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.

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.

 

 

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.

Academies, Responsible Officers and risks: getting the basics right

Tomorrow is the last working day of August. So the long-promised revised Academies Financial Handbook must be quite imminent as it is due this month for the new financial year. When it does arrive on the DfE website, academies and free schools will need to do some thinking about their assurance arrangements.

In the past academies were given somewhat ambiguous and vague advice on who could be appointed as the Responsible Officer (RO) to give assurance to Governing Bodies on internal financial control. That led to a range of approaches – good practice and not-so-good. Given the rhetoric around freedom as well as common sense, the new Handbook will doubtless formalise that flexibility.

In terms of what ROs did, there was more direction if not prescription. The RO was given a list of Suggested System Control Checks to be done on a quarterly basis (in practice for many academies, termly basis). These will, I suspect, go out the window. What will be in their place?

If the RO is to evolve into something resembling internal audit, the RO’s work will be driven by the risk register. That makes sense - the assurance function for control and risk should be informed by the risk register.

But maybe there is a hitch? Many academies – not only new ones – have in place risk registers that look remarkably like the one in the 2006 Academies Financial Handbook. Using a template is a useful aid but organisations have to think about their own specific risks – not simply the generic ones. They need to rigorously review and objectively assess risks. How many do that?

ROs need to start their work with some attention to risk registers. If ROs have knowledge, understanding and experience when it comes to risk management – as well as common sense – they will add real value as well as ensure that their own testing driven by the risk register addresses real risks.

If academies and their ROs can get their risk registers in shape, they can then progress onto assurance mapping. But that will have to be another blog post.

 

Audits and risks: the new Funding Agreement for sixth form colleges

The Education Funding Agency’s new Funding Agreement for sixth form colleges is a strange beast. It is clearly a slimmed down version of the 2006 Learning and Skills Council’s variant. But in slopping parts off, there seem to be some strange and perhaps unintended consequences.
In the 2006 Financial Memorandum colleges were instructed:

The College must ensure that it has an effective policy of risk management (including appropriate insurance arrangements). The College’s risk management arrangements should consider the key principles given in LSC guidance.

In a far more uncertain and hazardous environment, the 2012 Agreement does not utter a word to sixth form colleges on risk management. As established and largely mature organisations, I would hope they will carry on managing risks and enhance their arrangements.

While the words on risk management are omitted from the 2012 Agreement, oddly the wording on internal remains unchanged. So where the 2006 Memorandum states:

The governing body shall appoint an audit committee and arrange to provide for internal and financial statements audit, including regularity audit, in accordance with the LSC’s Audit Code of Practice and any other directions drawn up and published by the LSC in consultation with colleges. Any mandatory requirements under the LSC Audit Code of Practice shall be a condition of funding under this financial memorandum.

The 2012 Agreement states:

The Governing Body shall appoint an audit committee and arrange to provide for internal and financial statements audit, including regularity audit, in accordance with the Joint Audit Code of Practice and any other directions drawn up and published by the EFA in consultation with SFC. Any mandatory requirements under the Joint Audit Code of Practice shall be a condition of funding under this Funding Agreement.

Some mistake surely?

Only today, the Education Funding Agency reminded sixth form colleges that they did not have to make provisions for internal audit from August 2012. (Of course, any sensible college will await the Agency’s guidance before making use of this new flexibility.)

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 end is nigh: the internal audit requirement for Sixth Form Colleges

So we finally know what we kind of knew before: the government (via the Education Funding Agency) wants to relieve Sixth Form Colleges (SFCs) of the mandatory requirement to have an internal audit service. This is not a surprise as the SFC sector was on a promise from Lord Hill. A consultation period end in June and then in August it will be up to governors on SFC corporations whether they need internal auditors

As the typical SFC has an annual income of around £10m, the end of the internal audit requirement does make some sense.

Over four years ago, I blogged here:

The re-arrangement of [the LSC into] agencies might, on a brighter note, lead to a re-think of audit for colleges. (But I doubt it.) I would query whether the smallest colleges – particularly the smaller sixth form colleges – need their own internal audit service. These colleges often have a total income of a few million and limited non-core activities. They are quite different from Newcastle College with its £150 million income.

The smaller colleges are little different from the schools that they compete with for staff and students. They are arguably less exposed to risk than small housing associations who are not obliged to have their own internal audit.

While the internal audit requirement is going, the Education Funding Agency nudges SFCs as it:

recognises that in many areas of both the public and private sectors it is accepted good practice to have Internal Audit.

Audit committees at SFC will need some help in determining how to respond post-requirement. What does that nudge mean for them? I am sure that auditors and others will have their own views on what their potential and actual clients should do. More independent support and advice would be welcome too.

While I generally welcome “freedoms and flexibilities” I have some concerns over the end of the Financial Management and Control Evaluation (FMCE) self-assessment. For most SFCs the FMCE was completed in summary form annually and in full triennially. Something less “tick box” was definitely needed. The Education Funding Agency proposes:

Instead, the EFA will take formal assurance from the Corporate Governance Statement included within SFCs’ annual financial statements. Whether or not SFC’s continue to use the return as an aide memoire for their own management purposes is a matter for individual colleges to decide.

How often do SFCs or other organisations depart materially from boiler-plate wording in the Corporate Governance Statements? Not often enough. Maybe  audit committees will now spend more time drafting and considering these Statements.  But I am a little doubtful.

I hope that the Sixth Form Colleges Forum will provide support in this and other areas as SFC respond to this brave new world.

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).

College accounts: how colleges are surviving in hard times

Before Easter the Skills Funding Agency published the college accounts spreadsheet for 2010/11. In recent years the spreadsheet has generated more interest than a quick look to check out the Principals’ salaries. The spreadsheet offers some insight – albeit a little dated - into how colleges are coming with the age of austerity.

Sadly the college accounts spreadsheet currently omits almost all sixth form colleges. The Young People’s Learning Agency never got round to validating the figures before it was abolished into the Education Funding Agency at the Department for Education. Once the figures have been validated by the EFA, a revised spreadsheet with include these sixth forms.

For further education and tertiary colleges the accounts show the sector is stable but still in difficulty. There are 68 further education and tertiary colleges making operating losses but this figure is an improvement on 2009/10.Of course, some of the deficits will have disappeared through merger. Nevertheless, the funding cuts have been absorbed without a dramatic deterioration in financial health.

It is clear from the accounts that colleges are responding to funding reductions by saving costs at both the chalk face and in the back office. The pay bill for further education and tertiary colleges was about £200 million lower in 2010/11 than the previous year.

For the sub-sector of general FE colleges the operating surplus in relation to income fell only slightly from 1.7% to 1.6%. This was achieved as pay was cut faster than income fell. The critical pay:income ratio being reduced from 65.3% to 64.5%. For the small sub-sector of tertiary colleges the operating surplus fell more significantly from 2.6% to 2% as the pay:income ratio actually crept up 65.6% to 66.8%. As there are many more general FE colleges than tertiary colleges, the overall effect was one of staff numbers and pay levels taking the strain for the sake of colleges’ survival.

No Free Lunch? Disadvantaged young people in Sixth Form Colleges

I do not normally plug causes on this blog, but I will make an exception for the Association
of Colleges' No Free Lunch? campaign. The AoC is pointing out that sixth formers from disadvantaged backgrounds in FE or Sixth Form Colleges do not receive free meals at lunchtime whereas otherwise identical young people in school sixth forms do.

While this is the age of austerity, the Coalition does stress fairnesss in general and specifically for 16-18 education funding a "level playing field". So I hope the government is listening. To give it a prod, please sign the e-petition here.

Almost time to party – the ONS deciding on how to classify colleges

Today’s announcement that the Office of National Statistics is re-classifying FE and sixth form colleges out of the public sector is good news.

The change in the ONS position reflects changes ushered in by the Education Act removing various regulatory powers from Whitehall, the Skills Funding Agency (strictly speaking part of the department for Business, Innovation and Skills) and the Young People’s Learning Agency. The ONS ruling does not grant independence to colleges – it merely recognises the new freedoms granted to college corporations. (Those freedoms may have downside when a college stumbles or banks “re-price” the risk associated with lending to colleges.)

The bunting should be strung up as the ONS was threatening a tangle of new red tape. However, before the flags come out we should note that the financial memorandum will have to change. Tucked away at the foot of the BIS press release was a note:

This reclassification is provisional upon ensuring that there are no other public sector controls in other documentation, such as the funding agreements, and keeping under review the use of remaining government powers within legislation.

Nevertheless, the SFA is promising a new financial memorandum “very soon”. Presumably – and hopefully – the YPLA is also treating the issue with urgency. Before 1 April these will be handed down – probably well before then as a consultation draft. The timescales are somewhat tight.

There might be some other footnotes in the full ONS judgement when it is published. (The latest ONS press releases include bed blockers and breast enlargement but nothing appears to be there on the status of colleges.)

Whilst not wanting to be a party pooper, it is also worth remembering that the National Audit Office will have to consider a similar issue – whether the accounts of all the English FE colleges should be consolidated into the accounts of the SFA. The ONS announcement makes it easier for the auditors to say that consolidation (and all the returns which would be required of colleges to make it possible) is not necessary. The NAO will be applying financial reporting standards but the same kinds of issues of control are in play. So before long we should be able to toast the auditors as well as the statisticians.

Risk management and reputations: capsized cruise ships and mice in salads

Today, as stock markets opened, the share price of Carnival fell by 20%. I wondered if the directors and managers of the owners of Costa Concordia had listened to the Freakonomics podcast about A Mouse in the Salad.

The podcast recalls as case of a mouse being found in a salad at an up-market chains. It uses the case study to describe how companies deal with unfortunate incidents which pose a threat to their reputations.

The issue of reputational risk is not just a matter for shareholders and directors in the commercial world where brands are worth billions. Reputational risk can blow public and third sector organisations off-course too. Last year we saw the Metropolitan Police shaken at the very top by allegations.

Being prepared is always a good start when it comes to risk management. Too many organisations think that a periodic update of a risk register is enough. Contingency plans for specific situations as well as generic bad stuff should be in place. While media training may not be necessary for smaller organisations, leaders of all organisations need some support and guidelines in place for when necessary, especially if they might be unfamiliar with media glare. Having a link with PR agency for emergencies might come in handy as well as building up strong relationships with the media and other stakeholders in good times.

Listening to the Freakonomics podcast (or reading the transcript) highlights the importance of communication, transparency and ownership when things go wrong. The sooner that Carnival learn that, the quicker that their business will right itself.

Academies - converters in need of a hand?

Today’s Financial Times carries any article reporting that eight academies have had to be bailed out by the Department for Education in the last 18 months alone.

The article is not clear whether the eight academies were “converters” or longer established academies. What is likely is that many more of the 1500 plus academies will suffer financial problems in the next few years. Primaries without critical mass will be especially vulnerable unless they team up with larger secondaries or with the emerging schools chains.

While I personally believe in greater schools autonomy and choice, there needs to be a framework of greater support for academies. The Young People’s Learning Agency (and the soon to-be-Education Funding Agency under the wing of the DfE) is not set up provide the kind of support that the DfE’s old Academies Finance Unit aspired to provide. There are consultancies, accountancy firms and other service providers able and willing to help – normally for a fee. There is also self-help: academy finance directors and managers can get support at the academy finance directors' google group from their peers (many of whom have been in academyland for several years). Guidance can also be found in CIPFA’s new Effective Governance and Financial Management in Academies although a handbook can only take you so far however comprehensive and useful. CIPFA is also now offering a Certificate in Financial Reporting for Academies.

If local school commissioners were appointed – as suggested by the new head of OFSTED and Chris Cook of the FT – this “middle tier” between Whitehall and academies might offer some support. However, I suspect any such institutions be more a regulatory watchdog than a helping hand.

This all sounds very negative. Sorry. One thing that academies can do is seek out professional (legal, financial etc) with experience of coping with independence in a public or third sector setting. Last year I wrote to a local converter academy offering pro bona support – I did not even get an acknowledgement back.

Academies, finance directors and accountancy qualifications: lessons from FE?

If you want to start a lively discussion amongst academy Finance Directors at a Christmas party or anywhere else, you could ask them whether academy FDs should be professionally qualified accountants. This subject might be seen as too contentious by some – placed in same category as religion and politics.

Many of the academies in Labour’s programme did not initially have accountants appointed as Finance Directors although these schools often had involved and supportive sponsors who could provide financial expertise. By 2010 the National Audit Office was finding that almost two-thirds of these academies had Finance Directors who were accountants. Under the Coalition’s policy of encouraging schools to convert things may be different - many of those acting as Finance Director will not be accountants but will be experienced and qualified School Business Managers.

There are people who think that accountants should be leading on financial management in academies.

The Academies Financial Handbook (pdf) stated in 2006:

The DfES strongly recommends that the person appointed as Finance Director, or equivalent, should be a qualified CCAB accountant, or equivalent, with some experience in a senior position; charity experience would be valuable. An acceptable alternative, subject to the governing body themselves having significant financial experience and ability, would be a member of the Association of Accounting Technicians who has significant relevant experience in either a charity or educational institution.

When the successor to the Handbook arrives is unlikely to send out a different message - unless there is ministerial pressure.

The public sector accountants’ professional institute, CIPFA, published in 2009 a Statement on the Role of The Chief Financial Officer in Public Services. One of its five Principles is that:

The chief financial officer in a public service organisation must be professionally qualified and suitably experienced.

The cynics might suggest: professional bodies for accountants would say that, wouldn’t they? Nevertheless, academies - along with other independent providers of education such as colleges and universities – are entering a world where austerity casts aside the assumption of funding that grows faster than or even in line with inflation. General FE colleges and sixth form colleges gained their independence in the early 1990s – a similarly bracing climate – and they soon opted for professionally qualified Finance Directors.

I would not personally say that all academy Finance Directors must be accountants. However, each academy must ensure that it has robust financial management in place – which may involve support from, say, Responsible Officer governors or consultants if the Finance Director is not a trained and qualified accountant. Governors and Headteachers must always be mindful that if things do go wrong they will be asked whether they critically assessed the arrangements which they put in place.