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?