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.

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.

Academies and audit committees: where to start with terms of reference

The Academies Financial Handbook issued last week by the Department for Education nudges Academy Trusts (ATs) towards audit committees but allows other committees to incorporate the role of an audit committee into their remits.

The Handbook states:

All ATs must establish either an audit committee or a committee which fulfils the functions of an audit committee (ie it could be an addition to the terms of reference to an existing committee, other than the finance committee, and have an overlapping or fully integrated membership).

The apparent block on combined finance and audit committees may pose a challenge to some ATs. It will not be a surprise who are familiar with audit codes of practice in the college sector.

The audit code of practice introduced for colleges in 2004 (pdf) offers a useful template for setting out the role of an audit committee. Below I have modified its terms of reference to suit an AT:

The Audit Committee will consider matters relating to internal control and auditors. In particular the Committee is to:

• advise the governing body on the adequacy and effectiveness of the Academy Trust’s systems of internal control and its arrangements for risk management, control and governance processes, and securing economy, efficiency and effectiveness (value for money) ;
• review the statement on internal control and make appropriate recommendations to the governing body;
• advise the governing body on the appointment, reappointment, dismissal and remuneration of auditors (both external auditors and internal audit);
• monitor the effectiveness of auditors, including the use of auditor performance indicators;
• ensure effective coordination between auditors;
• ensure that additional services undertaken by the auditors is compatible with the audit independence and objectivity;
• agree the work programme of internal audit including the checking of financial controls, systems, transactions and risks;
• consider the reports of the auditors and, when appropriate, advise the governing body of material controls issues;
• monitor the implementation of agreed audit recommendations;
• ensure that all allegations of fraud and irregularity are appropriately investigated and controls weaknesses addressed;
• recommend the annual financial statements to the governing body for approval
• review the committee’s membership and effectiveness on a annual basis to ensure that it has appropriate skills and relevant experience.

This wording assumes that the Academy Trust refers to its assurance function as internal audit rather than a Responsible Officer. The wording can be tweaked on this and other Academy Trust specifics. Otherwise it can be adopted for a standalone committee or inserted into the terms of reference for another committee.

Internal control and audit committees - the new Academies Financial Handbook

In the past there was a degree of ambiguity about whether academies had to have an audit committee. The 2006 Academies Financial Handbook itself did not require one but it included, as an appendix, a document which did. The 2012 Academies Financial Handbook (AFH) clarifies the situation.

The AFH states the role of the audit committee:

The committee must review the risks to internal financial control at the [academy trust] and must agree a programme of work that will address these risks, inform the statement of internal control and, so far as is possible, provide assurance to the external auditors.

 
The AFH clearly requires that academy trusts (which, of course, includes free schools) must establish “either an audit committee or a committee which fulfils the functions of an audit committee”. Some trusts by virtue of size or nature are expected to have a separately constituted audit committee (i.e. one which does not also function as a finance committee).

Every [academy trust] must have in place a process for independent checking of financial controls, systems, transactions and risks.

Ideally this process should be driven by an audit committee appointed by Governors, but EFA recognises that this may not be a practical position for every [academy trust], especially the smaller ones or ones where there is a limited pool of potential governors to provide the necessary direction. So, EFA has provided for a system which allows some flexibility as to how any particular [academy trust] discharges these requirements.

 All [academy trusts] must establish either an audit committee or a committee which fulfils the functions of an audit committee (i.e. it could be an addition to the terms of reference to an existing committee and have an overlapping or fully integrated membership). The decision will be for Governors and should reflect the size and complexity of the organisation.

EFA's expectations are that that:

All [academy trusts] that are a multi-academy federation must have a dedicated audit committee;

All [academy trusts] with an income of over £10m or capitalised asset value of over £30m should consider having a dedicated audit committee;

All other [academy trusts] may have a dedicated audit committee.

The new Academies Financial Handbook (AFH) moves beyond internal financial controls and risks to internal control more broadly. This makes sense: while financial viability is vital so are other objectives –

The AFH states:

The [academy trust] should have in place sound internal control and risk management processes.

While the AFH talks of internal control and risk, strangely the AFH section on internal control is narrowly focused on matters such as producing annual accounts, preparing contingency plans, obtaining insurance etc.

These things all matter. But tinternal financial control falls short of the concept of internal control developed by the Turnbull Committee for listed companies and adopted by the Treasury for the public sector over a decade ago. "Turnbull" required:

An internal control system encompasses the policies, processes, tasks, behaviours and other aspects of a company that, taken together:

facilitate its effective and efficient operation by enabling it to respond appropriately to significant business, operational, financial, compliance and other risks to achieving the company's objectives. This includes the safeguarding of assets from inappropriate use or from loss and fraud, and ensuring that liabilities are identified and managed;

help ensure the quality of internal and external reporting. This requires the maintenance of proper records and processes that generate a flow of timely, relevant and reliable information from within and outside the organisation;

help ensure compliance with applicable laws and regulations, and also with internal policies with respect to the conduct of business.

If you plug in academy in place of company, that is highly relevant to good governance and management. It is also far more wide-ranging than contingency plans and insurance policies. It is about staff and pupil safety, academic performance, inspection grades, legal compliance, equality and diversity, and many other objectives.

So what should academies be doing if they should be thinking about controls and risks beyond the financial?

Academies need to ensure that audit committee review not only the risks to internal financial control but also the risks to delivery of all critical objectives. In performing that review, they should be directing the Responsible Officer or the internal auditor (or whatever the assurance function is called) to evaluate controls and test controls in those critical areas. At new academies with immature financial processes, much of the work will be around payroll and purchasing. As academies get better established, non-financial systems will get more attention and financial ones less.

The path from local authority control to independence has been trod before. In the 1990s over 400 further education colleges went that way. Many survived. Some lived on within merged institutions. A few merged or closed after failure – sometimes in scandal. For those of us working with colleges then and now, there were lots of interesting case studies and good practice and not-so-good practice.

Audit committees and internal audit contributing (or not) to internal control were part of the reason why colleges succeeded (or not).

"Turnbull" was an issue for colleges then. Now it should be a challenge for academies. Taking the AFH and going further – rigorous review of both financial and non-financial risks with audit committees pushing that agenda.

The Public Accounts Committee report on the oversight of schools – and changes in the regulation of academies

It has been good to see that Friday’s report on oversight and accountability for the schools sector by the House of Common’s Public Accounts Committee got some media coverage even if it was a little under-analysed.

For those who did not see the reports on the BBC or elsewhere, these were the main findings:

1.  The Department for Education's draft Accountability System Statement (the Statement) describes arrangements for providing assurance on regularity and propriety, but does not provide us with assurances that the systems being established will achieve value for money across the sector.

2.  Much of the Department's assurance on regularity, propriety and value for money comes through oversight by other bodies which are subject to major resource pressures.

3.  The Department is relying on the availability of transparent, comparable information to drive value for money across the schools sector. However, incomplete and inconsistent data currently make it difficult to compare all schools on their academic performance, funding received, and use of resources.

4.  Governing bodies are central to effective oversight of all schools, but the quality of governance varies. We are concerned that weak governance in some schools is leading to inadequate scrutiny of, and challenge to, school leadership.

5.  We are concerned about the Department's ability to pick up warning signs of improper spending or poor value for money for the taxpayer. It is not clear whether existing monitoring and accountability mechanisms do enough to flag up concerns that should be investigated.

6.  The Department has only a limited understanding of why some local authority maintained schools are persistently in deficit or surplus.

It is inevitable after the Priory report that the regulation of academies will draw attention – as seen in BBC coverage.

By 2015 almost all secondaries and many primaries will be academies. Will the DFE have the resources to regulate this sector?

The report noted:

the YPLA [sic] will have to oversee growing numbers of academies in the coming years, and we have early warning signs which raise concerns about whether it has enough capacity and skilled staff to do so effectively.

The DfE is staffing up with accountants. It will need to.

Unless the DfE via the YPLA’s successor, the Education Funding Agency, is able to detect weaknesses in academy chains and individual academies before they fail, there could be a lot of parents and children left in a bad place. This could be a ticking time-bomb under Michael Gove.

On the “major issue” of recruiting and training of governors with relevant financial expertise, the report notes:

The Department and the YPLA consider the main incentive for schools and academies to improve governors' skills to be through their aspiration to score well in the Schools Financial Value Standard and Financial Management and Governance Evaluation assessments.

It is ironic that there is now talk that the requirement of a FMGE self-assessment will be dropped for all academies apart from new ones. (The EFA is proposing that the parallel  Financial Management and Control Evaluation is abolished for sixth form colleges.)

While schools may have suffered in the past from excessive control, the baby of effective regulation should not be thrown out with the bath water of red tape.

The Priory – the report and the risks for academies

There has been plenty of press coverage of the Department for Education report about the Priory academy federation in Lincoln. The internal audit report is available on the DfE website.

On Twitter (where you can follow my Twitterstream), there is a Twittersplurge analysis of the Priory by the Education Editor of The Times, Greg Hurst:

Risks exposed by Priory Academy scandal: 1. Academy chain HQs handle much larger sums of money than a maintained school ...

2. Entrepreneurial activity by academies/chains widen scope for abuse eg buying grade II Georgian manor house / activity centre in France ..

3. Many academy chains built / led by dominant charismatic figure who other staff / governors may find harder to challenge

4. Academy chains with business links / sponsors have greater scope for conflicts of interest with suppliers, a risk that grows with scale

5. Many academy chains generate commercial / private revenue steams from leaders ' speaking, training, conferences, consulting

6. Business people who join chains in corporate / governance roles may not be as used to dealing with public rather than private money

Something for boards and managers to think about (especially audit committees - where academies have them).