Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 1 - 19)




  1. This afternoon the Committee is taking evidence on the Comptroller and Auditor's Report on Managing Finances in English Further Education Colleges. Our witnesses are Professor David Melville and Mr Geoff Hall. Welcome, gentlemen. I think you are reasonably familiar with our procedures, but I will try to give you some indication of which part of the report I am speaking to in my questions. The first one is fairly general. That is, that the figures show that 16 per cent of colleges are in financial difficulty and that the proportion is rising again. Why have actions taken by the Funding Council over a number of years failed to prevent a significant number of colleges getting into financial difficulty?
  (Professor Melville) Thank you, Chairman. Could I just make a correction to the actual figures supplied to the Committee?

  2. By all means.
  (Professor Melville) It will probably be helpful to the Committee to update the figures so that we are talking in the context of the actual current ones, if you are happy. Currently we have 72 Category C colleges (those in financial difficulty) out of a total of 416. So the figures that are in Section 1.10 and 1.11 should now be 72. That is 17 per cent out of 416, not the 56 which was 13 per cent out of 429 (the number of colleges is also changing downwards fairly rapidly). Although at the time of the NAO survey it was actually 71, so it is very close to the figure that is there. I hear your question.

  3. Do not change the substance of the question, will you?
  (Professor Melville) No, but I wanted you to be aware that the figure is slightly less favourable or slightly more difficult. Your question was related to—

  4. Why have you not been able to prevent that number getting into financial difficulties over that number of years?
  (Professor Melville) I think the important issue here is that it is very difficult to prevent colleges going into Category C. The main issue is as to how we get them out as quickly as possible. No doubt you will want to go over that, I think, in due course. Very broadly, the main reason why colleges go into this difficulty category, if one were to look for a major cause, is actually recruitment. It is actually the difficulty of meeting their targets. Therefore, because our funding is related very directly to the number of students that are involved, then generally it leads to a financial downturn. It can be followed by adverse publicity locally for the college if they are not recruiting well, it tends to get around, and that exacerbates the problem and continues the difficulty. We have seen a further downturn, to answer your question as to why it was slightly worse. We were on the increasing track in the sense of the number in Category C going down from 1997. It seems to have stabilised at round about 70 now. We believe that this is associated with the strength of the economy, surprisingly. That is, there is an increase in the number of young people, particularly those with relatively poor academic backgrounds, going into employment, and that is of course the major recruiting area for colleges.

  5. I understand that, Professor, but if it is possible to get a college out of difficulty once it is in there, it is also possible to prevent it getting into difficulty in the first place. However, I will leave that for others to pursue for the moment and move on to paragraph 3.8 and also paragraphs 2.26 to 2.28. They tell us that the Funding Council does not inform governing bodies of the results of their reviews of college solvency. How can the Funding Council be sure that governing bodies are getting the information they need on the financial situation at their colleges, including the solvency position, and are therefore in a position to take definitive action? It is happening quite a lot, because we have witnessed in more than one case the governing bodies being kept in the dark by the management bodies and not being co-conspirators in that process.
  (Professor Melville) One of our preoccupations is the strengthening of management and governance, and generally we have taken the view that it does not help that process if we communicate everything to governors; that is, it is a responsibility of governors to ensure they are properly informed, and we try to provide them with guidance on that, and also that managers do it. However, in the extreme cases where colleges are in our highest level of concern—that is, our regional review highest concern status—then we do simultaneously copy the regional review letters (that is, the requirements placed on colleges) to governors. However, what I would like to say is that we regard this as a very helpful report, and we regard the suggestions that have been made as very positive. What we intend to do as a result of the NAO's comments on this issue is now to copy all regional review results—that is, three times a year to governors—simultaneously for colleges that are in financial health Category C, so that all these college governors will now, as suggested in the report, receive that information.

  6. Good. Can I move on to paragraphs 3.5 to 3.8 on monitoring financial health? These tell us that the Funding Council has formalised and strengthened its regional review process, while paragraphs 3.9 and 3.10 record the introduction of the Quality Improvement Unit and the Standards Fund. What reassurance can you give us that the Council now has the appropriate systems in place to enable the early identification of potential problems at colleges?
  (Professor Melville) I think the assurance lies in the Council actually putting together through the regional review process that we only began in 1998—and this Committee commented on favourably earlier—whereby we bring together all of the information, as I think was commented on the last time we met. It is only by actually having detailed knowledge continuously of colleges that early-warning signs can be spotted. The regional review process has been established. We have reviewed its operation since its beginning. It has been adopted, I think as you know, Chairman, by the Welsh Funding Council as a similar model, and it brings together all of the information. In addition, we have extended the information that we provide to colleges to provide support, and this is noted elsewhere in the report, so particularly giving colleges the feedback, benchmarking colleges against other colleges and giving them as much background information as possible. What we have observed is that colleges do respond much more quickly now; they know that this is happening three times a year, they know that we expect progress rather than on an annual basis, on a more regular basis, and therefore we are seeing a much more rapid response, so I think that when we get to the analysis of figure 7 on page 15, which I think is the key issue that you may want to pick up, we have some interesting data that indicates that colleges are now spending less time in financial health Category C.

  7. Thank you. My next point relates to the same subject; it is paragraph 1.5 which tells us that the Further Education Funding Council is to be replaced by the Learning and Skills Council in April 2001. Given that the new body will be funding and monitoring several thousands of training providers, what assurance can you give us that the new Council will be able to sustain and improve the level of monitoring and support to colleges?
  (Professor Melville) I think that ultimately assurance will only come from the Learning and Skills Council. My colleague, Geoff Hall, although Director of Funding and Strategy for the Further Education Funding Council and has been responsible for the Halton follow-up is at the moment seconded for four days a week to the LSC in developing its operations. If I can give the indication myself, it is that all of the processes—for example, the regional review process—are being continued as a provider review process that will also cover all the private training. You are quite right, the number of organisations goes up from something like 400 to close to 4,000. However, the number of staff involved is increased also by a factor of ten. The Funding Council, it might be said that the FEFC was not set up with permanent staffing to have detailed intervention. Our regional offices each have ten to 15 staff in them and they carry out most of the background work in these reviews. The Learning and Skills Council will have 47 local offices which on average will have 90 staff, so that is just over 4,000 staff in the local offices, therefore there will be a much larger number of people. I have seen some of the draft structures for the LSC and there is a specific focus on what might provide support and help to maintain that close contact. In addition, the powers that the Funding Council has recently been given of greater intervention have been transferred on to the Learning and Skills Council, and in addition the Secretary of State has been given additional power in that Act to intervene on a wider ranging basis than he has had in the past.

  8. Others may want to talk about that, it is obviously an important area. The last question or two I want to ask you relate to the actions taken on Halton College and Bilston College, what progress have you made in assessing the extent of overclaiming by colleges from your target reviews and audits, and what are the financial implications likely to be?
  (Professor Melville) What are the financial implications?

  9. Yes, that's right.
  (Professor Melville) The pre-submission that we made to you attempted to update all of those issues. What is important to note, first of all, on Halton College—which exercised us last time we here—was that has moved towards a very successful situation. The claw-back of all of the funds for Halton, which we note there is £8 million, as opposed to £7.3 million that was reported by the Public Accounts Committee, will all be complete by the end of March 2001. We have already recovered £5.1 million of that. Do you want me to go through all of the follow-up?

  10. Let me pick it up there and raise the issue of Bilston College with you, the investigation is still on-going and may not be complete until January 2001, nearly two years after the collapse of that college. Why has it taken so long to establish what went wrong there? How much would you estimate the overall loss is going to be?
  (Professor Melville) On the first part of your question the reason is that Bilston College—both the permanent secretary and I made the point at the Halton Inquiry that there was only one other college that was in the same category as Halton and that was Bilston—is the worst example of the kind of issues that came up at Halton itself.

  The Committee suspended from 16.45 pm to 16.52 pm for a division in the House

  11. You have had a long time to think about the question.
  (Professor Melville) You asked the question as to why it has taken so long.

  12. Why it has taken so long and the order of magnitude?
  (Professor Melville) As I indicated at the time of the Halton Inquiry, this is a very similar case which is largely associated with ineligible provision. The background was very similar, a strong principal, an extremely poor governing body and supine auditors. As far as action was concerned, that was rapid. The college was dissolved last year. We reviewed the situation and the new college is developing out of joining the previous college, Bilston College, with Wulfran College. It was a very complex case, putting the evidence together and developing detailed audits over a long period of time. The evidence amounts to 1,400 banker's boxes.

  13. 1,400.
  (Professor Melville) 1,400 banker's boxes of evidence which at the moment are kept under the supervision of the West Midlands Police Major Fraud Unit, who are also involved in investigations associated with this. As far as the Council is concerned there are three steps that we will be taking forward. We are co-operating with the police on the matters they regard as potentially criminal fraud. We are pursuing the issue of suing the auditors in order that we might recover as much of the lost funds as possible, and we will also be considering suing other partners associated with this. That is in a civil action. Of course, we will be reporting fully all the lessons that can be learned. I hope you will forgive me, at this stage I am not able to indicate what the order of magnitude of the sum is. The first is that we have taken detailed legal advice, including advice from a leading QC, and in order that our statement of claim stands up it is very important we do not in any way prejudge that by making estimates in public that may turn out not to correspond to the claim we are making. We believe we will be in a position in the early new year, when the work that is currently being carried out by the auditors employed for this purpose will establish what the sum is. Our statement of claim in terms of the courts will be made by March 2001. At that point it will be possible to indicate the order of magnitude of the sums involved. I also think in addition there are issues associated with a criminal investigation, whereby we have been advised that the indications of sums involved so far would not be appropriate at this time.

  14. Let me correct you on a few things. Firstly this is not sub judice as it now stands.
  (Professor Melville) It is not in the courts, no.

  15. This Committee is not in the habit of making exemptions on these matters. March is too late for us to know, we will want to know before then. I would suggest that you—I am not going to force you today—pick on a figure—particularly if it is not accurate—but I suggest that you confer with the NAO and the Committee's Clerk to take Speaker's Counsel advice on this[3]. This is not the first time this has happened, the advice you have been given is not accurate when it relates to the parliamentary procedures. I will move on from that. In the past few years there have been serious problems with excessive spending in some colleges and that not being picked up by college auditors. You mentioned you are suing one of your auditors, who is that?

  (Professor Melville) The auditors involved in Bilston are Deloitte & Touche.

  16. Given that colleges receive £3 billion public money per year what radical changes are you considering?
  (Professor Melville) A number of things have actually been put in place, Chairman. The first is that we have insisted that the colleges should separate their internal and external audit. The second is that we have been reviewing the work of auditors in terms of the quality of the work. Members of the Committee will be familiar with the fact that colleges employ their own internal and external auditors, the Council is only involved in advising on the appointment process. It is a matter for the corporation as to who they might choose. In the light of reviews of the work of specific auditors, this is not a whole firm, it is a particular branch of a firm, because they do vary across the country, we have been giving advice to colleges when they re-engage auditors, in particular where we feel auditors failed, to advise colleges against reappointing those particular auditors. We follow up a noncompliance report on an audit provider by requiring them to meet us. We call in an educational partner, my chief auditor does that, and interviews them and makes clear that we expect improvements. Our ultimate sanction is that we will cease to recommend them as auditors for colleges. In addition the Audit Committee has recently considered the production of a preferred list of auditors. The result of this is that we have seen improvements in internal audit quality over the last year, very broadly on internal audit work. In 1997/98 we were seeing 69 per cent compliance with our requirements for auditors. In the last year that has gone up to 75 per cent, so we have seen some improvement. The second issue is that as far as one of the key issues in audit is concerned, it has been the audit of the final funding unit claims. That is the means whereby we determine precisely what is due. This, of course, has been the issue in Bilston and in Halton where auditors have signed off funding claims which we in subsequent examination have found to be ineligible for funding. A decision was made that this responsibility will be shifted to the Funding Council. That was then the Further Education Funding Council and we have put steps in place to take that on. We conducted a pilot last year with a number of colleges to see how that would work. We have been working closely with the Department and with the National Audit Office on that. It is now going to a second-stage pilot in order to further develop a detailed method of how this can be done, particularly using computer-aided techniques. That will be in place for the current year, so that effectively audit of final funding unit claims will not be done by college auditors, it will be done by auditors supplied by the Funding Council, and that, of course, will be taken on by the Learning and Skills Council. At the moment we are letting tenders for those audits.

Mr Davies

  17. Welcome to you both. Can I say first of all that I notice in the NAO Report there are not perhaps regional variations in difficulties due to poor financial health. Can I ask you to confirm, Professor Melville, that the situation is reasonably flat other than in London and the South West, with London having particular financial difficulties? Is that correct?
  (Professor Melville) It is something that varies considerably from time to time. Remember, we have typically around about 70 colleges and we have nine regions, so the variations in the numbers are on average six colleges in each region which would be in financial health Category C. For example, I can give you the most up-to-date figures, if that is helpful. At the extremes, the Eastern region has 28 per cent of its colleges in Category C, whilst Greater London has only 5 per cent of colleges. What the NAO Report concluded was that we could not find any obvious explanation for the differences, other than perhaps that Greater London—and we have consistently found this—tends to have always a lower proportion of colleges in Category C difficulties. The variation is large at the moment.

  18. My understanding of the funding formula is that the presumption is that unit costs for a unit of education at a further education college are the same irrespective of where you are—in other words, it costs the same to educate someone in London as in Yorkshire—and that there is a move towards harmonising that in terms of the funding formula. Is that is correct?
  (Professor Melville) Yes. The same programme delivered to the same kind of student wherever they live in the country in fact costs the same. You will see there is some allowance for type of student in the formula. London is the first exception where we apply a London weighting factor in line with other organisations, and recently we have applied a 5 per cent uplift for specialist colleges—that is, colleges like agricultural colleges—and that is planned to go to 10 per cent.

  19. What is the London weighting?
  (Professor Melville) By "the London weighting" you mean what is its value?

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