Review of Financial Management in the Further Education Sector in Northern Ireland from 1998 to 2007 & Governance Examination of Fermanagh College of Further and Higher Education

John Dowdall CB, Comptroller and Auditor General for Northern Ireland, today published a report into (1) Review of Financial Management in the Further Education Sector in Northern Ireland from 1998 to 2007 and (2) Governance Examination of Fermanagh College of Further and Higher Education

1. Review of Financial Management in the Further Education Sector in Northern Ireland from 1998 to 2007

In view of the importance of the Further Education (FE) sector to Northern Ireland and the amount of money it spends each year, this report reviews the governance arrangements and financial management of the 16 colleges from their incorporation in 1998 to 2007. In 2007 they were restructured to form six larger, area-based colleges

FE colleges are independent corporate bodies, managed by governing bodies. Each Governing Body is accountable for the financial health and good management and the proper use of public funds entrusted to it. The lifetime of the 16 colleges was a period when there were significant and sustained developments in governance arrangements in public bodies in Northern Ireland. By and large, the Further Education sector reflected these. However, the report notes that “Occasional significant lapses illustrate that it is not sufficient to have governance structures in place: they need to operate intelligently and effectively to work.”

The report highlights the following:

• The Colleges total income in 2006-07 was £231 million, three-quarters of which was funding from the Department of Employment and Learning (DEL).
• The Sector as a whole saw declining surpluses in the three years to 31 July 2007 from an overall surplus of £15 million in 2003-04, with no colleges having an annual deficit, to an overall deficit of £5 million in 2006-07, with 8 of the 16 colleges having incurred a deficit in that year.
• Colleges, in broad terms, are required to break even to maintain their solvency. Annual surpluses are permitted to ensure, among other things, adequate levels of working capital, to protect against fluctuations in future funding allocations and to fund periodic maintenance programmes or capital development. Colleges are also permitted to have an annual deficit budget which can occur as a result of these surplus funds being used to underpin periods of growth within the college or to fund maintenance or capital development programmes.
• Common reasons for deficits in those colleges which were in financial difficulties at some point in time during the period covered by this report were poor financial controls, inadequate financial systems and insufficient information provided to senior management or Governors.
• The North East Institute got into significant financial difficulties between 2000-01 and 2002-03 incurring deficits for 3 consecutive years. DEL carried out an Efficiency Review in December 2002 to assess the College’s financial circumstances. The report includes a case study of the circumstances giving rise to these deficits, the findings of the Efficiency Review and the lessons learnt. The College subsequently returned to a surplus position.
• Despite a number of colleges facing serious financial difficulties in the past, some of them have accumulated significant cash balances each year with cash reserves at their highest level in 2005-06 when they totalled £54 million, £38 million more than the level recommended by DEL. This total was reduced to £50 million in 2006-07. DEL has made a commitment to reduce the level of cash and reserves in the sector over the next three years.

2. Governance Examination of Fermanagh College of Further and Higher Education

In 2005 and 2006 a number of Departmental and consultancy reviews in Fermanagh College highlighted serious failings in financial management and raised concerns over the regularity and propriety of the use of public funds. The findings included:

• significant weakness in corporate and business planning and financial planning and budgeting;
• an absence of financial controls;
• an unreliable management information system;
• a lack of challenge from corporate governance systems;
• a lack of organisational structure in the Senior Management Team, discord between management and academic staff, and fundamental breaches in complying with Departmental circulars and Governing Accounting requirements; and
• a need to secure the necessary leadership and a significant corporate change programme

The Audit Office considered that the creation of a new college structure would be an appropriate time to review the problems identified at Fermanagh College to see what general lessons could be learned by the new colleges and the Department.

Following reviews by the Education and Training Inspectorate in November 2004 and the College’s external auditors, in September 2005, the Department of Employment and Learning concluded in 2006 that funding claimed and received from DEL by the College had not met the necessary funding criteria. This funding related to Work Based Learning (WBL) training for employer companies. As a result of these reviews, the College agreed to repay funding of £1.14 million. An action plan was being implemented and progress is monitored by DEL.

In view of concerns over the deficiencies identified by the review of WBL training and that they might extend to other areas of College business, the Governing Body, following advice, guidance and assistance from DEL, commissioned consultants to carry out a comprehensive review of financial management within the College.

The consultant’s report noted significant weaknesses in corporate governance, business and financial planning, management information systems and issues over financial control. The report also identified a lack of structure in the operation of the Senior Management Team. Meetings were ad hoc and minutes were either not kept or, if produced, were vague with no decisions or action points recorded. Staff remarked that there was no clear sense of there being a Senior Management Team in place within the College.

In addition, various whistle-blowing allegations were received by DEL in 2005. The Governing Body informed the Department in August 2006 that, having examined all the findings, it had “concluded that, other than the overtime payment issue, there were no major areas of concern identified as a result of the various investigations into allegations contained within the anonymous letter.” The Audit Office was surprised that DEL was prepared to leave it to the Governing Body to decide what action it should take in the light of the serious failures emerging from the WBL investigation and as one of the allegations made was that previous complaints to the Governing Body had not been investigated. DEL took this course of action as a result of legal advice it had received.

Given the findings of the various reviews conducted, the Audit Office considered DEL’s monitoring of the College. Findings included:

• It is a matter of some concern that the findings in Fermanagh College remained undetected by the Governing Body. We note that new arrangements were introduced for the recruitment of members of the six new Governing Bodies who take up duty from the merger date of 1 August 2007.
• The Department told the Audit Office that its biggest concern was that the problems in Fermanagh College had not been identified by internal or external audit. We recommended that the Department should take steps to monitor closely the operation of college audit committees. DEL has taken forward this recommendation.
• A balance has to be struck between the arms-length status of the colleges and DEL’s Accounting Officer’s responsibilities and the Department had given this careful consideration. However, the Audit Office concluded that the Accounting Officer was not able to obtain sufficient assurance to meet the responsibilities for the distribution of public funds by the College.