Examination of Witnesses (Questions 1
WEDNESDAY 22 NOVEMBER 2000
BOURN, KCB, PROFESSOR
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
(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,
(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
(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 concernthat is, our regional review highest
concern statusthen 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 resultsthat is, three times a year to governorssimultaneously
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
(Professor Melville) I think the assurance lies in
the Council actually putting together through the regional review
process that we only began in 1998and this Committee commented
on favourably earlierwhereby 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
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 processesfor example,
the regional review processare 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 Collegewhich exercised
us last time we herewas 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 Collegeboth 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 Bilstonis 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
(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
(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
(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 youI
am not going to force you todaypick on a figureparticularly
if it is not accuratebut I suggest that you confer with
the NAO and the Committee's Clerk to take Speaker's Counsel advice
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.
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 Londonand we have consistently
found thistends 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 arein other words, it costs the same to educate someone
in London as in Yorkshireand 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
collegesthat is, colleges like agricultural collegesand
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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