Audit, risk and financial regulation in the FE sector

Transcription

1 Audit, risk and financial regulation in the FE sector Andy Reid Simon Turner Grant Thornton International Ltd. All rights reserved.

2 Introductions A little bit about us

3 Introductions What type of college do you come from? What is your college experience? What is your 'day job'? What do you want to get out of this session?

4 Plan for today Timings Session Framework for financial regulation Current issues facing the FE sector Audit Committee effectiveness Break Case study what can go wrong Summary and closing thoughts

5 Framework for financial regulation

6 College s Articles of Government Set out the main responsibilities of the college corporation, including: effective and efficient use of resources solvency of the institution safeguarding of assets

7 Post-16 Audit Code of Practice 2016 to 2017 Issued jointly by Skills Funding Agency (SFA) and Education Funding Agency (EFA) Sets out how the SFA and EFA gain assurance that colleges spend public money in accordance with HM Treasury guidelines and properly discharge any statutory and other legal requirements Latest version March 2017

8 Financial memorandum and funding agreement SFA funding provided under a financial memorandum & EFA funding provided under a funding agreement sets out in detail the requirements on, and responsibilities of, college corporations, including that any mandatory requirements of Audit Code of Practice form a condition of funding

9 Audit Code of Practice requirements for Audit Committees a condition of funding that colleges establish an audit committee advises the corporation on the adequacy and effectiveness of the college s assurance framework advises and supports the corporation in explaining, in its annual accounts, the measures taken to ensure it has fulfilled its statutory and regulatory responsibilities

10 Terms of reference for Audit Committees the right to investigate any activity within its terms of reference the right to access all the information and explanations it considers necessary, from whatever source, to fulfil its remit a responsibility to maintain its independence in appointing members a responsibility to include individuals with an appropriate mix of skills and experience to allow it to discharge its duties effectively. Collectively, members of the committee should have recent, relevant experience in risk management, finance and audit and assurance a restriction not to adopt an executive role

11 Financial statements and audit Colleges must prepare annual accounts in accordance with directions given by the funding bodies, and appoint an external auditor to audit these annual accounts By 31 December Colleges must send to the relevant funding body a copy of: - the audited annual accounts - the external auditor s management letter Colleges must publish their annual report and financial statements on their website by the end of January following the financial year to which they relate Colleges must appoint a reporting accountant to provide an assurance report on regularity each financial year. The reporting accountant must be the same as the external auditor

12 Tests for regular and proper transactions is the expenditure in the best interest of the college? does the expenditure comply with approved procurement rules and policies? is there a valid benefit to the organisation from the expenditure and not just personal benefit to an employee? is the expenditure necessary? is the expenditure reasonable does it meet the identified and agreed needs? has the expenditure been properly authorised?

13 Statement of recommended practice (SORP) improve the quality of financial reporting enhance the relevance and comparability of information presented in financial statements provide clarification, explanation and interpretation of accounting standards and their application to the FE and HE sectors assist those who are responsible for the preparation of the financial statements

14 Other key documents College Accounts Direction College Accounts Direction Handbook produced by the EFA and SFA sets out requirements for colleges annual reports and financial statements, bringing together requirements of EFA and SFA EFA and SFA review the accounts direction annually covers key areas, such as: timetable for submission of financial statement who has to sign which component of the annual report and financial statements specific accounting and disclosure matters which the EFA and SFA want to draw to the attention of colleges produced by Association of Colleges in partnership with College Finance Directors Group not mandatory guidance aims to provide advice for colleges and their auditors on the way in which they can complete their financial statements provides advice on the implementation of the accounting policies set out in the SORP and College Accounts Direction example set of financial statements Casterbridge College created to illustrate the presentation and disclosures that might be found for a typical college

15 Current issues facing the sector

16 Current issues facing the sector Financial health of the sector NAO report on financial sustainability 2015 Area Review process Insolvency regime College mergers

17 NAO report on financial sustainability 2015 Overseeing financial sustainability in the further education sector Key conclusions: Financial health of the sector has been declining since 2010/11 Sector in deficit overall (for first time) in 2013/14 % of colleges assessed as inadequate on financial health rising Decline quicker than anticipated by colleges plans Key factors funding, falling student numbers, increased competition

18 NAO report on financial sustainability 2015 Overseeing financial sustainability in the further education sector Key risks identified: Robustness of College plans/forecasting SFA/EFA tended to rely on College figures with limited challenge Balancing finances vs educational standards is difficult Impact: SFA/EFA moved to more risk based intervention Area Review process

19 Area Review Process Launched in 2015 Fewer, larger and more financially resilient organisations Meeting educational and economic needs LEPs, local authorities Providers with strong reputations and greater specialisation Access to high quality and relevant education and training for all Colleges equipped to respond to expansion of apprenticeship programme Conducted in waves (Birmingham and Solihull Wave 1)

20 Area Review Process Outcomes to date Recommendations for all areas now published - between late November 2016 and February 2017 Number of mergers recommended Sixth Form Colleges pursuing MAT status? Development of shared service arrangements Links with HEIs

21 Insolvency regime Current regime limited options available Intervention by FE Commissioner but no statutory authority; can make recommendations in relation to: Recovery plans Changes to governance/leadership (but no power to remove) Conditions/restrictions on funding Secretary of State intervention Secretary of State can remove governors but not other staff, give directions to governing body including dissolution Further and Higher Education Act 1992 does not include provision for treatment of insolvent colleges

22 Insolvency regime The Technical and Further Education Bill The Bill introduces the application of insolvency procedures to FE bodies Consultation launched July 2016 October 2016: Government response to consultation - important not to overstate the risk of college insolvency Currently going through Parliament House of Lords Report Stage end of March 2017

23 Insolvency regime Insolvency procedures potential impact Allows for insolvency procedures as for a company including winding up a college Special administration regime - alternative to any normal insolvency procedure Education administrator manages the FE body s affairs, business and property to avoid or minimise disruption to students education

24 Insolvency regime Insolvency procedures potential impact Governors open to same potential liabilities as company directors when insolvency occurs Risks of disqualification/wrongful trading but countered by: Data to inform decisions - financial controls, forecasting and reporting Sound governance and rigour in monitoring financial performance Open communication with lenders and the SFA/EFA Maintain balance between financial health and quality of education provision Consult legal/financial advisors where required Act in good faith

25 FE College mergers Number already taken place as at 31 July/1 August Clear vision what are the objectives? The importance of planning pre and post merger

26 FE College mergers Clear vision what are the objectives? Essential to have clarity on the objectives of merger - costs, financial security, quality of provision? Need this vision before engaging with stakeholders (students, staff, lenders, local employers, LEP etc)

27 FE College mergers The importance of planning pre and post merger Merger is a demanding project, lots of time, investment, energy. Don t underestimate how much planning is needed Engagement with key stakeholders Internal stakeholders student, staff, unions, suppliers, landlords External stakeholders SFA, EFA, banks, LEP engaging with banks is crucial. Plan for post merger can often take 12 months + post merger to deal with issues

28 FE College mergers Engaging with lenders Clear vision for merger Detailed plan doesn t have to be perfect but does have to be properly supported and thought through Credibility Scenario/stress testing Clear governance arrangements for the enlarged college Evidence that plans are deliverable - need to be realistic on skills needed for change management Banks need to go through their own processes when changes are being made to lending arrangements which can take time

29 FE College mergers Issues for Boards What will the college be called important for students, staff, branding in the marketplace Governance right Board, management team, governors. Get lenders on board Merger accounting proper representation from both colleges on Board and management team Be realistic on how much external support is needed Additional costs of realising the merger eg costs of leases, rebranding etc. (Some funding available from SFA/EFA)

30 Audit Committee effectiveness

31 Audit Code of Practice requirements for Audit Committees a condition of funding that colleges establish an audit committee advises the corporation on the adequacy and effectiveness of the college s assurance framework advises and supports the corporation in explaining, in its annual accounts, the measures taken to ensure it has fulfilled its statutory and regulatory responsibilities

32 Terms of reference for Audit Committees the right to investigate any activity within its terms of reference the right to access all the information and explanations it considers necessary, from whatever source, to fulfil its remit a responsibility to maintain its independence in appointing members a responsibility to include individuals with an appropriate mix of skills and experience to allow it to discharge its duties effectively. Collectively, members of the committee should have recent, relevant experience in risk management, finance and audit and assurance a restriction not to adopt an executive role

33 Benefits of an effective Audit Committee Increasing public confidence in the objectivity and fairness of financial and other reporting Highlighting the independence of audit and any other similar review process (for example, providing a view on the Statement on Corporate Governance and Internal Control/Statement on Regularity, Propriety and Compliance) Raising the awareness of the importance of internal controls and the implementation of audit recommendations Independence from the executive and scrutiny functions, having a clear right of access to full council, other council groups and committees

34 Sources of assurance - Officer and clerk reports - Internal Audit - External Audit - External assessments Ofsted, SFA/EFA

35 Knowing the Ropes Status in the organisation - Well regarded, communicates with, is listened to by decision makers etc Operation of the Audit Committee itself Skills and qualities Evaluation of effectiveness

36 Status of the Audit Committee - Clearly defined role (TOR) - Understanding of the role of the Audit Committee within the organisation - Sufficient scope - Interaction and coordination with other committees

37 Size of the audit committee 3-5 members is an ideal size for an audit committee If your audit committee has more than three members, what additional benefit are the extra members bringing?

38 Frequency and length of meetings Meetings should be regular tied in to key audit milestones length should adapt to content.

39 Membership relevance and ability Audit committee members should be selected based on the skills and experience they bring Sufficient training should be provided for audit committee members

40 Skills and qualities required of members - Selection basis? - Key skills of effective members - Appropriate skills and knowledge to carry out role effectively - AC generally seen as a challenge mechanism

41 Some do's and don'ts Do Question and challenge Focus on areas of concern Share your concerns Be constructive Question every decision, every figure, every plan Put personal views above organisational views Aim to 'score points'.

42 Emphasis on relationships The style of the Audit Committee The Supporters Club The Improver The Rubber Stamper The Examiner Rigour of oversight.

43 Other features of an effective Audit Committee Knowing who to call upon to provide specialist advice where required Ensuring that members are aware of key items that inform their work, e.g. governance and regulatory structures, the College s strategy Members are independent of other key committees Meetings are free, open Unbiased attitudes- treat auditors, the executive and management equally Challenge executive/management- seek assurances on action being taken, monitor progress, hold officers to account.

44 Common misconceptions Overview of adequacy of arrangements vs checking delivery in practice Risk management Financial position Response to Ofsted assessments Review financial statements vs spot check accounts Call in specialist knowledge vs attempt to be an expert in everything

45 Some pitfalls to avoid Too much information Agenda too long or meeting not structured around priorities Dominance Disproportionate time on favourite subjects Lack of direction or inappropriate focus Not taking time to review progress and challenge "are we achieving our objectives most effectively and adding value to the governance of the College?"

46 Evaluation of Audit Committee effectiveness - Is effectiveness being assessed? - Use of KPIs/objectives? - Periodic external review - Annual review of ToR - Monitoring of internal controls

47 Sharing what really works at your audit committees What are the top three things you do at your audit committee which make a real difference to its effectiveness? One pet hate!!!!

48 Conclusion - top tips for effectiveness Establishing or reviewing the committee: appropriate, tailored, up to date terms of reference membership - good chair supported by audit and financial expertise (including lay members and planning for future role) management support - 'board secretary' role. Planning for the year: focus on end point of assurance year end members to own the agenda and ensure that this reflects key risks facing the organisation workplan and meeting schedule to flow from this, as well as required training and briefings.

49 Conclusion - top tips for effectiveness During the year: pre-meetings (including audit) to organise and prioritise agenda focus on assurance gathering for the AGS and speaking up / call officers in if not getting what is needed hard challenge on anything that threatens to soak up committee time that is not key to assurance gathering (interesting distractions / too much detail) awareness of tendency to drift into executive/management roles (policing role but assurance that it is being covered in the appropriate place) willingness to flex workplan / additional meeting / subgroup to deal with emerging important issues and risks. Year end: prepare a report on the effectiveness of the committee during the year feed improvements into next year's plan.

50 Case study what can go wrong

51 Case study FE Commissioner assessment reports Role of FE Commissioner is to assess the position of colleges found to be inadequate in terms of quality or financial management Trigger points for FE Commissioner intervention could be: inadequate Ofsted inspection failure to meet national minimum standards of performance inadequate assessment for financial health or financial control as identified by the SFA

52 FE Commissioner assessment process FE Commissioner assesses capacity and capability of the current governance and leadership to deliver rapid improvement - assessment takes place over a two week period FE Commissioner considers relevant available information and data on the college and takes account of the views of the staff and learners, local stakeholders, Ofsted, DfE, EFA and SFA FE Commissioner recommends action needed to secure improvement and the college is then charged with developing an action plan for implementing those recommendations

53 Case study FE Commissioner assessment reports What went wrong? Why did it happen? What recommendations would you make? Could it happen at your college?

54 Common themes from FE Commissioner Annual Report weaknesses in clerking arrangements, such as inadequate minutes, little training of governors and lack of value for money governance weaknesses, such as boards failing to hold senior management to account, not setting clear performance targets and not challenging failure to meet forecasts financial health issues caused by small class sizes, excessive numbers of management and support staff, unreliable financial information and poor utilisation of teaching staff and estates

55 Summary and closing thoughts