Civil and criminal liabilities for college governors - the small print of the proposed insolvency regime

As summer term drew to a close, the government issued a consultation on an insolvency regime for colleges. Much of the paper is usefully about clarifying what happens when colleges become insolvent. But it also includes a far-reaching proposal to extend the fraudulent and wrongful trading provisions of the Insolvency Act 1986 to college governors. The introduction of these civil and criminal sanctions may have unhelpful implications.

In setting out the context, the consultation paper notes that, as charity trustees, governors have a duty to act with reasonable care and skill. They must act responsibly, reasonably and honestly; they should put appropriate procedures and safeguards in place. The paper also notes that trustees can be held personally liable to their charity for any financial loss they cause or help to cause by their wrongful action although charity law protects trustees who have acted honestly and reasonably from personal liability.

The paper does not make a strong case for the extension of governor liability. Indeed, it concedes: “Indeed, in the event that [governors] were to breach wrongful and fraudulent trading provisions it is likely that they would, through the same conduct, also already be in breach of their duties as charitable trustees.”

The liabilities put in place by the Insolvency Act 1986 were intended to deter and punish “rogue directors” who enriched themselves through running failed or fraudulent companies. There does not appear to be evidence of rogue or “fly-by-night” governors in the college sector. The financial problems in the sector arise from an extended period of funding reductions and changes.

The unstated rationale of the proposed extension of governor liability is to provide a bigger stick in the Area Review process.

The law firm Eversheds note in a briefing: “In our view, the introduction of the wrongful trading provisions in the context of colleges does heighten the risk for Governors as it makes it explicit that the duty to act in the interests of the creditors is a higher priority than the delivery of the charitable purpose.”

The extension of governor liability may have serious effects on college governance. Existing and potential governors may be discouraged from taking on the already heavy responsibilities of the voluntary position of governor. It’s a hard sell: “you can give up your time, you don’t get paid and you could lose your house!”

It would be a particularly perverse outcome of the proposals if accountants, lawyers and other professionals were increasingly wary of joining college governing bodies.

Phishing: should you be worried of cyber fraud?

1.    What exactly is ‘phishing’?

The text book definition is: “the illegal attempt to acquire sensitive information such as usernames, passwords and account details often for malicious reasons by masquerading as a trustworthy entity in electronic communication”.

2.    What are the worst cases of online fraud/phishing that you’ve heard of?

Victims of phishing may be shy. But we do know that schools can fall victim to online scams.  St Aldhelm's Academy in Poole was contacted by fraudsters pretending to be bank employees and asking about the school's bank account. Staff provided the requested details and the criminals withdrew over £1million. The academy subsequently suffered the ignominy of national press coverage and a financial notice to improve from its funder and regulator, the Education Funding Agency.

3.    What advice would you offer schools wanting to avoid falling victim to online fraud?

Complacency is the greatest threat. Many of us will have had a poorly spelt and badly worded email from a United Nations official or the widow of a recently deposed dictator.  These missives asking for help in transferring funds are often safely redirected straight to our junk filters. However, we must not assume all phishing emails are so blatant. Increasingly, scammers are raising their game and making their emails more professional and hence believable.

4.    What are the most common online scams?

Attempts – both online and offline - to redirect payments from legitimate suppliers to fraudsters appear to be the most common scam in the education sector. There have been increasing reports in recent years of both successful and failed attempts to defraud schools and colleges as well as other not-for-profits.

While technology allows fraudsters to go phishing on an industrial scale, some of the most effective scams have been offline exploiting our innate trust in paper.  There have been several recent cases where BACs electronic payments have been made directly into fraudsters’ bank accounts after correspondence on convincing letterheads asked for the bank details of suppliers to be changed. In 2010 Oldham Sixth Form College transferred £730,000 after receiving such a letter.

Sometimes the fraudsters supplement their paper letters with fake websites as part of the scam.

5.    How can schools tighten up their online security?

While schools should have robust cybersecurity, common sense and caution are essential too. Never give information to your bank which your bank should already know. If in doubt, speak to your bank manager. Always verify verbally any paper or electronic request to change supplier bank details with known contacts. Above all, take care!

Fraud in Schools - what can be done?

In July news emerged of an investigation into an alleged fraud at a London academy after £4million of school funds disappeared. The case was kept under wraps for two years while parents were asked not to speak to reporters although hawk-eyed readers of the Department for Education’s annual accounts for 2012/13 might have noticed oblique references to an “irregularity” at the Haberdashers Aske’s academy trust. The case is believed to be largest school fraud in British education history.

While school managers might expect to notice and stop millions of pounds being siphoned off, schools are at risk from fraud perpetrated by those on the inside and the outside. Complacency - “it could never happen here” – worsens that vulnerability.

A perusal of Google news over a month or two will unearth cases of schools falling victim to managers signing off fake timesheets, finance assistants using cards to pay for holidays and heads appointing friends and family without due process. There are many more con artists outside trying to defraud schools – last year a solicitor was jailed for his part in tricking a sixth form college into paying over £730,000 intended for a genuine contractor into a bogus bank account.

While fraud risks cannot be eliminated, schools can mitigate them. A few simple steps can help:

1.       Get the tone from the top right

School leaders need to lead by example and emphasise probity. That means a fraud policy with zero tolerance of irregularity. There should be a register of interests for governors, senior managers and other staff with significant financial authority or influence. Similarly there should be a policy on gift and hospitality. Everyone should know about these policies – where to find them and what they require. 

2.       Assess risks and mitigate them

The identification, assessment and management of fraud risks should be covered by school risk registers – particularly in the risky area of purchasing.  There is plenty of free guidance available online including fraud risk self-assessments. The Chartered Institute of Public Finance and Accountancy recently published a Schools Fraud Health Check. Simple checks and balances with segregation of duties and independent review of transactions are effective in mitigating risks. This is more challenging for smaller schools, particularly primaries. However, there is normally a second pair of eyes, even if it is a governor, who can ensure that there is never too much reliance upon one member of staff.

3.       Look out for risk indicators

Both the Education Funding Agency and the Audit Commission have published advice on fraud risk indicators. The Commission’s list of behavioural warning signs included: reluctance to take holiday entitlement; poor work practices such as “bending rules”; a lifestyle not equal to income. There may be innocent reasons for strange behaviour but sometimes these can be indications of a staff member with something to hide. 

4.       Use data

While there are software packages to highlight strange patterns in financial data, a spreadsheet is sometimes enough to spot anomalies. A key check to perform is looking at the top dozen or so suppliers over the last year compared with previous years – does it make sense? There may be nothing untoward about using the same suppliers or contractors again and again. But, on the other hand, it may be a sign of an overly cosy or even inappropriate relationship with a supplier. (Aside from fraud risks, this simple review of spend patterns may identify value-for-money opportunities.)

5.       Welcome whistleblowing

Appropriate arrangements for confidential reporting are not only a legal must-have, whistleblowing is vital defence against fraud and other wrong-doing. Staff must know where to find the whistleblowing policy. The policy itself should link into the governance framework, including those elements perceived as most independent e.g. the audit committee, the internal and external auditors.

Are schools doomed to be scammed?

Before the National Fraud Authority ended up on the Coalition’s bonfire of quangos it did a lot of work on raising awareness of fraud. One of its major projects was estimating the total value of fraud in the economy – everything from “blue badge” parking abuse to multi-million VAT fraud. Before the NFA disappeared, it published Annual Fraud Indicators which estimated the loss to the economy of fraud to be £52billion (pdf available).

What has that number got to do with schools? In one month the press reported:

·         Arrests following concerns over the use of£162,000 at an academy following an Education Funding Agency report.

·         Finance staff giving away bank details in response to a phishing email with a subsequent loss of £1m

·         A school bursar being convicted of signing-off fake overtime claims with a loss of £18,000

·         A former head being found to have fallen below the standards expected of school leaders for his involvement in the recruitment of a family member which "breached the expected standards of transparency".

Much detected (and obviously undetected) fraud does not get into the papers. The 2012/13 Department for Education accounts mention a £2m “irregularity” at one academy chain – a Google suggests that the case never got into the press.

The NFA cautioned against its estimates being used for identifying trends. But is fraud getting worse? Quite possibly: while staff will generally be honest and public-spirited, after years of pay freezes and 1% rises, a minority may be demoralised and feel squeezed;  many organisations are struggling to cope with financial pressures so some managers may be tempted to bend rules; greater autonomy for schools creates opportunities but not all are positive.

Are schools doomed to be scammed? In fact, schools can protect themselves through simple steps. But the first step is to recognise that fraud is an issue.

 

 

Later this month I am talking at EdExec Live about how schools can protect themselves. Tickets are still available.

EFA asks academy principals and boards to think about fraud

Today the chief executive of the Education Funding Agency sent a letter to accounting officers (i.e. principals) at all academies in England. It reminded them of the requirements in relation to fraud, connected parties and special payments.

The letter included an annex setting out questions for principals and trustees to consider in order to minimise the risk of fraud or irregularity:

• Authority – Do you have a written scheme of delegation, approved by the trustees, so that individuals are clear about their levels of financial authority?
• Purchasing – Are you confident you are procuring all goods and services in an open, competitive and transparent way?
• Payroll – Do you have robust controls for payroll including checks that payments are for the right amounts and paid to bona fide employees?
• Oversight – Do you ensure that financial reports are produced that fairly reflect the activity at the trust, that they are properly reconciled at least monthly and are shared regularly with the trustees for formal review?
• Cash management – Are your bank accounts reconciled at least monthly?
• Assets – Is all of the trust’s property under proper control and measures in place to prevent loss or misuse?
• Segregation – Do you have appropriate separation of responsibility in your finance team? And are you providing proper management support to your finance staff to help them to operate in a role where they are well-placed to provide you with a “first line of defence” in terms of upholding propriety, regularity and value for money in the use of public funds?
• Records – Do you have robust procedures for recording, documenting, evidencing and monitoring information and especially the reasons for entering into major spending commitments?
• Scrutiny and audit – Do you have properly constituted arrangements for internal review (such as a responsible officer or internal auditor) to give you and trustees a further safeguard that the trust’s financial systems and controls are operating effectively and efficiently? Does the trust debate, and agree how to act upon, recommendations arising both from these internal reviews and from the work of its external auditors?
• Risk – Do you have an effective process for identifying and responding to the major risks that the trust faces?

These are all basic and sensible measures.

Next month I will be talking about fraud risk at the EdExec Live conference. I will be explaining what more academies can do to protect themselves from fraudsters both inside and outside their organisations.

Job losses in colleges – things did not get much worse last year

The college sector has had a bad few weeks. As a consequence of the funding squeeze, especially the painful reductions in adult skills budgets for 2014/15, there have been redundancy programmes announced at FE colleges across the country: Brighton, Kingston, St Helens, Stratford-upon-Avon.

There was some slightly brighter news tucked away in the Skills Funding Agency release of 2012/13 financial accounts for the college sector. Tucked away in the numbers, the number of teaching staff full-time equivalents in colleges fell by only 1% last year compared with 5% in 2010/11 and 6% in 2011/12.

This is not a good news story. There are still over 100 FE colleges in deficit and the number of sixth form colleges with losses doubled. We are only half way through the Coalition’s austerity programme and things won’t be much easier with a different government. The 2013/14 figures might well see an acceleration in job cuts.

EFA tweaks fraud reporting requirements for academies

In the New Year academies may not have noticed a subtle change in the Education Funding Agency’s requirements for fraud reporting.

The Academies Financial Handbook in para 3.9.2 still states:

All instances of fraud or theft committed against the trust, whether by employees or trustees or third parties, above £5,000 must be reported by the trust to the EFA. Any unusual or systematic fraud, regardless of value, must also be reported.

But in January the EFA decided to change the requirements for fraud as they affecting the 16-19 bursary fund and noted on its website:

We have reviewed the advice given to institutions on the threshold for reporting cases of significant fraud to the EFA. The threshold has now been reduced from £5000 to £1200 to reflect the amounts of funds that institutions typically pay to students. Institutions must now report any suspected 16 to 19 bursary frauds of £1200+ to the EFA.

All academies should have fraud policies (as well as whistleblowing policies and fraud response plans). They (and other 16-19 provider) need to make sure their next update of their fraud policies reflects this lower threshold.

The FE Commissioner reflects on college governance

After his first six interventions, the Further Education Commissioner has written to colleges with some reflections. The whole letter is worth a read but below are some extracts with particular relevance to college governance. Governors and clerks should dwell on his thoughts:

• College governors must take greater ownership of their college, driving the strategic direction forward and challenging the Principal and senior leadership team on the quality of teaching and learning and the institution’s financial position. 
• College governors must satisfy themselves that they have a complete picture of how the college is operating by triangulating the information they receive with other sources of information, for example the new Data Dashboard being produced by Ofsted and which is due to be published in the Spring. 
• It is essential to undertake effective succession planning of the governing body; bringing in new and diverse skills and fresh thinking regularly.  I especially see the case for more business people on boards.
• Clerks are vital to the success of colleges.  Clerks ensure that good governance practice is followed and that the Principal/senior leadership team are not exceeding their authority.  Clerks should be independent, supported and have the skills and experiences necessary to fulfil their role.  
• If you’re not already doing so, it is very important that you conduct an annual professional appraisal of your Principal, which examines and reports on their performance to date and sets clear SMART targets for the year to come. 
• College governors should have regular and purposeful training and development. …  They often are working in something of a vacuum with little or no contact with Board members from other colleges and hence are unable to benchmark their performance against their peers. 
• There is some evidence that college governors can be reluctant to take the difficult decisions when there is evidence of poor performance.

Now that I am resuming blogging, I will be writing on some of these governance themes as well as some not mentioned.

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.

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.

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.

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.

Also this week Times Higher Education carried an article about a Transparency International report which warned financial pressures could impact on ethical standards. Global Corruption Report: Education noted:

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.

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.

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?

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.

This contrasts with the Treasury minister David Gauke in Parliament in May this year:

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.

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.

Footnote:

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.

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.

 

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.

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.

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 College – an 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.