therefore undermine its viability. Instead, rather than use his financial viability ratings to convey his assessment of financial viability, the Regulator uses the governance ratings to signal concerns about financial viability. This approach lacks openness and is confusing.

The committee noted that the social housing regulator had admitted that a “handful” of providers that are of concern to the regulator and a “small but steady flow of problem cases”, no provider has yet been graded as having “financial viability [which] is of concern”. Less than 1% of ratings were V3 or V4 – the two lowest. The only V4 rating was awarded after Cosmopolitan Housing Association was on its last legs.

The committee’s solution was simple and straightforward:

Ratings published by the Regulator should be reliable and capable of being understood at face value. The practice of using governance ratings to signal concerns about financial viability lacks openness and is confusing. It is misleading to the taxpayer and tenants, and potentially also to lenders who, it appears, are expected to understand the coded message from the Regulator. We conclude that the practice should cease. We recommend that the Regulator publish accurate financial viability ratings.

How practical are warts-and-all viability ratings? Might they actually be self-fulfilling in terms of financial weakness?

Transparency is important. But might narrative opinions be better than the pass/fail simplicity of ratings?

Tuesday, August 27, 2013

Hope for sixth form colleges on VAT? Or just a little more honesty?

Today’s Guardian online and tomorrow’s paper carries an article about sixth form colleges: overachieving but underfunded by Harry White. The piece highlighted the funding inequities suffered by SFCs.

The article included a quote from a Department for Education spokesperson:

Colleges are treated differently to schools when it comes to VAT because of their legal status. We are looking into whether funding arrangements should be reviewed to take this into account.

Basically that recognises that SFC bear VAT on their purchases whereas schools do not.

There are no plans to allow sixth form colleges to waive VAT on purchases. They ar required to pay VAT on their purchases, in common with everyone else. The basic funding principle for sixth form colleges is that these VAT costs are taken into account as part of the up-front funding allocation.

I am not expecting any U-turn but there is now a more honest appraisal of the situation coming out of the Department for Education.

Tuesday, August 06, 2013

Governance of social landlords – themes in a tagcloud

Since the Homes and Communities Agency (HCA) has taken over social housing regulation, there have been some eye-catching Regulatory Judgements (RJs). In seven cases social landlords have been graded as weak with a G3 or G4 (see Footnote).

Hopefully in there will be detailed work on these and other social landlords in with governance difficulties. In the past there was the Problem Cases trilogy – research by the Housing Corporation and consultancy CampbellTickell on housing associations who had been placed in regulatory supervision. Perhaps in the age of austerity there will be no funding for looking at case studies of failure.

While we wait for more detailed research we might be able to visualisation techniques to pull out some of the themes from the first seven social landlords to get G3 or G4 in their RJs. With a population of seven, the statistical significance will be limited. Nevertheless, the TagCloud does highlight issues like development. Also, the TagCloud shows the importance of frameworks for risk management and assurance for governance. As the HCA churns out more RJs, TagClouds may prove more instructive.


G3 = The provider does not meet all of the requirements on governance set out in the Governance and Financial Viability standard. There are issues of regulatory concern and in agreement with the regulator the provider is working to improve its position.

G4 = The provider does not meet the requirements on governance set out in the Governance and Financial Viability standard. There are issues of serious regulatory concern and the provider is subject to regulatory intervention or enforcement action.

Thursday, August 01, 2013

Colleges face yo-yoing bottom lines with proposed accounting rules

There might be a few green shoots of recovery for UK plc but public services are set for austerity up to at least 2018. The college sector has felt the pressure of being outside the funding ring-fence protecting pre-16 education. In the middle of this decade, many colleges will take another set of blows with National Insurance increasing and Formula Protection funding ending in 2016. Like buses coming in threes, the college sector has another prospective blow – a new accounting Statement of Recommended Practice (SORP) for Further and Higher Education which radically (and adversely) changes the way that capital grants are treated.

The draft SORP has not yet been issued but we know what it will propose for college accounts from 2015/16 onwards. The SORP consultation website already outlines the changes on capital grants:

The revenue recognition rules will result in most capital grants being credited to the Income Statement, rather than to deferred capital grants on the balance sheet. Deferred capital grants recorded on balance sheets, and their subsequent release to the I&E Account, will no longer occur.

This change will result in more volatile surpluses and deficits.

Future Income Statements will no longer benefit from the credit arising from the release of deferred capital grants (currently c£xm per year), which will reduce on-going reported surpluses.

Whereas now capital grants are released as income gradually over the life of the buildings or other assets which they funded to offset the depreciation cost of the assets, under the SORP the capital grant is recognised as income in one go with the depreciation hitting the bottom line year after year until the asset is fully depreciated. The resulting volatility will be seen in ridiculously large surpluses coming along when a college gets a capital grant but then many years of surpluses being much lower (or deficits much higher) than otherwise.

Sometimes the size and/or frequency of those deficits will mean that colleges breach the financial performance requirements of the covenants on their loan agreements. Since the credit crunch it can be very costly to upset bankers – a covenant breach means that a loan is (theoretically) repayable immediately and, in practical terms, the interest rate can be cranked up.

What will this mean in practical terms? How volatile will the proposed SORP requirements make bottom lines? It’s hard to say exactly without a crystal ball. However, we can look at the most recently available college accounts for some idea of what this means.

In 2011/12 the operating surplus for the whole of the college sector was £141 million – the value of the capital grant releases was £143 million. So these capital grant releases are significant for the further education and sixth form colleges taken as a whole. But what about individual colleges?

In total there were 74 colleges with operating surpluses had capital grant releases larger than these surpluses. In most of these cases the SORP treatment would have led to an operating surplus. A similar number of colleges already in deficit would have had a much operating deficits.

One London college had an operating deficit of £193k in 2011/12 but the value of its capital grant releases was £2.6 million. Another college in the south east had a surplus of £53k in 2011/12 after benefiting from capital grant releases of £2.3 million.

Colleges will have different loan covenants to comply with. But the SORP changes are a nasty shock to even colleges with relatively permissive covenants dating from before the credit crunch.

This amounts to a ticking bomb under the college sector unless the drafters of the SORP can be persuaded to change their minds by the consultation period ending in October.


Saturday, June 29, 2013

A revised Academies Financial Handbook from September 2013

The Education Funding Agency at the Department for Education have published a revised version of the Academies Financial Handbook (pdf here). These Handbooks are like buses: you wait patiently for six year then two come along in less than 12 months.

The Handbook applies from September. As with the previous version, it applies to free schools and UTCs - which are both types of school constituted as academies.The DfE have usefully issued a companion At A Glance guide (the pdf is tricky to find but it is here). The Handbook is largely unchanged from the 2012. The At A Glance guide highlights the following changes:

  • improved information relating to the interlocking roles of trustees, directors and governors;
  • additional information on the role of the accounting officer;
  • clarification of the delegated limit for academy trusts to make staff severance payments;
  • clarification and relaxation of the delegated limits for trusts to dispose of fixed assets;
  • clarification and relaxation of the delegated limits for trusts to take up and grant leases;
  • additional information about Financial Notices to Improve;
  • emphasis of academy trusts’ duties in relation to payments to trustees;
  • decoupling of the annual value for money statement (announced in the 2012 Handbook) from academy trusts’ annual accounts, and replacement with a separate return;
  • introduction of the option for a multi-academy trust to pool its GAG to meet costs at any of its academies;
  • emphasis of academy trusts’ duties in relation to services provided by sponsors;
  • a change to the criteria for establishing an audit committee so that it focuses on the size, rather than the type, of academy trust;
  • confirmation that the appointment of a responsible officer is not mandatory;
  • the introduction of an annex summarising the requirements in the Handbook;
  • changes to formatting and cross-referencing, and the use of a navigation pane so that it is easier to move between key topics.

Interesting the U-turn on finance committees not acting as audit committees is formally incorporated into the Handbook. This is not highlighted in the At A Glance guide.

Thursday, May 02, 2013

Financial health of sixth form colleges holds up with belt-tightening

An initial review of the newly published spreadsheet of sixth form college accounts for 2011/12 suggests a sector bracing itself for the storm ahead. Its financial health is bearing up in spite of a funding squeeze. The sector is managing this by reducing its pay bill relative to income.

The median average operating surplus for sixth form colleges has risen to 2.9% of income from 2.8% in the previous two years. Masked by this average there appears to some polarisation – the weak colleges getting weaker and the stronger more than holding their own.  The median operating deficit for the poorest quartile worsened from 0.2% to 0.6%. Meanwhile the median operating surplus for the financially strongest quartile improved from 7.2% to 7.7%.

In 2009/10 staff costs as percentage of income (including contract tuition services) stood at 70.4% for the sixth form college sector. Then in 2010/11 it reduced to 68.8%. By 2011/12 it had fallen to 67.3%. This is well below the regularly quoted benchmark of a pay:income ratio of 70%.

The reduction in the pay:income ratio is partly from pay restraint: pay freezes restrain pay costs even though many staff derive some benefit from increments. In 2011/12 the average pay costs per staff full-time equivalents (FTE) rose by only 1%.

Moreover, the total staff count for the sixth form college sector (as measured by FTEs) reduced by 3%. In 2011/12 the staff count was15,301 – down from 15,766 in the previous year. Part of this reduction was at a cost of £5.4m in staff restructuring costs.

Last week the unions in the higher education sector rejected a 0.5% offer from the employers' side. Maintaining industrial peace in the sixth form sector may be increasingly difficult. This will doubtless complicate the challenge of the funding squeeze.

Tuesday, April 30, 2013

Academies in the news – or not

It isn’t exactly news that academies have been in the news recently. But it is worth reviewing some of the stories and their significance.

The opponents of the academisation of education will have seized on the financial Notice to Improve issued by the Education Funding Agency to the academy chain E-Act. In the past E-Act had plans to become a "super-chain" running 250academies by 2016. It is no blocked by the EFA from taking on any more – for now. Days after the financial Notice to Improve, E-Act announced that its chief executive Sir Bruce Liddington would be leaving. Liddington was a former leading civil servant at the Department for Children, Schools and Families.

The financial Notice to Improve should be a wake-up call for academies whether standalone or chains. They must take governance and financial management seriously.

Meanwhile the spring has seen interviews for free school projects. A few sixth form academies will probably have been among them. There have been applications from Burnley to Salisbury.

Further down the line is the new Connell Sixth Form Collegean academy sponsored by Manchester City as part of an ambitious regeneration project. The Connell academy is intended to meet a demand for new sixth form places but it is located close to well-established and successful sixth form colleges. In the output of the Connell academy’s consultation (pdf available) the complaints of other post-16 providers (who do not benefit from the VAT funding of academies) can be discerned.

What has not been in the news has been the debate among sixth form colleges about seeking academy conversion. Since discussion at the Sixth Form College Forum in the autumn there has not been much talk of this. While conversion appeared to promise the VAT funding enjoyed by academies, it also posed questions about the implications of academy status in terms of loan agreements penalties and formula protection funding. Having said that, some sixth form colleges will have fewer financial problems with academy status and may well succumb to the call of the sirens.

Tuesday, March 05, 2013

Sixth form colleges at 20

Everyone loves anniversaries. This month it is the golden anniversary of the Beaching Report which shrunk the rail network. Next month it is twenty years since colleges were given their independence.

For colleges these are challenging times. Things are perhaps even more confusing for sixth form college sector.

Even though sixth form colleges have proven themselves to deliver qualityoutcomes and excellent value-for-money, the sector feels unloved. Last autumn the Sixth Form Colleges Forum debated the possibility of a mass conversion toacademy status. (This will never happen – there are too many financial obstacles.) The sector feels that academies get all the limelight while many schools now want to trespass on 16-18 landscape. In the case of sixth form free schools, the two developments combine.

Over the years there has been a steady shrinkage of the sixth form college sector. In 2001 there were over 100. In 2011 there were 95. The numbers carry on going down. On 1 August this year one of the oldestcolleges in the country, Ludlow College, merges into a local General FurtherEducation college.

Financial headwinds will affect sixth form colleges – both the funding squeeze and the competitive environment. While the sector as a whole starts of in fairly robust health some colleges start with greater challenges.

In 2010/11 five sixth form colleges had negative “performance ratios”. This is a measure of financial health which takes operating surplus and adds back the non-cash cost of depreciation. You would expect this always to be comfortably positive although there can be exceptional circumstances. (In one case the college appears to fit in that category.)

Surplus-based measures of financial health do fluctuate. One-off costs and lucky windfalls can distort the picture. A key measure of financial viability is a sustainable relationship between income and pay.

In 2010/11 there were nine sixth form colleges with a pay:income ratio of 75% compared with an average of about 69%. In 2000/1 there were fourteen colleges with such a high ratio – but three of those colleges are no longer around.

All these measures will suffer some turbulence over the next few years – not least with the effects of the 2013/14 funding changes and then the end of the Formula Protection (probably) three years later.

It should be remembered that operating losses and high pay costs can be shouldered for some time where sixth form colleges have been salting away cash-backed reserves.

When, hopefully, the 2011/12 college accounts are published in the next few months, we will see the readiness of sixth form colleges for the next decade.