IMPROVING COLLEGES' FINANCIAL PERFORMANCE
5. In his report, the Comptroller and Auditor General
noted that the overall financial performance of further education
colleges in England had improved significantly, from a sector
deficit of £128 million in 1994-95 to an overall surplus
of £18 million in 1997-98. At the same time, the number of
colleges in poor financial health had fallen from 21 per cent
in 1996 (93 colleges) to 13 per cent (56 colleges) in 1999.[2]
However, the percentage had risen again to 17 per cent (72 colleges)
at the time of our hearing.[3]
6. He concluded some external factors play a significant
role in determining whether a college will be in good or poor
financial health, such as financial problems inherited at incorporation
and the type of students it has. Some factors, like differences
in funding, are diminishing with time. Others, such as the type
of college or type of student tend to apply to restricted groups
of colleges rather than right across the sector.[4]
7. He also found that the way in which colleges are
managed and governed plays a large role in deciding their financial
health. In particular, there are certain key elements of best
practice in management that can do much to ensure a college's
financial health.[5]
8. We focussed our examination on the scope to improve
colleges' financial performance through:
- Changes in funding (paragraphs 9-16);
- Strengthening College Governance (paragraphs
17-22);
- Ensuring the adequacy and quality of provision
through mergers and collaborations (paragraphs 23-29);
- Proactive rather than reactive measures (paragraphs
30-33).
(a) Changes in funding
9. The Funding Council confirmed that the problems
inherited on incorporation had diminished. At incorporation, about
100 colleges had inherited deficits. Some were large; the largest
was about £2 million. Most of those cases had been resolved,
and only about 11 per cent of colleges now in poor financial health
are those with deficits on incorporation.[6]
10. Funding for colleges is subject to a complex
methodology. The methodology was reviewed and simplified to some
extent in 1996 and the new Learning and Skills Council is expected
to introduce a new funding system.[7]
11. The Funding Council acknowledged that one change
in college funding had had a major impact on some colleges. The
previous government had encouraged franchising, whereby students
enrolled at colleges are taught by third parties who take a share
of the funding provided by the Funding Council for these students.
Resourced mainly by open-ended demand-led funding, this had grown
to cover some 740,000 students by 1997-98. However, some colleges
had focussed on distant franchising rather than their local communities,
in order to secure increases in student numbers. When the new
Government withdrew the demand-led element of funding at the end
of 1996 and early 1997, the Funding Council no longer had the
funds to support new distant franchising. They therefore encouraged
colleges to withdraw from this in an orderly way so that they
could replace distant provision with local provision. As a result,
the number of students covered by franchising had dropped to 400,000.
The best colleges were withdrawing from franchising over a period
of three to four years but quite a number did not get the funding
they had expected.[8]
12. Because funding is related directly to the number
of students at each college, one major cause of financial problems
now is the difficulty some colleges have in recruiting sufficient
students. This is associated with the strength of the economy,
in that there has been an increase in the number of young people,
particularly those with poor academic backgrounds, going into
employment. And where a college is not recruiting well, adverse
publicity can exacerbate the problem.[9]
13. At any one time certain regions of the country
might have more colleges with financial problems than others.
At the extremes, at the time of our hearing, the Eastern region
had 28 per cent of its colleges in poor financial health whilst
Greater London had only 5 per cent.[10]
The funding formula assumed that the same programme delivered
to the same kind of student cost the same wherever they lived.
However, certain factors led to additional funding, such as London
weighting, to cover the extra costs of colleges in inner London
(18 per cent uplift), outer London (12 per cent) and the London
periphery, for example Croydon (6 per cent). These uplifts took
into account the advice of a working group and consultants, and
reflected variations in staff costs as well as fixed costs such
as premises.[11]
14. The Funding Council also sought to target specific
funds on particular groups of students. For example a weighting—linked
to post codes—called the widening participation factor,
took account of the extra costs of educating certain types of
students, such as the homeless, asylum seekers, and those with
mental health problems who may be prevalent in large numbers the
in major cities. This weighting averages eight per cent and was
planned to go up to ten per cent. It also applies to students
who are studying English as a second language, although it does
not specifically target multi-cultural and multi-lingual education.[12]
15. Despite these weightings, the Funding Council
accepted that there was a general problem of teachers' salaries
in further education. The Government had announced a further £50
million to be applied to improving conditions for teachers, and
the Department were reviewing the whole issue of teachers' pay.[13]
16. We asked whether the changes to funding now planned
by the Learning and Skills Council might make matters worse, and
whether funding for School sixth forms would be maintained when
they came within the Learning and Skills Council arrangements
in 2002. The Funding Council confirmed that there would be a degree
of continuity with the funding regime and that schools had been
given a real-terms guarantee that their level of funding would
remain the same and be protected, providing they maintained the
same numbers of students. A consultation paper was due to be issued
in December 2000 on the way sixth form colleges would be funded.
They added that the provision of additional funding by the Government,
an influx of £522 million in 2001-02 for further education,
would further help ease the financial situation of the further
education sector.[14]
(b) Strengthening College Governance
17. The Funding Council agreed with the Comptroller
and Auditor General that the strength of college governance and
management was a key factor in financial health. The financial
performance of each college was a central responsibility of governors,
and solvency of the college was a key requirement of their financial
memorandum.[15]
18. To strengthen governance, the Funding Council
had produced a new guide and mandatory induction training within
the first six months after a governor's appointment. They had
developed and distributed training materials for governors, and
provided funds—£2,000 for each governing body—for
colleges to employ trainers. In addition, they had introduced
a requirement that there should be audit committees and that a
member of the audit committee should have financial expertise.
They had taken steps to strengthen recruitment arrangements and
would continue to review the quality of governance as part of
their inspection process.[16]
19. As regards ensuring that all colleges were aware
of the key elements of good financial management that could improve
financial health, the Funding Council gave a good deal of advice
to colleges. Since 1999 they have had a fund, the Standards Fund,
which has enabled them to produce a training programme for managers.
Ninety-six college principals had been trained during the last
year and financial management and strategic management was a very
important issue. The Funding Council expect to train a further
200 college principals and a number of aspiring principals.[17]
20. Where problems do occur, governors are indemnified
provided they have acted in good faith. However, in a number of
instances where things had gone seriously wrong with governance,
the governors had resigned. The Secretary of State could dismiss
governors, and had taken stronger powers to direct them in the
new Learning and Skills Act. Where the Funding Council's inspections
of colleges had graded them lowly on a comprehensive measure of
management quality, including financial health, in almost all
cases the principal had either left the college voluntarily or
in some cases involuntarily.[18]
21. The Funding Council told us that the time governors
are expected to spend on the job had never been defined. Governing
bodies generally met between three and six times a year, and sub-committees,
such as finance committees, more often. Despite this they received
no remuneration. The Government had considered this on a number
of occasions and decided against it. The key arguments were that
school governors were not remunerated and there was a parallel
to be drawn with them, and that there was no strong evidence to
show that remuneration would lead to a better quality of governor.
Any change in these arrangements, including for example a pilot
scheme, was a matter for Ministers.[19]
22. One concern raised by the Comptroller and Auditor
General, was that the Funding Council did not inform governors
of the outcome of college solvency reviews, although they did
tell the college principal. We therefore asked the Funding Council
how they could be sure that governing bodies were getting the
information they needed to take definitive action. In their view,
it was the responsibility of governors to ensure that they were
properly informed, and the Funding Council provided guidance to
that effect. The Funding Council also did not want to overload
governors by communicating everything to them. However, where
the Funding Council's regional reviews raised the highest level
of concern, they did copy their letters to governors. That said,
the Funding Council regarded the Comptroller and Auditor General's
report as very helpful, and intended in future to copy all regional
review results to governors where a college was assessed as in
poor financial health.[20]
(c) Ensuring the adequacy and quality of
provision through mergers and collaborations
23. Merger and rationalisation of further education
colleges has been a specific Government policy since 1997. Where
colleges are in financial trouble, they are required to consider
merger as an option and since 1999 the Funding Council have provided
financial support for that process. Since incorporation, there
had been 48 mergers, most from 1997 since when the number had
been running at about ten a year.[21]
24. The Funding Council confirmed that their primary
responsibility was provision, in terms of the adequacy and sufficiency
of education; they review provision every year and decisions are
never taken purely on financial grounds. Where continued provision
is needed, then the Council look at what steps can be taken to
secure it. They ask colleges to consider a range of options and
possible merger partners.[22]
25. One area where provision has been under pressure,
and where the Funding Council had encouraged mergers was agriculture
colleges. Historically one agriculture college was established
in each county. But with the general decline in the industry,
the demand for agricultural education, the number of farmers and
farm workers, had decreased. As a result, there had been difficulties
in recruiting students and the Funding Council had concluded that
there were too many colleges. Also, a number were very small and
not very good. So they had encouraged merger in a number of cases,
whereby provision could be maintained but sheltered in a college
that had greater diversification. There had been a number of mergers
with general Further Education colleges and three with higher
education institutions. At the same time, they had introduced
a five per cent uplift in the overall funding of agricultural
colleges, and this was planned to increase to ten per cent in
2001-02.[23]
26. One such merger had taken place in the North
East of England in 1999, between Durham College of Agriculture
and Horticulture and East Durham College. Durham College had been
in serious financial difficulties and the Funding Council had
considered merger the most appropriate option. Durham College
had considered two possible merger partners in the area, and had
chosen East Durham.[24]
At the time, the Funding Council did not have funds to support
such mergers, although the following year the Government made
funds available. Since then the Funding Council had been able
to give financial support to new mergers, for example to undertake
due diligence work and to deal with some inherited liabilities.
In considering applications for funding they take the overall
financial position of the colleges into account, to ensure that
they applied scarce funds only where needed.[25]
27. Looking forward, an important development was
that national training organisations would be much more involved
with the new Learning and Skills Council. The land-based national
training organisation was a particularly effective one and was
already looking with colleges at the overall provision. In addition,
the Funding Council was encouraging the best half-dozen or so
agricultural colleges to disseminate good practice.[26]
28. In other subjects, difficulties in recruiting
sufficient students had led to course cancellations, some at very
short notice. The Funding Council supported the view of the Comptroller
and Auditor General that colleges should develop their course
costing and consider the future of courses that did not pay their
way. It was not a sensible use of public money to have small unprofitable
courses in various places. Therefore, the Council encouraged colleges
to work together so that there was provision within a reasonable
distance. But they accepted that where courses were cancelled,
students should be given proper notice and helped to find alternative
programmes either in the college or elsewhere.
29. Where it was essential to continue a course because
demand was not being met elsewhere, for example in more isolated
communities, then the Council had the powers to ensure that there
was local provision. The Learning and Skills Council would be
a much more local body, and it would be one of their responsibilities
to ensure the adequacy of provision, not just in colleges but
also through private training providers.[27]
(d) Proactive rather than reactive measures
30. The Comptroller and Auditor General noted that
the Funding Council had developed a sophisticated system for monitoring
colleges and assisting them from poor financial health to recovery.
The regional review process, recently formalised, had significantly
enhanced this system and it would be further enhanced by the work
of the Quality Improvement Unit and funding from the Standards
Fund. The Funding Council also provided valuable support to colleges
in the areas of benchmarking and performance indicators. There
were some areas, however, where his work showed scope for the
Funding Council to give more effective assistance.[28]
31. We therefore asked the Funding Council whether
they now had the systems in place to enable the early identification
of potential financial problems at colleges. They told us that
the regional review process brought together all of the information
needed on colleges' financial position. The Council had also extended
the information they provided to colleges—three times a
year—including feedback and benchmarking colleges against
each other. Some 100-120 colleges had experienced poor financial
health since 1996 but as a result of the action taken colleges
now responded much more quickly to financial problems and were
spending less time in poor financial health.[29]
32. Despite this progress, the Council still found
it difficult to prevent colleges getting into poor financial health
in the first place and we were concerned that the number in poor
financial health had deteriorated again to 17 per cent (72 colleges).
They assured us that as a result of their regional review process,
they had stopped some colleges whose financial position had started
to deteriorate, and told us that of the 72 colleges in poor financial
health only 13 were causing extreme concern. They added that the
provision of additional funding by the Government, amounting to
£522 million in 2001-02 for further education would further
help ease the situation. But they had set no targets for reducing
the number of colleges in poor financial health.[30]
33. They told us monitoring of and further support
to the sector might further improve with the establishment of
the Learning and Skills Council, since they would be organised
on a local basis - with 47 local offices - and have considerably
more staff resources available. There would be a specific focus
on support, for example in using discretionary expenditure to
support activities such as adult and community learning.[31]
Conclusions
34. Overall the financial performance of the further
education sector has improved, from a sector deficit of £128
million in 1994-95 to an overall surplus of £18 million in
1997-98. This is partly as a result of additional funding, tackling
deficits inherited on incorporation, targeting resources at areas
of high cost and specific needs, a series of mergers, better management
information and support from the Funding Council.
35. One of the key factors in the number of colleges
in poor financial health has been funding. Overall funding has
been increased, the Funding Council have made a start in simplifying
the byzantine funding methodology, and the Learning and Skills
Council plan to introduce further changes. It is reassuring that
there will be some continuity of funding. But the Learning and
Skills Council will need to make the new system as simple and
transparent as possible, and to phase in any significant changes
to avoid the sudden falls in college incomes that followed the
withdrawal of funding for distant franchising.
36. The Comptroller and Auditor General and the Funding
Council agree that another key contributory factor in poor financial
health is the quality of governance and management in colleges.
Action has been taken by the Funding Council to strengthen these
aspects, partly in response to the series of financial and governance
problems that have occurred in specific colleges, many of which
we have looked at in this Committee. The Comptroller and Auditor
General has identified a number of further actions that the Funding
Council and colleges can take to improve governance and financial
management in the sector, and we endorse them.
37. There have been 48 mergers since incorporation
in 1993, most since 1997. Mergers and rationalisation provide
an important way of dealing with colleges in poor financial health.
At the same time we welcome the commitment of the Funding Council
to continue to give priority in their decisions to the adequacy
of provision particularly in the more isolated areas and in subjects
such as agriculture.
38. Where merger and rationalisation is an option,
it is important that colleges are given adequate advice and support,
including funds to help tackle financial problems. This has been
a feature of the Funding Council's approach since 1997 and it
is helpful that the new Learning and Skills Council will have
a stronger local role and more resources locally, which should
strengthen this aspect of their work.
39. Developments in the Funding Council's monitoring
and support activities, particularly through the regional review
process, have helped prevent some colleges getting into financial
trouble, and where they have, spend less time in poor financial
health. However, there must be more that the Funding Council,
and its successor the Learning and Skills Council can do to identify
potential problems earlier. This would allow them to take a more
proactive, preventative approach to resolving the causes and spend
less management time on reactive measures. We expect the new Learning
and Skills Council to let us have their plans and targets for
reducing the number of colleges in poor financial health.
PROGRESS IN INVESTIGATING AND DEALING
WITH HALTON COLLEGE AND OTHER COLLEGES WITH PARTICULAR FINANCIAL
AND OTHER DIFFICULTIES
40. In April 1999, we took evidence on the outcome
of alleged irregularities at Halton College, based on a report
by the Comptroller and Auditor General. In our report, we drew
out a number of key lessons.[32]
41. Halton College was able to claim almost £14
million more in grant from the Funding Council than was justified,
despite a range of controls for ensuring the accuracy of funding
claims including audit by the College's external auditors. The
Funding Council were still investigating six other colleges where
overclaims might have arisen. We found it difficult to understand
how unjustified claims on this scale could have evaded the financial
controls in place, that it had taken so long to finalise the figure
at Halton, and that other potential cases were still not resolved.
We looked to the Funding Council to review again their financial
controls and checks over grant claims to ensure that any future
overclaims were picked up before payments were made. And we urged
the Council to complete its investigations into those colleges
with similar features to Halton, who might therefore also be overclaiming
public funds, as soon as possible and to let us know the outcome.
42. The problems at Halton arose from a combination
of a strong Principal, a weak audit process and a governing body
that was not on top of the situation. We had seen similar failings
in other colleges. Given that further education colleges receive
over £3 billion of public funds each year, we welcomed the
new measures announced to strengthen governance and audit arrangements
throughout further education colleges. We expected that these
would go some way to prevent further cases and re-establish the
credibility of the sector. But we looked to the Funding Council
to follow through on all of these issues in their cyclical audit
and inspection work at colleges. We also welcomed the steps taken
by the Funding Council to strengthen the audit of grant claims,
and to separate responsibility for internal and external audit.
However, we were concerned by the Funding Council's conclusion
that internal audit could not be relied on in about a fifth of
colleges. We looked to them to ensure that internal audit arrangements
throughout the sector were rigorous and reliable.[33]
43. Before our hearing in November, the Funding Council
gave us an update on the position at Halton, and on their investigations
at other colleges. At Halton, the principal, deputy principal
and governors had resigned, and been replaced. The college had
been awarded low grades for management and quality assurance following
an inspection in October 1999, and would be re-inspected in 2000.
New internal and external auditors had been appointed. And the
claw-back of £8 million of funds would be completed by the
end of March 2001.[34]
44. As regards other colleges, which may also have
overclaimed, the Funding Council had examined six in some depth.
In four cases—Clarendon, Handsworth, Mid-Kent and Stafford—
action had been taken to tackle weaknesses in aspects of management.
In two cases—Clarendon and Mid-Kent—issues with funding
claims would result in the return of funds to the Council or reduced
claims. Investigations were still underway in a fifth case, at
Barnsley College, where the Council and the college were clarifying
the extent to which funding claims might be reduced and the implications
this might have for the college.
45. In the sixth case, Bilston, following a highly
critical report from the Council's inspectorate, and an inquiry,
the Secretary of State had dissolved the college on 1 October
1999. The college's property and assets had been transferred to
Wulfrun College, now known as Wolverhampton College, and its liabilities
to the Council. Investigations were continuing into various matters
arising, involving joint work between the Council, the audit companies
HLB Kidsons and Bentley Jennison, the Department of Education
and Employment's special investigation unit, the Charity Commissioners,
the Department for International Development and the Qualifications
and Curriculum Authority. Some aspects were also being considered
by the West Midlands Police. The Council planned to consider civil
proceedings against the internal and external auditors.[35]
46. Against this background, we asked for an update
on the position at Bilston, particularly on why it had taken so
long to establish what went wrong and the extent of the overall
loss. The Council told us that the case was very complex and the
evidence amounted to 1,400 banker's boxes that were kept under
the supervision of the West Midland's Police Fraud Squad. Substantial
sums were involved. But the Council were reluctant to give us
an estimate of the loss to public funds at this stage. This was
because this might prejudice any case they might wish to bring
against the external auditors, Deloitte Touche, who had also been
the external auditors of Halton College, and the internal auditors,
Garratt and Co.[36]
47. In view of the problems at Halton, at Bilston,
and at other colleges we asked about the reasons for the poor
quality of auditing, and what the Funding Council were doing to
improve it. They told us that college external auditors had to
sign off both the college accounts and funding claims. Some had
found it difficult to audit the funding claims, which involved
signing off the number of students who had been educated. As a
result, the Department of Education and Employment had decided
to take this task away from college auditors and to put the responsibility
on the Funding Council.[37]
48. The choice of firms for audit of college accounts
remained a decision for college governing bodies; the Council
was only involved in advising on the appointment process. However,
the Funding Council reviewed the quality of audit work—in
terms of specific branches of audit firms—and advised colleges
when they re-engaged auditors. The Council followed up any non-compliance
report on an audit provider by requiring them to meet the Council.
They met the educational partner, and made it clear what improvements
were expected. The Council's ultimate sanction was to cease to
recommend firms or branches of firms as auditors of colleges.
As a result of their work, the Council had seen an improvement
in compliance with their requirements, up from 69 per cent in
1997-98 to 75 per cent in 1998-99.[38]
49. Because external auditing had been so poor, we
asked the Funding Council whether if the Comptroller and Auditor
General and the National Audit Office were appointed as external
auditors for all colleges, auditing would improve. The Chief Executive
of the Funding Council gave his personal view that the Comptroller
and Auditor General should be appointed to audit all Further Education
Colleges, along the lines of the arrangements recently introduced
in Scotland.[39]
Conclusions
50. The quality of external audit in the Further
Education sector continues to be poor. This applies both to external
and internal audit, and to medium and large national audit firms.
The sector receives around £3 billion of public funds each
year, over 75 per cent of its income, and it is essential that
Parliament has confidence in the way this money is spent. The
Comptroller and Auditor General should be appointed the auditor
of all college accounts and funding claims. Such arrangements
have already been introduced statutorily in Scotland, following
devolution and we understand are under consideration in Wales.
51. There have been substantial losses to the public
purse, arising as a result of the position at Bilston College.
The Funding Council needs to bring its investigations of the Bilston
affair to a conclusion and take action to recover this money.
1 Thirty-seventh Report from the Committee of Public
Accounts report (HC 413, Session 1998-99), and C&AG's
Report (HC 357 of Session 1998-99) Back
2
C&AG's report (HC 454, Session 1999-00), paras 1.10-1.11 and
Figures 4 and 5 Back
3
Evidence, Qs 1-3, 38-41 Back
4
C&AG's report (HC 454, Session 1999-00), para 3 Back
5
ibid Back
6
Evidence, Q106 Back
7
Evidence, Q61 Back
8
Evidence, Qs 51-60 Back
9
Evidence, Q4 Back
10
Evidence, Q17 Back
11
Evidence, Qs 18-23, 26 Back
12
Evidence, Qs 23-25 Back
13
Evidence, Qs 28-29 Back
14
Evidence, Qs 101, 107-108 Back
15
Evidence, Qs 86, 116 and C&AG's report (HC 454, Session 1999-00),
paras 3 and 2.14-2.28 Back
16
Evidence, Qs 85-88, 93-94 and 37th Report from the
Committee of Public Accounts, Session 1998-99 (HC 413 (1998-99)) Back
17
Evidence, Qs 43, 104-105 Back
18
Evidence, Qs 45, 92-93 Back
19
Evidence, Qs 89-92, 95-97 Back
20
Evidence, Q5 and C&AG's report (HC 454, Session 1999-00),
paras 3.8 and 2.26-2.28 Back
21
Evidence, Q44 Back
22
Evidence, Qs 36, 46, 49, 68 Back
23
Evidence, Qs 47-49 Back
24
Evidence, Qs 62-68 Back
25
Evidence, Qs 69-75 Back
26
Evidence, Qs 49-50 Back
27
Evidence, Qs 33-37, 98-99 Back
28
C&AG's report (HC 454, Session 1999-00), paras 3 and 3.3-3.8 Back
29
Evidence, Qs 4-6, 42, 113 Back
30
Evidence, Qs 82-83, 101-105, 126-129 Back
31
Evidence, Qs 7, 101-105 Back
32
37th Report from the Committee of Public Accounts,
Session 1998-99 (HC 413 (1998-99)) and C&AG's Report
(HC 357 of Session 1998-99) Back
33
ibid Back
34
Evidence, Qs 8-9 Back
35
Evidence, Appendix 1, pp 19-20 Back
36
Evidence, Qs 10-15 Back
37
Evidence, Qs 16, 76-81 Back
38
Evidence, Q16 Back
39
Evidence, Q81 Back
